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Overbought Equities and Record Inequality

25 January 2019

Gold was relatively flat this week after failing to break through the key US$1,300 level mentioned in last week’s commentary. We currently trade at US$1,283 per ounce and silver dropped back down to US$15.40 per ounce.
The AUD/USD lost some ground so in local currency terms we are trading ever so close to $1,800 per ounce for gold and $21.50 for silver.
Platinum dropped to just below US$800 per ounce and palladium looks like it may have put in a short-term top, pulling back to US$1,348 per ounce after a short lived spike to a whopping US$1,430.
As mentioned in the last market update, there was some risk of a pullback if gold couldn’t clear the $1,300 mark. The pullback in AUD gold terms was short lived, as one can’t really rely on the AUD/USD to keep afloat and give us too many buying opportunities. So dollar cost averaging remains our preferred strategy as it takes the emotion out of gold investing and puts the focus on accumulation, as opposed to price picking.

Gold in AUD chart above and short term we are more or less tracking sideways with not too much action. But from a long-term perspective, we are actually teetering on a multi-year breakout, if we can manage to convincingly trade well up into the $1,850+ range.
Gold in AUD 

NAB Raises Rates

NAB just announced changes to its variable home loan interest rates for owner occupiers and residential investors and it would seem many Australians will start to feel the pinch of higher borrowing costs despite the RBA leaving the cash rate on hold.
Wholesale funding pressures continue to rise so banks may continue to slowly increase rates themselves to protect margins, regardless of what the RBA does.
The increases of advertised rates can be seen below and one can only imagine the number of interest only investors losing money hand over fist in Sydney or Melbourne, as rental yields aren’t anything close to the advertised 6.4% interest rate for interest only loans. All whilst property prices are falling.
NAB Raises Rates 

With the Royal Commission unearthing some of the reckless lending standards of recent years, banks lifting rates should not bode well for the Australian economy and consumer spending. Sadly, many financial planning firms would have convinced a lot of Australians to set up SMSFs to drop their entire balance into an investment property during the peak, and would have taken a clip along the way for the favour.
It’d come as no surprise to find many Australians were given poor advice in regards to property investment using the vehicle of SMSFs, as a recent ASIC survey found that 19% of SMSF members didn’t even have an investment strategy, and 14% didn’t even know they needed one.
Meanwhile, Sydney property prices are falling at the fastest rate in 20 years, dropping 11.4% from the mid-2017 peak.

The Bounce in Equities Looks Overbought

US equity market performance in the short term seems to be dictating the appetite for gold investors. As we saw gold pull back slightly and the rally come to an end, we simultaneously saw a sharp bounce back in US stock markets.
Those thinking the sell-off in equities is over and done with may be counting their chickens too soon. There is a big, meaningful shift in Central Bank policy moving forward, as they seem to be serious about becoming net sellers of assets in the near future versus net buyers.
The Bounce in Equities  
The above is the main reason why we think this is just the start of a deeper long-term trend of poor equity market performance moving forward, as things start to get tighter.
The chart below shows the S&P500 index and the recent bounce of the past few weeks. A few things of note here from a technical perspective: we see that longer-term momentum is pointing lower, according the moving averages, which are in a bearish formation. The sharp spike off the lows is signalling overbought territory on the Williams %R indicator, and is at risk of correcting, and we look like developing a pattern of lower lows and lower highs.
It’s way too soon to say that equities are out of the woods and deserve to march higher, as valuations, particularly in the US, are still well above historical averages.
Don’t be surprised to see gold catch another bid if indeed we see the US stock market roll over in the near term.
US Stock 

Why the Inequality?

Around 3,000 of the world’s political elites descended on Davos, Switzerland this week to talk about inequality and other pressing matters at the World Economic Forum (WEF). When it seems like each year the world gets more fragmented and individual economies seem to be in a worse off position than the year before, I wonder when people will start blaming economists for our economic problems. Or at least the academics that create the monetary and fiscal policies of the world’s largest economies.
We have a correlation occurring in the last decade, as it seems the greater level of market participation at the central bank and government level, the greater the level of inequality, and perhaps this is not a coincidence. Could those trying to save the world from inequality actually be creating it?
According to Wesley Widmaier, associate professor with an expertise on International Political Economy at the Australian National University, the World Economic Forum could be ironically exacerbating the problem, as opposed to providing a solution.
"They're trying to solve poverty and rising inequality using tools that ultimately modify the excess of a machine that increases inequality — it's pathological in a sense," he told the ABC.
A recent Oxfam report found that the world's wealthiest people grew richer by 12% last year, while the bottom half of the global population fell by around 11%.
So we wonder why there is record inequality, yet we have Central Banks creating trillions of dollars out of thin air and buying treasuries and equities in an attempt to provide economic stimulus to the masses. There is a clear benefit from conventional monetary policy, but the main beneficiaries undoubtedly are those who hold assets.
Those without the money or saving to buy assets will fall further and further behind as they deal with inflation eating away at their purchasing power, leading to higher costs of living. So the quantitative easing policies of Central Banks since the GFC has kept economies ticking along for now, all whilst distributing new capital straight to the top by inflating financial asset prices.
So the name of the game is to own assets, but it will be interesting to see which assets benefit from central banks collectively turning off the stimulus taps over the next few years. We believe the volatility in financial markets that will come as a result should see money flow back into the precious metals space as a safe haven, as we saw since the October to January sell-off in equities.
It shouldn’t take too much of a shift in psychology to have a decent impact on precious metals prices, as gold remains incredibly under-owned by US and European investors.
Lastly, for those technically minded, you can read our Monthly Precious Metals Positioning Report by Global General Manager Nicholas Frappell here.

Until next time,
John Feeney
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