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Rates and IPOs - Approaching Zero

04 October 2019

Precious Metals Commentary

It looked like we were about to see a more sustained pullback in precious metals prices this week when gold traded lower into to the USD$1,460-$1,470 range, but this was short lived as equity market volatility and a miserable US PMI read helped gold rebound back up through the $1,500 level for now. A tough market to pick in the short term, but it seems in general the overall mentality moving forward is to buy into any decent sized dips.

On a technical basis we have talked about the probability of a decent sized pull back on profit taking but it’s hard to tell if that will be it for now. The MACD on the daily chart is one positive for the chart readers out there, as it looks close to signalling a buy signal, but ultimately prices are likely to react to stock market jitters and Non-Farm Payrolls out of the US tonight.
Gold CME Chart 
As for broker upgrades, UBS has upped its forecast for the price of gold for the second time in less than two months. It says the price for the yellow metal could reach as high as USD$1,730 a troy ounce next year, up $50 from an August forecast, citing “an environment of negative and lower-for-longer real rates, slowing growth with downside risks, and elevated uncertainty strengthens the case for holding strategic gold allocations.”

Locally, the AUD/USD lost some ground to the low 67c range with the RBA rate cut on Tuesday to 0.75%, but most of the move would have been ‘baked in’ with market participants putting around an 80% chance to a cut. We would say the RBA might have one or two more cuts left in them before they start following in the footsteps of other Central Banks with our own Aussie version of Quantitative Easing (QE). This is not a fairy tale and is actually very likely to happen as early as 2020.

We have talked about RBA QE for over a year now as they themselves started to prime the market a long time ago with their commentary that they would consider any measures should the economy warrant it. Perhaps we are better forecasters than they are though, as last year the RBA were talking about rate hikes!

Goldman Sachs economist Andrew Boak is tipping for a whopping $200 billion bond buying program in order for the RBA to achieve their inflation and employment targets.


Metal Flows to Where it is Wanted

We noted last week that China’s Golden Week/National Day would result in weak Asian demand and while the price did take a hit this week, it has recovered as discussed above. Physical demand in other markets continues to be spotty, with US Mint sales continuing to be weak.

ABC Bullion continues to see higher buyback volumes but our business is more balanced than what we hear from other dealers, who report strong buyback volumes as well as an increase in cash-for-gold jewellery sales by the public looking to capitalise on the high Australian gold price.

The metals have been supported by investment via futures and ETFs, as demonstrated by recent large flows from Switzerland to the UK (where most of the physical backing ETFs is stored). This contrasts to the usual flow, which is from the London market to the Swiss refineries and then on to the Asian market. 

The Financial Times reports that physical demand for gold in China and India has been weak this year, with high local prices a key reason. Refinitiv Metals says that gold is trading in India at a deep discount to international prices with Chinese premiums stable as any demand shortfall managed by quota restrictions.

Australia has also seen an increase in shipments to the UK, which happens when Asian demand falters. As you can see from the chart below, Chinese imports from Australia have been declining since mid-2018.
Australian Gold Exports
Given our geographical closeness to India and China, it should not be a surprise to see that most of Australia’s gold output flows to those countries, with the UK only being a stop-gap in times of weak demand.

An interesting feature of the data is the dominance of India from 2003 through to 2011. Increasing hostility by the Indian government towards gold, via increased duties and other measures, as well as more aggressive sourcing by Indian refineries of gold direct from miners, has seen India fall away as an export destination and China emerge as the major consumer of our gold.

Australia has been a top gold producing country for many years. As this Refinitiv Metals video below shows, we have been in the top 4 since 1980.

Refintiiv Metals Historical Data

Tech Bubble 2.0 Popping?

We have previously talked about a lot of US (and some ASX) stocks looking like a Dot Com 2.0 bubble. Over the past few years investors have demonstrated a passion for “story” stocks similar to what happened at the turn of the century, as the chart below of percentage of initial public offerings (IPO) issued by profitless companies shows.
Profitless IPOs
However, the withdrawal by WeWork its IPO this week is being seen as the tipping point in the market’s acceptance of companies offering little more than a yarn about their potential profits. Morgan Stanley's chief US equity strategist was quoted as saying that WeWork would be “remembered as the end of an era when unprofitable companies could get huge market valuations.”

A significant driver of the overvaluations has simply been too much money chasing too few investment opportunities. A founder who can spin a good story and convince investors they will be the next Google or Amazon has found it easy to raise funds.

It is not too different to the dynamic behind crypto currencies, with investors willing to throw money at various shitcoins in the hope of becoming like the whales who got in early in Bitcoin or Ethereum.

Low interest rates, of course, contribute to this as investors seek out big capital gains to make up for a lack of interest or dividend income.

While the stock profit music continues investors are willing to keep on dancing but with big names posting big losses (see table below) enthusiasm is waning.
 Returns since IPO   Return over the past 12 months
 Fiverr  -28%   Grubhub  -61%
 Uber  -31%   Zillow  -53%
 Slack  -41%  Tesla  -25%
 Lyft  -55%  Spotify  -38%

Marketing expert Scott Galloway sees Uber as starting the decline which WeWork has just accelerated, saying that “it’s like we’ve had this cocaine-fueled party at Studio 54, Uber was the lights starting to go on, and now they’ve gone on so bright it’s like you’re in an operating room.”

This is not just a US problem, with Charlie Aitken from Aitken Investment Management noting that the $36.7 billion of WAAAX stocks in Australia (WiseTech, Afterpay, Appen, Altium, and Xero) are “all priced with no margin of safety and could all be subject to de-rating on delivery of even the slightest disappointment.”

With US investors appearing to be de-rating their tech superstars, the risk on the same occurring in Australia is high and so he recommends getting out of “concepts” and into “cashflow”.

Another problem for US stocks is a slow down in share buybacks, which hit a record of more than $1 trillion in 2018 on the back of a tax overhaul, posing a threat to the record-long bull market according to investment bank Jefferies.

Again, low interest rates encourage share buybacks but at the same time they increase a company’s leverage and thus risk. An unusual thing to do when a Duke University survey found that 53% of US Chief Financial Officers “believe that the U.S. will be in an economic recession by the third quarter of 2020.” Maybe those CFO’s are hoping to pay back their debt before the recession hits?

Unlikely according to John Mauldin, who sees a globally coordinated debt liquidation he is calling “the Great Reset” happening – and he sees no other way out of our debt binge.

Meanwhile, the venture capitalists and executives from more than 100 startups met on Tuesday to discuss direct stock exchange listings as an alternative to initial public offerings.

It is an approach that usually only works for companies with a high-profile brand that investors would already be aware of, but it is no guarantee of better post public listing prices – both Spotify and Slack directly listed and they are down significantly as the table above shows – and it could be argued that it may actually increase the risk of the public coming out worse.

As one of the organisers of the vent was quoted as saying, that the reason for a direct listing is that “investment banks have long been “fleecing” companies by pricing shares [too] low”, which comes at the expense of early investors or employee stockholders.

To bookend our story on story stocks, we note that WeWork CEO and co-founder Adam Neumann, who was forced to step down, recently cashed out more than $700 million in advance of the company’s dropped IPO. Here he is below, post-cash out, walking barefoot in New York.
WeWork CEO
Maybe he is on the phone to fellow former-CEO Patrick Byrne, who we mentioned last week was investing his stock sale money into precious metals and cryptos, asking how much of his $700m to allocate to the shiny safe havens?

Until next time,
John Feeney and Bron Suchecki
ABC Bullion
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at, or call us during trading hours on 1300 361 261.

This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.