Time for gold to pop

Dear Investor,

US dollar gold price [XAUUSD]
Hourly chart

(Click to enlarge)
Source: Trading View

Gold holds onto its gains: Gold’s trading range continues to narrow. This week the yellow metal has barely moved US$30 per ounce (above, far right, shown in purple), up around 1% for the week so far to US$1,785 at the time of writing.

Good news Bulls: The good news is, gold has hung onto last week’s momentum. The tight trading range may be a sign of consolidation and it looks to be keeping gold above a key area of support, which is around US$1,750.

• What we need to see to get excited: Gold breaking up — and through — the blue line. Moves towards US$1,800 is a positive sign.
• Can it break this key barrier? For any rally to have legs, we’ll need Au to nudge US$1,830, which has been acting as a price barrier (below, black line).
• What if gold jumps above US$1,830? That brings the US$1,900s into focus…

But…the technical trend favours the Bears right now: The bad news, gold is nearing that downtrend line (shown in blue).

• There’s resistance US$1,800: Gold has struggled to break above US$1,800 since the middle of September. Being rejected here again could see the yellow metal dip back to US$1,750-60.

US dollar gold price [XAUUSD]
Daily chart

(Click to enlarge)
Source: Trading View

As for the other precious metals: Silver has staged a stunning rally this week, platinum has barely moved, and palladium also struggled.

• Silver is up 3.80% so far.   
• Platinum is down 0.70% for week.
• Palladium is lower by 2%.

Is gold under pressure or ready to break out? Gold continues to remain under pressure from the US dollar. In spite of the Dollar Index [DXY] falling 1% or so from its October high, gold is failing to find support from managed money. While managed money isn’t supporting the gold price at the moment, the ‘transitory inflation’ narrative continues to be questioned.

Australian bond yields drive the Aussie dollar higher: Once again we find ourselves at the mercy of the Australian dollar’s volatility.

• Australian government bonds have surged higher in the past two weeks as investors question the Reserve Bank of Australia’s ability to hold off on a rate increase until 2024, pushing up bond yields. 
• Coupled with a strong terms of trade, this has forced the Aussie dollar higher, to 74.77 US cents at the time of writing.

A great entry price for Australian investors: The benefit of a strong local currency means it keeps a lid on gold prices in our local currency, as the Australian dollar gold price is stuck under AU$2,400 for now. If you’re looking to increase your gold holdings, anything under this level is tempting…

Not your parents’ inflation says hedge fund

Stagflation is viewed as a tail risk: As Metals Focus explains, there is a lack of conviction towards gold at the moment with stagflation ‘still viewed by many as a tail risk’ writing:

‘… in the current circumstances, it is still far too early to make a meaningful comparison with the 1970s (when the global economy suffered markedly and gold eventually shone). Indeed, while actual and forward inflation have remained persistently higher over the last few months, they are nowhere near the double-digit levels seen during the 1970s.’

Today’s inflation is not the same as the 1970s inflation says BlackRock: BlackRock are quick to rebuff any notions of 1970s-era stagflation returning. Pointing out that the inflation we are seeing now — more so in the US — has different causes to inflation of the 1970s, writing: 

‘Why is today’s picture different? First, the current pickup in inflation is driven by the restart, not rising energy prices. Supply capacity has been slow to come back online, resulting in bottlenecks and price pressures.

Second, growth has room to run, we believe, with global activity well below its long-run potential. Supply will eventually rise to meet demand, instead of the 1970s experience of demand going down to meet supply.

Third, resurgent activity is increasing demand for oil and driving prices higher. Again, this is the exact opposite of the 1970s, when higher oil prices harmed economic activity.’

BlackRock’s conclusion, however, is that the US is experiencing persistent inflation and investors should be aware of it. Their view is that ‘moderately higher inflation’ because of ‘structural cost pressures’ should ease as supply chains untangle themselves.   

Should Australian superannuation funds hold gold?

Should Australian superannuation funds hold gold? This is exactly the question the World Gold Council (WGC) asked overnight.

With Australian interest rates in steady decline since 2011 — and now at record lows — fixed interest investment products have contributed to the multiyear downtrend in Australian super fund returns, writing:

‘The declining interest rate has contributed to the downward trend in Australian super fund returns over the past years. Between 2016 and 2020 cash and fixed-income assets, both domestic and international, accounted for 32% of an average super fund portfolio. Inevitably, returns were negatively impacted as interest rates around the globe fell. The average super fund annual returns were 11% in 2005, 8% in 2010, 7% in 2015, 6% in 2019 and -0.2% in 2020.’ 

Australian super fund returns for the past 15 years

(Click to enlarge)
Source: Australian Prudential Regulation Authority (APRA); World Gold Council (WGC)

After analysing how super funds have performed on the back of moving into equities, the WGC suggest that perhaps ‘an asset seldom noticed’ by super funds may have a better outcome over the long term.

Their modelling shows that a ‘5% allocation to gold significantly improved the hypothetical portfolio’s risk-adjusted return and reduced its maximum drawdown. And the difference became more obvious as rotation out of bond increased.’

Few — if any — Australian super funds offer the ability to invest in physical precious metals. This lack of allocation to physical metals is one the many reasons self-directed investors set up a self managed super fund (SMSF).

If you have a SMSF and wish to allocate a portion of your retirement funds to precious metals, here’s a guide to help you get started.

Inside our office this week

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion