Trade War Boosts Gold!

Precious metal prices have had a minor rally this week, with the price of gold currently sitting at USD $1,331oz.

In AUD terms, gold is sitting at $1,737oz, up nearly 1% for the week, with the metals still largely range bound, as they have been for some time.

News flow has of course been dominated by tariff talk, with both China and the United States upping the ante in terms of potential tariffs they’ll be implementing on goods imported into either nation.

As a quick recap of the latest action, whilst there has been a bit of bluster from both sides (as well from Europe) in recent weeks, it was only on April 3^rd that the US announced USD $50 billion in proposed tariffs on imports from China.

The Chinese decided to follow suit, coming up with a list of products they’d impose circa USD $50bn in tariffs on as well, with Trump deciding to up the ante, and is now suggesting tariffs of up to USD $100bn on imports from China.

The screenshot below, taken from Bloomberg, highlights clearly how much this ‘trade war’ talk is dominating the markets' attention right now.
 
It’s also no wonder risk assets are mixed at best in Asia right now, whilst US stock futures look ugly too.
 

ETF Flows Supportive of Gold 

Whilst gold has largely been range bound for some time now, with record low levels of volatility, there are signs that western investors are turning back toward the metal, even if bar and coin demand is still slow (more on this below).

In North America, we saw over 20 tonnes of inflows into gold ETFs in March alone, as investors seek a hedge against more volatile equities and amid increasing concerns about the aforementioned ‘trade war’.

Any further uptick in equity market volatility will likely exacerbate this trend, though short-term, gold has a lot of work to do to get beyond the USD $1,360oz level that has proved such a hurdle in the past few months.
 

Bitcoin Battered Again 

Weakness in cryptocurrencies will also likely prove gold supportive over time. To that end, it’s been another tough week or two for Bitcoin, with the world's most popular cryptocurrency currently back below USD $7,000.

No doubt this will have led to a lot of panicked sales from investors in this space, especially those who didn’t actually buy Bitcoin until very late in 2017, when Bitcoin was going through what now looks to have been its hyperbolic blow off top.

Most of those investors will already be down circa 50%, a pretty horrific outcome given we are only talking about a 3 month period. 

Regulatory pressure continues to build, and even previous Bitcoin fans like Mark Karpeles (former CEO of Mt Gox) are increasingly sceptical about the future of Bitcoin specifically, and cryptocurrencies more generally.

In fairness though to Bitcoin bulls, we have seen this kind of volatility in the past, with the following chart highlighting some of the largest Bitcoin corrections we’ve seen in its circa 9 year history.

As long as it can hold the USD $6,000 level, then there is a chance it will rally higher, but if it falls through there, then it its likely a case of ‘look out below’.

If we were forced to place a bet (we are neither long nor short Bitcoin), we’d suggest its likely the latter as surveys of crypto ‘experts’, according to the latest finder survey, are still suggesting Bitcoin will trade at USD $27,898 per coin by the end of this year.

That’s a staggering four fold increase on its current price.

Crypto might be different, but you don’t typically see forecasts like that anywhere near a market bottom.
 

Has Global Growth Peaked? 

Over the last year or so, there has been much excitement about the pick up in growth that we’ve seen around the world, with a seemingly synchronised uptick in output amongst the world's major economic regions.

Whilst this been pleasing to see, it increasingly looks like we may be approaching the end of this cycle of higher than expected growth, with a Bloomberg article noting that manufacturing activity in 19 of 28 countries tracked by JP Morgan and Markit had slowed in March 2018, with the Euro area particularly affected.

At a country level, we came across an interesting chart this week looking at the United Kingdom, which plots the rise and fall of UK car registrations on a yearly basis, as well recessions, which are marked in the red/grey columns.


As you can see, a plunge in UK car registrations typically takes place either during, or directly prior to a UK recession, which makes sense in a lot of ways, as cash constrained households are less likely to go out and purchase a big ticket item like a car, even if the credit required to do so is freely available.

Interestingly enough, central banks around the developed world are already factoring in lower rates of GDP growth in 2019 and 2020, as evidenced by the below chart.   

Australian investors will note that the RBA is the outlier, as of all the central banks included in the chart, they are the only ones forecasting an uptick in growth in 2019 and 2020.

For a number of reasons, including a slowdown in China and continued softness in East Coast property markets, we think the RBA will be proved wrong.

Another reason we think the RBA is way too optimistic about the outlook for the local economy is the outlook for employment, and particularly wages.

The RBA has been notoriously bullish on wage growth expectations over the last few years, always predicting a faster pace of wage growth, even though the exact opposite has taken place, with wage growth currently at record lows, with private sector employees particularly affected.

The following chart, which comes from the team at ANZ, suggests we’ll be stuck in an era of low wage growth for some time to come, as the vast majority of employment gains have been driven by industries that pay below average wages.

What next for Equity Markets? 

Equity market volatility is one of gold’s best friends, as its safe haven demand comes to the fore whenever a ‘risk off’ appetite grips markets.

To that end, gold has been one of the better performers over the past few months, up several percent, whilst equity markets have come off the boil.

Our view is fairly well established, in that whilst we wouldn’t short equity markets, we think the best of the bull market is well behind us, with much more downside risk that upside potential in the next five years.

This week we thought it would be worth sharing a link to an article from one of favourite analysts, Vimal Gor from BT Financial Group.

His latest piece, titled “Was January 26 the cycle peak?”, included the following chart, which as he pointed out, highlights the fact that “despite the February dip being bought, the subsequent rally has failed. The market’s near-term focus has shifted from looking for the next new high to wondering whether the technical supports will hold (as at time of writing on Tuesday 3rd April, they look like they have broken). Also different to February, larger intra-day ranges are being accompanied by larger high-close ranges, which is typical of a rising volatility environment.”

Interestingly enough, Gor also includes a chart called “The Everything sell-off?” which notes that in the current environment, there is ‘no place to hide for a traditional balanced portfolio’, and that volatility is the only clear winner.

Sounds like a good reason to own gold, if you ask me.

You can (and should) read his article on Livewire Markets here.
 

We’ve bought back how much gold? 

As many gold market followers, including readers of ABC Bullion market updates will know, it's been a slow year or so in the coin and bar market.

Evidence of this is everywhere, including sales figures from the US Mint which have been at or near decade lows recently, and reduced premiums on coins around the world.

To help put this into perspective for ABC Bullion clients, we thought it might be useful to look at the following chart.

Covering the time period from September 2016 to March 2018, it shows buybacks (metal we’ve bought from individual clients wanting to sell gold and silver) as a percentage of total turnover that we do with our ever growing client base.

As you can see, back in late 2016 (immediately post Brexit and pre-Trump) buybacks were 10% of total turnover maximum, as more and more investors were buying gold as a hedge against the rising political uncertainty, and a correction in risk assets that never came.

By the middle of 2017, and especially late last year, buybacks were typically pushing 35%-40% of total retail client turnover, as investors cashed in their gold in order to chase equity markets and cryptocurrencies higher.

From our perspective, we are actually encouraged by this data, for gold, despite the headwinds, is still up 25% from its end 2015 bear market low.

Despite this, sentiment towards the precious metals, especially silver, is incredibly soft, with a lot of investors abandoning the sector, which the chart above makes clear.

This is exactly the kind of behaviour we’d expect to see at or near a market bottom. It will almost certainly be a different story at the next gold market top.

Until next time,
Jordan Eliseo
Disclaimer
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