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We Are All Gold Bugs Now

14 August 2020

Precious Metals Commentary

In what was an incredibly volatile week for precious metals, we finally saw some profit taking before a rebound off the lows. Gold experienced a dramatic sell off after failing to hold the US$2,000 level with stop-loss triggers contributing to a sharp and sudden sell-off to lows of $1,868 on Tuesday, before the price recovered to $1,955 at time of writing.

No doubt both markets needed a breather after such an incredible rally, but the metals went from being overbought to oversold in the space of a couple days.

Silver remains incredibly volatile hitting lows of US$23.40 before a sharp recovery above $27.40. Expect some choppy trade and distribution for the time being as the metals could form a base before deciding whether this pullback was enough, or if we need more of a capitulation before the next leg higher in this bull market.

gold price chart

ABC Bullion's Global General Manager, Nick Frappell, says that silver has hit some major targets but took good support from the Weekly Turning Line at $23.40. With silver almost reaching the previous high on the aggressive rebound the test will be whether it can overcome the recent highs. Watch ABC Bullion's 306 Weekly Wrap on Monday to hear Nick's latests forecasts for the metals after this big week.

Many new investors will likely read into the sell off more than they should, as the broader long-term fundamentals for holding metals remains unchanged. Nothing would surprise us in the short-term when it comes to direction, but we remain confident that there is a plethora of investors globally that are waiting to buy into any significant dips in the price of both metals.

ANZ this week sighted “abundant liquidity, negative real interest rates, a weaker US Dollar and escalating geopolitical tensions” to contribute to a higher gold price of US$2,300 in the next six to twelve months. One of the more significant contributions to gold’s outperformance of late has been global treasury yields falling to near record lows, so a tick higher in the US bond yields this week halted the rally in metals for now.

us 10 year bond yield

Despite the move higher in US yields this week, central banks remain on the dovish side, with the Reserve Bank of New Zealand the latest to hint at negative interest rates as it expanded its bond-buying program this week.

The RBNZ warned that policy rates might have to go below zero to revive the economy after coronavirus lockdowns. Their large scale asset purchase plan (LSAP) was expanded to NZ$100 billion, up from $60 billion previously with the deadline for purchases stretching out to mid-2022.

The RBNZ has sent its clearest message yet that negative interest rates are coming, stating “the committee also agreed that any future move to a lower or negative OCR, if complemented by a Funding for Lending Programme, could provide an effective way to deliver monetary stimulus in addition to the expanded LSAP if needed”.

Negative rates in our opinion is a certainty for the not too distant future as central banks have been priming the market and talking of their benefits for long enough now that the whole concept is generally accepted by the broader public.

The trouble with negative interest rates is the fact that these will be difficult (if not impossible) to unwind and revert to normal. Just look at how zero interest rate policies were followed by a build-up in household, corporate and government debt.

It is impossible to now normalise rates in any way without a catastrophe, so central banks are going further down the rabbit hole towards deeply negative cash rates. Perhaps in the future one will be able to earn a return on a home loan and pay an interest rate for a savings account. Entirely reckless and incredible dangerous, but also undoubtably supportive for precious metals demand moving forward.

We Are All Gold Bugs Now

So says Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, in an opinion piece in The New York Times. The fact that the famous newspaper ran the article is noteworthy in itself and indicates that gold is moving from the smart money phase we have been talking about for some time to more mainstream acceptance.

Ruchir’s basis for the “all gold bugs now” claim is a survey he referenced that had one in six Americans buying gold or other precious metals in the last three months, and that about one in four were seriously thinking about it.

With the amount of new accounts ABC Bullion has experienced these past few weeks and the queues out the door, we wouldn’t be surprised that a similar survey in Australia would yield the same results.

Ruchir is a reluctant convert, however, saying that gold “has none of the virtues I admire… and many of the vices I despise” but says that with central bank money printing and inflation-adjusted rates turning negative, it is difficult not to be a gold bug.

Public and proud of it gold bug Ray Dalio’s hedge fund Bridgewater was reported to have invested $400 million into gold between April and June this year, according to US regulatory filing.
With the price averaging $1,714 over the quarter, that $400 million has turned into at least $450 million, which is a Powerball-like $50 million dollar gain in a couple of months.

Bridgewater argue that gold is a contra-currency and storehold of wealth that should replace normal bonds alongside with inflation-linked bonds in a portfolio. They have a particular concern about current government stimulus resulting in stagflation – the worst of both worlds of weak economic growth and higher inflation.

Based on their studies of 127 cases across 39 countries as far back as 1800, they conclude that gold tends to outperform equities and provide balance to a portfolio.
As the chart below shows, swapping out bonds for inflation linked bonds and gold outperforms the classic 60% equities / 40% bonds portfolio.

bridgewater 60/40 comparison

Note the 1970s where the red line gains when the traditional 60/40 green line declines. If we are headed for a repeat of the 70s then gold will be an essential part of a conservative investment plan.

It is not coincidental that a few days later Vincent Deluard, global macro strategist for StoneX, discusses the shortcomings of a 60/40 portfolio in this Macro Voices podcast. It is just another indication that gold’s unique investment attributes are being recognised – or is it that people are recognising what a crappy economic period we are and will be going through, to which gold has always been suited?

Vincent says that “the six horsemen of inflation are here”, namely:
  • asset price bubbles
  • out of control money supply growth
  • protectionism
  • excessive debt
  • generational unrest
  • manipulated prices
and says that as a result the 60/40 portfolio will post a decade of negative returns going forward. Like Bridgewater, he recommends gold as a cheap hedge against inflation.

Getting your Gold out of Dodge

Well not Dodge, but Hong Kong. Financial Times reported this week that investors have moved 10% of their physical gold out of Hong Kong to Singapore and Switerland following the new national security laws.

Hong Kong has long been a major gold trading centre and gateway for gold flows into China and its extensive vaulting and logistics have been utilised by ultra-wealthy. Can’t say we are surprised to see some getting cold feet and likely that trend will continue.

Australia also attracts safe-haven money as we are geographically isolated (harder to invade), have never had a civil war, and have rule of law (although Victoria’s Stage 4 lockdown is attracting international attention for its heavy handedness).

On the back of the Victorian second wave, Westpac reported a 9.5% collapse in Consumer Sentiment, with NSW falling much more than Victoria.

westpac consumer sentiment

COVID concerns are one of the factors that has been behind the second wave of gold and silver buying ABC Bullion has seen these past two weeks.

If you have 30 minutes to spare over the weekend, watch Bron’s interview with SBTV about how the physical gold and silver markets are now exerting more pressure on the paper markets amongst other topics.

sbtv interview with bron
 
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 comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.
Disclaimer
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.