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Why 2019 Could Get Very Interesting

30 November 2018

Gold held a relatively tight trading range this week as we currently trade slightly lower at USD $1,221 per ounce, with silver sitting around USD $14.30 per ounce at time of writing.
Not a very action-packed week for precious metals markets as participants digested the statements of the Federal Reserve chief Jerome Powell. The focus was on interest rate expectations, and Powell exclaimed this week that the Fed’s benchmark rate is “just below” neutral, more or less flip-flopping on the October statement that the Fed was “a long way” from neutral.
As markets hang off every word the Fed chair says, the dovish tone saw US equities recover off the recent lows, the USD index took a dive of around 0.70% and gold popped higher to $1,222 after hitting a low of $1,212 earlier in the week.
The weaker USD lead to the AUD/USD spiking back above 0.73c, hence giving Australian investors a lower AUD gold price, hovering at $1,675 and silver just below AUD $19.90 per ounce.
The weaker USD lead to the AUD/USD spiking back above 0.73c
Markets broadly expect another 0.25% hike in the Fed’s fund rate in December, but there's been a wide disparity between investors and the Fed on where rates should head in 2019. Traders currently have just one increase priced in, whereas Fed officials in their most recent projections point to three. With Fed projections having a history of being more hawkish than reality, this could be wishful thinking on their part.
The amount of debt built up in the US since the GFC makes raising rates an incredibly hard thing to maintain without serious issues arising over the broader economy. Powell seems to be aware of this as he also touched on financial stability risks, stating, "Information on individual firms reveals that, over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most," he said. "In addition, other measures of underwriting quality have deteriorated, and leverage multiples have moved up. Some of these highly leveraged borrowers would surely face distress if the economy turned down, leading investors to take higher-than-expected losses--developments that could exacerbate the downturn."
On the stock market, Powell sees valuations as “about normal” with long term levels and he “does not see dangerous excesses” in equities. Curiously, this is despite the Shiller P/E ratio sitting at the second most excessive level in the past century, only surpassed by the Dotcom bubble in 1999.
Shiller P/E ratio
Powell continued, "My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level," he said. Of the many roles the Fed serves, identifying asset bubbles is apparently not one of them.
Donald Trump has maintained his criticism of the new Fed chair stating this week “So far, I’m not even a little bit happy with my selection,” and “the Fed is way off-base with what they’re doing.”
Also contradicting Powell’s rosy outlook for the US economy is Nomura Holdings list of 19 financial metrics, which “nearly all suggest we are closer to the end of a cycle”.  Courtesy of Business Insider this week is a handy chart, which summarises 19 key financial indicators across the US economy, and compares them to their long-term averages.
Key financial indicators across the US economy
As you can see, when Powell talks of equity market valuations being “around normal” with long-term levels, this is indeed simply his opinion and not a fact. The above chart shows both S&P500 market cap as a % of GDP and marginal debt to GDP both sitting considerably higher than their long-term averages, whilst Corporate Debt as a % of GDP is right at the top of the range. There is also clearly a majority of other indicators above signalling the US economy is approaching the later stages of this current cycle.
With Trump and Powell butting heads, there is complete lack of direction in the US. We have a government adopting expansionary fiscal policy, and a central bank attempting to counterbalance with contractionary monetary policy. All whilst the country marches further and further into debt. Something doesn’t add up and we get the feeling 2019 will be a very interesting year.
Which brings us to an interesting Livewire Markets post this week that looks at the US housing market moving forward into next year.

The Fire That Burns Out in 2019

Our readers are well aware of the slowdown in Australian Property that is occurring and why it is set to continue, but simultaneously the US could be in a similar predicament as rates are rapidly rising, and house prices are much higher than their pre GFC peaks. With US Government debt climbing toward USD$22 trillion, and US mortgage debt over USD $15 trillion, every 0.25% increase in the Feds Fund rate is a big deal. There is a reason that most financial crisis occur shortly after a rate hike cycle.
So as the biggest monetary experiment in history is unwinding, the following interview with Charlie Jamieson, CIO at Jamieson Coote Bonds covers major problems arising in the US housing market, explaining “unless you can continuously keep throwing money onto the fire, the fire finally burns out. And that starts to happen in the United States in 2019.”

The full article and video can be found here


Senior Trader Andre Lewis’ Gold Market Update

Gold (USD) has spent the week (thus far), being buffeted around within its range as headline events like ‘The Battle of Brexit’, the Italian government’s showdown with the EU over budget discipline, the meltdown in crude oil markets (resulting from heavy oversupply) to name a few, have lent direction at various stages during the course of the week.
Gold chart 

Arguably, the Fed Reserve Chairman’s comments on Wednesday and the release of the latest minutes from the FOMC’s November 7th & 8th meeting were somewhat contradictory, with the minutes stating that “Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations,” i.e. a December interest rate hike remains very much on the cards.
Likely to eclipse all of these events however, is the ‘Big Daddy’ news event of the week. The G-20 meeting in Buenos Aires commencing on Friday and concluding on Saturday, during which all eyes will focus on the dinner between US President Trump and his Chinese counterpart, Xi Jinping on Saturday - in view of the salvos being fired between the two nations during the course of their ongoing ‘trade war’.
President Trump has indicated he is prepared to pull the trigger on raising tariffs from 10% to 25% on $250 billion worth of Chinese goods entering America if no progress is made in relation to longstanding sources of trade angst to US interests.

Global General Manager Nicholas Frappell’s Technical Comments

Gold has pulled away from the Daily Cloud where it encountered support at the top of, and just within the cloud. This means the short-term trend remains positive. The Daily Cloud top is now about US$1221 and the Daily Standard and Turning line supports are almost identical around US$1220.
Short term point and figure have turned bullish and targets build up to US$1233 through to US$1236. Downside targets lead back to US$1217 and US$1212 but the targets to US$1235 look more likely overall, where the price intersects with recent highs and the 50% retracement of the June-August downswing.
I am neutral to bullish as the price has yet to break out of the recent range. Plus, the bigger trend is still negative, with the price failing to break above the 31.80 % Fib retracement of the April-August downtrend.
Chart 1 

Chart 2

Chart 3
Until next time, have a great weekend all.
ABC Bullion Team

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