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You Can’t Print Gold

24 April 2020

Precious Metals Commentary

Gold edged higher this week to $1,726 with more than 4.4 million Americans filing a new jobless benefits claim. That takes the total to 26 Million Americans filing for unemployment in just the last five weeks, and still, the stock market edged higher.

Silver is tracking sideways around the USD$15.00 per ounce level, yet to make up its mind on whether to join gold or remain uncoupled. Gold for local investors is ending the week just above $2,700 as the AUD/USD trades at 0.635 with silver flat at $24.00 per ounce. 

On a technical level the recent highs of USD$1,743 will need to be cleared to give some confidence to the bulls, but overall the moving averages remain in a bullish alignment and gold remains in a strong upward trend.

Equities seem to remain completely unfazed by the horrible employment numbers being printed globally, but we expect this to change at some point soon.
 
market report chart 1


Gold to $3,000

A report from the Bank of America that revised their gold price forecast to $3,000 by October 2021 got a lot of coverage this week – in both gold markets and mainstream media.

The rationale for the call is increased government deficits, and a doubling of central bank balance sheets as they underwrite that government spending, putting pressure on fiat currency values as interest rates are forced to remain near or below zero.

With interest rates below inflation, inflation that central banks are determined to create, the Bank of America says that such “financial repression is back on an extraordinary scale” and thus “investors will aim for gold”.

These are issues that many in the gold market, and us, have been talking about for some time but it is not something that has been on the radar of mainstream investors. For us, the significance of the Bank of America report is not the $3,000 forecast but the fact that it came from a mainstream source and got picked up by conventional media.
What puts a fire under the price of gold is money flowing in from first-time investors. This is what happened in the global financial crisis (GFC) and it provided the fuel for gold to peak out at $1,920 in 2011.

It has been our contention that gold’s 50% move from its (in hindsight) bottom of $1,050 in late 2015 to $1,600 pre-corona has been below the (mainstream) radar and driven by:
  • Institutional “smart money”
  • Central bank accumulation
  • Additions by existing holders of precious metals
The coronavirus situation has moved the market into a new phase as it has been the trigger to move two groups of new buyers into action:
  • those who were already considering buying gold
  • those who had general concerns about stock markets and low interest rate on cash, but hadn’t yet looked at gold

As coronavirus drags on it will result in a new group of gold buyers – investors who previously did not question stock valuations or the outlook for the economy but who will now be concerned not just about the short-term impact of lockdowns but also come to realise that the problems behind the global financial crisis have not been fixed and may now come to fruition.

We have mentioned previously the massive increase in demand we have seen at ABC Bullion but another metric is number of accounts opened. The chart below indexes the weekly number of new accounts to our normal baseline rate.

market report chart 2
You can see a slight build in numbers towards the end of 2019 as the gold price broke out but as Australia went into increasing restrictions new accounts ballooned out to ten times our normal rate.

A majority of those new accounts have purchased but many are waiting on the sidelines as they get familiar with the gold and silver markets – which is what we normally see – and they will turn into buyers in time, providing continued demand.

Undoubtably this is the pattern that has been seen by bullion dealers in other countries, with each at a different phase aligning with the coronavirus case count and social restrictions.


Change in Psychology

Some may argue that gold will come off when coronavirus restrictions are lifted or reduced but we feel that coronavirus has permanently changed investor psychology. We see this in more and more commentary questioning the power of central bankers to fix things.

For example, Rabobank noted that the Wall Street Journal, the pre-eminent paper of record for financial markets, recently observed that the Federal Reserve chairman said that their recent interventions “will retreat when the virus plague is over. But that is what the Fed also said during the financial panic, and it never did come close to normalizing policy”.

In that note Rabobank asked how is it free-market capitalism if the Federal Reserve “is going to backstop everything whenever it looks like investors might lose money” and that “this is moral hazard and/or central planning being carved into the bedrock of the US financial system”.

Will investors be able to read comments from billionaire hedge fund manager Daniel Loeb that central bank actions “simply prop up asset prices in the short term and perhaps offer a reprieve to market participants who profited handsomely for years by using excessive debt to give the illusion of high returns” and go back to thinking that everything is awesome?

market report image 3 
Sure, investors will play along with central banks - as exemplified by investment manager BlackRock, who recently said they “will follow the Fed and other DM central banks by purchasing what they’re purchasing” – but this “as long as the music is playing, you’ve got to get up and dance” (link) attitude is in our opinion a very unstable setup.

Thinking this way is an explicit acknowledgement that fundamentals have been thrown out the door. It is a game that can continue for some time, and we’d argue it has been going on since the 2008 GFC, but it becomes increasingly risky as more and more people question it and begin to look for the door.

The fact that the title of the Bank of America report was "The Fed can't print gold" and that they called gold the “ultimate store of value” in our opinion is how this shift in perceptions is happening right now.
 

Gold Protection

A good example of the role gold can play in a portfolio in these uncertain times comes from Melbourne based investment management firm Cor Capital, which has a 25% allocation to gold.

The chart below comes from their latest fund update and compares their fund’s performance against the stock market and typical balanced fund allocation.

market report chart 4
Cor Capital’s gold allocation provided it with protection from the recent carnage, with a 12-month return to the end of March of +8.1% compared to -14.4% for the ASX200 Accumulation Index.

We aren’t necessarily suggesting a 25% allocation to gold or silver is for everyone – that works for Cor Capital as it is part of a considered and disciplined strategy – but we would say that having no allocation to gold is not prudent.

Just as one cannot say which snowflake will be the one to trigger an avalanche, it is impossible to predict the exact trigger point when the current “follow the Fed” game of musical chairs will end.

In such situations we think it is smart to have a gold chair to sit on when the music stops.

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 article has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this article or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it.

Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, ABC and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances.

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