Gold is Under-Owned

Precious Metals Commentary

Gold and silver continued to trade in a tight range and are holding within the pennant formation we noted last week. A break is inevitable, with many analysts seeing the chart pattern as bullish and thus favouring a break to the upside. We should get a resolution and sense of the next path for the precious metals markets by the end of the month as the pennant tightens.

Gold popped above $1,500 yesterday on poor US factory figures and is currently holding above that. In his keynote presentation yesterday at the Gold and Alternative Investments Conference in Sydney, ABC Bullion Global General Manager Nick Frappell said that $1,500 was a key target price when gold broke out in June.

He said that it is not unusual after a target price has been reached for a market to rollover. In the case of gold, the immediate support if a rollover was to occur would be $1,445.

However, Nick notes the saying that ‘the only position to have in a genuine bull market is a long position’. As we are still in a significant bull market with the world trapped in a very low interest rate environment gold should continue to find favour for a considerable period of time.

Silver followed gold and climbed to $17.80 and with the Aussie dollar weakening a little this week towards 0.68, AUD silver has moved above $26 and is currently at $26.20 with gold just back above $2,200 at $2,208.

Crypto Currency Threat

Back in June we noted political and regulator resistance to Facebook’s stablecoin Libra. Since then, the project has bumbled from one setback to another:

• ECB board member: “Libra’s ecosystem is not only complex, it is actually cartel-like”.

• French Minister of the Economy and Finance: “we cannot authorise the development of Libra on European soil”.

• A letter from two US Senators to the CEO of Stripe: “If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related payment activities, but on all payment activities”.

• Financial Action Task Force (FATF): “stablecoins were to become widespread, it could potentially lead to new risks regarding money laundering and terrorist financing”.

FATF is the global regulator of money laundering and drives the adoption of those standards across the globe and its concerns around stablecoins like Libra is that they “could spark the mass adoption of cryptocurrencies and peer-to-peer transfers, cutting out the need for regulated middlemen”.

What this comment reveals is that for all the attention crypto currencies have attracted as a supposed challenge to the banking system, it is only when an established player like Facebook with an existing large user base gets involved have the regulators become worried.

Up until this point they haven’t been concerned about cryptos because “mass adoption” was not occurring. The mention of “peer-to-peer” and “regulated middlemen” indicate that Facebook will not be able to hide behind the stablecoin/crypto labelling to avoid the anti-money laundering rules that other business, like bullion dealers, have to comply with.

With all this negative attention it was not surprising that Mastercard, Visa, Stripe, eBay and PayPal have pulled out of the project.

Libra also appears to be walking back from the originally proposed idea of backing it by a bunch of different fiat currencies by saying that “instead of having a synthetic unit ... we could have a series of stablecoins, a dollar stablecoin, a euro stablecoin, a sterling pound stable coin, etc”.

Mark Zuckerberg confirmed this in testimony this week before a US House committee saying that Libra was not trying to build a currency but rather a payments system.

No doubt in our mind that the idea of some new unit of account is a big factor behind the political/regulatory resistance, so maybe this back track by Libra will be enough. Of course, as we said back in June, why not just use gold as it is an already accepted globally?

One thing cryptos and Libra have done is spark interest by central banks in issuing their own “digital currency” with Switzerland’s, Sweden, Singapore and China all looking at them.

The latest is the Bank of Canada, who said in an internal presentation obtained through a freedom of information requestion that “cryptocurrencies may become a direct threat to our ability to implement monetary policy and lender of last resort (LOLR) role”.

They say eventually a digital currency would replace coins and notes and that while it may present a risk to the stable, low-cost funding banks get from their deposits, it would give them the ability to “collect more information on Canadians than is possible when people use cash” that “could be shared with police or tax authorities”.

Credit and debit cards and direct deposits are certainly convenient for the consumer. Looks like the central banks also see them as convenient – for getting your data.

Downside of High Palladium Prices

We have covered the run up in palladium prices in the past and with it continuing to show strength at the $1,750 level, it appears to have attracted unwanted attention. Indeed, according to industry expert Matthew Turner, there does not appear to be any indication of substitution of platinum for palladium occurring so he believes there is “good reason to think the price of palladium could go higher”.

With vehicle catalytic converters containing precious metals such as rhodium, platinum and palladium there has been a rapid increase in thefts of the converters in the UK, according to The Guardian.

In the first six months of 2019 there were 2,900 catalytic converter thefts reported, compared to just under 1,700 for the whole of 2018. Hybrids are being targeted as they contain more precious metals than other vehicles and tend to be in better condition, with scrap yards paying $150 to $200 per converter.

Toyota has responded by reducing the prices of replacement converters and anti-theft “Catlocs” to at-cost levels but notes that “thieves are using high-powered cutting tools to remove catalytic converters and because of this it is not possible to make catalytic converters ‘unstealable’.”

Let’s hope this is not a trend that finds its way to Australia.

Checkmate

While stock markets continue to levitate, and US and Australian economies post growing GDP figures (as long as one ignores per capita measures) the reality “on the ground” is not so rosy.

CBS News reported that almost one in eight Americans (or roughly 40 million people) experience food insecurity - a lack of money or resources to secure enough to eat.

In Australia, research firm Roy Morgan says that 2.17 million people were unemployed and under-employed in September, representing 15.7% of the workforce. While it has come off, the figure has been above 2 million for four straight years.

If we aren’t in a technical recession today, Saxo Bank’s Chief Economist says that “2019 will most likely be remembered as the year that kickstarted a global recession”. Saxo sees gold continuing to benefit from numerous tailwinds over the coming months, key one being a weakening of the US dollar, which they see as the “only one other tool left in the box for the global economy” given that monetary policy has proven a failure.

Sprott’s CEO agrees, saying that the US Fed is in checkmate and that interest rates have to continue to fall as economic growth is lower than the rate at which debt is growing. Sprott sees gold as a mandatory portfolio insurance asset, particularly as “the majority of non-believers are steadily converted and buy-in”.

Cor Capital also noted gold’s under-owned status in their latest monthly report and expressed  concern about the widening gap between economic reality and financial asset prices, making their 24.5% allocation to gold “more important today than at any point in our seven-year history”.

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.