Australia’s Property Bonfire
Friday, 12 March 2021
Gold may be finding its feet this week on the back of very strong demand for bullion in Asia. The price in USD terms managed to stay above the long-term trendline going back to 2019 after hitting lows of $1,680 and recovering back above $1,700 convincingly. Silver bounced back above $26 USD per ounce with the Gold:Silver ratio currently sitting at 66:1.
US treasury yields fell back this week after a strong auction on new US notes helped push yields lower and aided gold to recover some ground. It seems this level of $1,700 USD is generating quite an interest across Asia with strong gold demand in China presently. Sales of jewellery categories during last month’s Chinese New Year holiday soared 161% year on year, and kilo gold bars on the Shanghai Gold Exchange (SGE) were reported to be trading at close to a $10 per ounce premium over NY spot. Usually, you can find that demand in Asia coincides with a low in prices as they tend to be more longer-term value investors VS the western investors (or speculators) trading ETF’s. It will be interesting to see if once again this is the case and the price recovers from here.
India too has seen an increase in demand at these lower prices. Gold was reported by Reuters as trading up to a $5 per ounce premium over official domestic spot prices last week, as demand was reported to have significantly improved. It is starting to look like the latest washout in gold has run its course and the correction could finally be coming to an end. Let’s hope gold can hold above the key longer term trendline from a technical perspective, seen below.
The Australian property market is on fire at present, leading the RBA to be concerned over the disparity between surging house prices and weak wage growth. In a speech at a business summit this week Phillip Lowe warned that soaring house prices coupled with low population growth and stagnated wage growth was not a healthy combination, and ‘raised concern for many people’. Record low interest rates continue to fuel the fire in the Australian property market, but it isn’t the case that everyone is excessively wealthy, it is simply the case that Aussies are taking on more debt than ever before.
Australia’s household debt to GDP ratio is one of the highest in the world and the royal commission has not seemed to have a lasting effect on the lending standards of most banks. It is true that Lowe expects interest rates to remain low, as long as wage growth remains weak, however there is no doubt many Australians are maxing out their borrowing capacity to get the largest loans possible. The common assumption is that rates will never rise, ever, which is a dangerous mindset to have when it comes to properly assessing your risk tolerance. Even the slightest increase in the underlying cash rate could put a lot of households into a credit crunch.
Even right now with the RBA’s targeted cash rate of only 0.10%, we are seeing around one third of Australian households being 30 days behind on their mortgage payments. A survey conducted by Finder found that 31 percent of home loan customers were behind on their payments with South Australia having the greatest number at 41 percent. Scary when you think about the number of households that would currently be on the temporary ‘job keeper’ payments.
New research by CBA has estimated that around 110,000 people could lose their jobs when JobKeeper expires at the end of the month. It is less than 3 weeks until the Federal Government stops subsidising wages for roughly 900,000 employees. Economists at CBA think recipients in the ‘transport’, ‘arts and recreation’ or ‘accommodation and food services’ industries are the most likely to lose their jobs. We could expect our official unemployment number to start rising shortly after, which could impact the AUD/USD negatively depending on how that plays out. The fallout from the end of JobKeeper could be worse than expected, with University of Melbourne economics professor Jeff Borland seeing job losses between 125,000 and 250,000. Keep an eye on Australian employment numbers into April/May. It could move the AUD/USD significantly if the numbers print better or worse than expected.
To put Australia’s household debt bonfire into perspective, when we compare to the peaks in household debt in pre GFC levels in other housing bubbles, Spain peaked at only 85% of GDP before having a financial crisis they are yet to recover from, the US peaked at 98% of GDP right before the GFC. Australia is currently sitting at 128% of GDP. We cannot withstand higher interest rates without a credit crisis, so we better hope we don’t see inflation here domestically getting to the point where the RBA is forced to raise rates in response.
As for the latest jump in property prices nationally, “cheap money is the most important thing by far” according to Prof Hal Pawson of the University of NSW. “It’s the ability to take out $150,000 more on a mortgage than you could have had a year ago on the same salary.”
Gold Bitcoin and the Elon Effect
Over the years the Gold VS Bitcoin argument has gained traction, with many high-profile figures from both markets getting involved in heated discussions over why one is a better investment than the other. Of course, given the much smaller market caps and much lower liquidity that crypto currencies offer, you obviously have more potential form extremely volatile short-term moves, either higher or lower. Just look at a long-term Ripple chart to get an idea.
I’ve always held the believe that the two markets should be viewed entirely separate, and that whole debate over one VS the other as being unproductive. Gold is of course an entirely different asset class to crypto currency. It has a much longer track record as a store of wealth, but it will never offer the same potential explosive moves that you see in crypto. One is a safe haven asset that has lasted millennia, the other is a complete speculation, and in my opinion the greatest bubble we will see in our lifetime. Not to deter anyone away from trading it, as it has also been possibly the greatest investment opportunity if you were brave enough to hold on for this long.
The one thing that has always prevented me from feeling safe holding bitcoin is the likely underlying potential fraud of Tether, which can be created at the push of a button, and is largely unaudited. How much of the market has been driven by Tether printing is unknown, but they themselves went from claiming a 100% backing in USD to 70% just recently (admitting they were lying previously) and they are currently under investigation for fraud by the New York Attorney General.
Few comparisons go into such detail as the recent one below. Jordan Eliseo, Manager of Listed Products and Investment Research at the Perth Mint has put together an excellent piece comparing the two markets in detail and this would be essential reading for anyone interested in either market.
Until next week,
Guardian Gold Sydney
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