Gold trades below $2,300

Gold trades below $2,300

Friday, 19 February 2021

In AUD terms we saw slightly better than expected employment numbers this week, pushing the AUD/USD above 77.5 US cents and helping us see the lowest gold price since February 2020, just below $2,300 AUD. It has been a very significant correction for AUD gold investors thus far, with the metal pulling back a whopping 19% from the recent highs in August 2020. Understandably investors may be becoming jittery, but there are a few indicators that the pain could be over soon for Aussie dollar gold, as we will discuss in this week’s report.

We are in the middle of what seems to be a capitulation environment in gold, which would usually coincide with a significant market bottom. It is true that we are starting to see sentiment reach extreme optimism when it comes to the stock market and potential economic recovery, and conversely, extreme pessimism towards gold, with bitcoin taking all the limelight. These periods usually occur during lows and not highs in the market, and some of the best times to add to your holdings rather than reduce or hit the sell button in fear.

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If you see the weekly chart above for gold, we can see the Williams % oscillator at the very bottom of the chart is signaling -96%.  The Williams% indicator tells you from a standard deviation perspective how ‘overbought’ or ‘oversold’ an asset is relative to its average trading range, in a given period of time. Right now, we are about as oversold as it gets when it comes to AUD Gold and these areas a usually shortly followed by a recovery in the price.

Gold typically trades within a 20% trading range intra-year, so a large correction of close to 20% from top to bottom is actually quite rare, and may only come around every few years. If we go back to recent corrections, we can see the largest during 2020 calendar year was a 12.7% correction in May of 2020, and a 9.5% being the largest correction of 2019. So, this current sell-off is already beyond what would normally be your average correction, so perhaps not much further left to find a low.

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Another positive sign for a market low has been the way that silver has held up in retrospect. After a short burst to $39AUD we have been consolidating sideways at $35 and silver seems to be well supported at these levels. Gold has been dropping whilst silver consolidates sideways in what looks to be a base for another leg higher. You would usually see silver sell off with gold in such a pullback but the ratio is falling (65:1 currently) and silver continues to catch a bid. Demand remains strong for silver and we still cannot source new Perth Mint silver bars, but expect these to be available again very soon.

When it comes to timing markets, one Warren Buffet quote always comes to mind and that is ‘time in the market is more important than timing the market”. Rather than waiting for the perfect time, dollar-cost-averaging seems a much more prudent strategy as you will get an average price for your metals and won’t be too caught up in the latest news headlines. Especially the strategy of dollar-cost-averaging into ‘oversold’ environments like we see in gold today VS ‘overbought’ environments, should yield you a lower average entry price over time.

Commodities Super Cycle?

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There is a lot of talk in financial media about a ‘commodities super cycle’, with some analysts from major investment banks calling for a bull market in commodities for the next few years at least. After the last super cycle peaked around 2008, there was overinvestment in the resources sector at the top of the market, which lead to oversupply issues pushing most commodities prices lower through to 2019/2020. In recent years a lot of capital has moved out of the resources sector and into tech and other areas, leading now to the theory that commodity prices in general have found a bottom and a significant 5–7-year bullish cycle is set to start.

An AFR article this week made reference to the setup being similar to that of the 1970s or 2000s. “Commodity super cycles tend to occur after periods of loose central bank policy and run for about a decade,” said Chris Watling, chief market strategist and founder of Longview Economics. “Commodities peaked relative to equities a decade ago and now they are very cheap and below their levels seen in 1969 and 1998 before prior super cycles began.”

It is true that we are seeing a massive amount of both monetary and fiscal stimulus currently, so if we do start seeing a push from countries like China and the US to overspend on infrastructure in response to the Covid crisis, then keep an eye on commodity prices.

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Inflation remains a topic of discussion with the US monetary base (M2) increasing by circa 20% in 2020 alone. If we finally start seeing an inflationary environment with a boom in commodities prices for the next 5 to 7 years, then one could also expect decent returns for precious metals, especially silver, being the more industrial metal compared to gold. In previous super cycles precious metals performed quite well and would have been the easiest way to get physical exposure to the boom.  

In the last super cycle between 2000 and 2008 the silver price in USD went from $5 an ounce to a peak of $20 per ounce, whereas gold started the cycle at $350 USD per ounce and topped out at $1,000 USD in 2008. History never repeats, but it does often rhyme, so let’s hope the theory of a new commodities super cycle plays out as expected. 

John Feeney

Guardian Gold Sydney

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Or on Twitter @JohnFeeney10






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