Is the Aussie market next?

Friday, 8 November 2019
Adelaide, Australia
By Bernd Struben

  • A golden buying opportunity
  • In the mailbag…the human pyramid scheme

While most of us slept the night away here in Oz, US markets were enjoying their moment in the sun.

By the time the closing bell rang, all three major indices were, again, in record high territory.

The gains weren’t huge. But they didn’t have to be. US markets have been hovering near or setting new records for the past weeks.

The S&P 500, for example, gained a modest 0.27%. Still, enough for a new record. And enough to put its year-to-date gains at 22.9%.

The ASX 200, by the way, isn’t too far behind. It’s up 21.0% for the year. Though it’s still down 1.7% from July’s record high.

As stocks gained, US Treasuries sold off, pushing yields for 10-year Treasury notes to three month highs. (Yields move inversely to bond prices.) At time of writing, 10-year Treasury yields stand at 1.94%. That’s up from 1.43% in September.

Similar moves were seen in sovereign bond markets across the pond. As Bloomberg reports:

In Europe, rates on benchmark 10-year French and Belgian securities climbed back above 0% for the first time in months, while globally the stock of bonds with sub-zero yields has shrunk to around $12.5 trillion, from about $17 trillion in August.

US$4.5 trillion (AU$6.5 trillion) fewer bonds offering negative yields than only three months ago. Remarkable.

Could this spell the beginning of the end for the great negative interest rate experiment?

We can only hope.

So why the turnaround and the resurgent animal spirits?

Positive noises in the US–China trade negotiations, of course. It’s looking ever more likely that Trump and Xi may sign off on the first part of a meaningful truce before we ring in the new year.

Yesterday, China’s Ministry of Commerce spokesman Gao Feng said:

In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement.’

The US side is echoing the positive sentiment.

From Bloomberg:

White House economic adviser Larry Kudlow later Thursday confirmed the advance in negotiations. “If there’s a phase one trade deal, there are going to be tariff agreements and concessions,” he told Bloomberg.

Kellyanne Conway, senior White House adviser, also said Thursday President Donald Trump is “anxious” to sign the deal.’

Now phase one of the new trade deal could still unravel. We’ve seen it happen before…more than once. And there’s still no set date or meeting location for Trump and Xi to sign off on it.

But both men are under intense pressure to make some progress. So I believe this time we’ll actually see some significant concessions from China and some tariff rollbacks from the US.

That should offer a good boost to stocks and further erode the pool of negative yielding debt.

As for gold?

We’ll look at that right after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 182.24 points, or 0.66%.

The S&P 500 closed up 8.40 points, or 0.27%.

In Europe the Euro Stoxx 50 index closed up 17.94 points, or 0.49%. Meanwhile, the FTSE 100 gained 0.13% and Germany’s DAX closed up 109.57 points, or 0.83%.

In Asian markets Japan’s Nikkei 225 is up 26.48 points, or 0.11%. China’s CSI 300 is up 0.42%.

In Australia, the S&P/ASX 200 is bucking the trend, down 14.03 points, or 0.21%.

Crude nudged up overnight on the back of rising optimism a US–China trade deal will see an increase in global energy demand. West Texas Intermediate crude oil is US$57.10 per barrel. Brent crude is US$62.29 per barrel. Crude could rise another 5% from here in the short term. But I believe the US-driven supply glut will see oil take a steep fall in 2020.

Gold headed the other way, down 1.5% since this time yesterday. The yellow metal is trading for US$1,468.85 (AU$2,129.08) per troy ounce. Silver is US$17.11 (AU$24.80) per troy ounce.

One bitcoin is worth US$9,228.40.

The Aussie dollar is worth 68.99 US cents.

A golden buying opportunity

As you saw in the markets section above, gold took a hammering on news that the trade war could be winding down. At one stage it was down US$30 per ounce before gaining back about US$6.

The yellow metal is still up 14.5% since 1 January. But at US$1,468 per ounce it’s well of its US$1552 peak from 4 September.

Gold’s 2.7% price slide since Monday is being magnified among most gold producers. Just as gold stocks tend to amplify any gains in the price of gold, they also tend to lose far more when the price slides.

Gold mining giant Newcrest Mining Limited [ASX:NCM], for example, is down 8.1% since Monday’s open. More than half of that loss comes amid heavy selling today.

On the smaller end of the big players, Evolution Mining Ltd [ASX:EVN], with a market cap of $6.7 billion, is down 7.9% for the week. Again, today’s 5.3% drop in intraday trading makes up most of those losses.

So why the big slide?

Well, the gold price, as you may know, has largely been driven higher by three aligning factors.

First, there’s low interest rates. Low or even sub zero rates make gold — which pays no yield — more attractive. But as mentioned earlier, 10-year Treasury yields have now ticked up 0.51% since September. That makes holding gold relatively more expensive.

Second, gold is the classic haven asset. When there are rumblings of political or economic uncertainty, the demand for gold spikes. As does its price. Both the trade war and Brexit have been good for gold. If the US and China do ease back on their trade dispute and Brexit comes off without too much turmoil, gold could have further to fall.

The third factor supporting gold’s price surge has been central bank buying, with China and Russia leading the pack. I don’t expect to see an end to central banks’ appetite for gold. But the latest news from China may also be putting a damper on the price.

China’s upped its gold holdings for the past 10 months running, adding more than 100 tons to its stockpile. But, Bloomberg informs us, ‘China just hit the pause button on its gold-buying spree. The People’s Bank of China kept holdings level 62.64 million ounces in October, unchanged from a month earlier…’

That’s three strikes for gold.

But don’t rush out and sell your gold stocks…or bullion holdings…just yet.

One week of good news does not a big picture make. All three factors above could be reversed in a heartbeat…or a tweet.

And then there’s the supply angle. According to colleague Greg Canavan’s in-depth research, the world is fast approaching peak gold. Meaning new supply will head downhill even as demand could — and likely will — resurge.

That’s why Greg remains upbeat about his top small-cap gold plays over at Crisis & Opportunity. Sure, they’ve all lost ground this week as well. But that could make now the best time to pick up some shares…before the gold price turns back higher.

You can get the full scoop in Greg’s ‘Peak Gold’ report here.

In the mailbag…the human pyramid scheme

I titled Wednesday’s Port Phillip Insider, ‘The Biggest Ponzi Scheme in History Nearing Collapse’.

The scheme in question is the exponential global GDP growth over the past 120 years. It earns the Ponzi label because that growth, largely, has been driven by population growth. Which is fast nearing its end point. All the more so in the face of growing global activism to reduce carbon emissions at all costs.

We received a few letters on the topic. Like this one, from reader John:

So glad to see the elephant in the room mentioned. It rarely is discussed. If every person on this planet rode a pushbike, became a vegetarian and did all possible to improve the environment and say we halved our emissions. Then we double the population again, we are right back where we started…

The Population Ponzi can’t go on.

Thanks John.

Perhaps something the Aussie government may want to keep in mind before signing off on any new trade deals with the EU. As the AFR notes:

France’s Foreign Minister warned the Morrison government that a planned free trade deal between Australia and the European Union must incorporate “highly ambitious” action on climate change.

At a growth rate of 1.6%, Australia’s population is increasing at more than twice the rate of the US. And those 400,000 additional folks each year probably enjoy a good meat pie and road trip as well.

We’re told this is essential for economic growth.

And yet real wage growth — outside taxpayer funded government jobs — has gone missing…

That’s all for today.

Be sure to tune back in with trading guru Murray Dawes on Monday and Tuesday. I’ll be taking a brief birthday hiatus to smell the roses.

Cheers,
Bernd