Echoes of 2008: Real or not, the ban on Aussie coal further strengthens the case for gold
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Coal and gold do not appear to have much in common, but there is a link and it’s one that affects every Australian reader of Stockhead.
Why? Because one is driving down the value of the dollar, and the other is a way of dodging the impact of a currency crash.
No prize for guessing that the bad boy is coal. Not because of its status as an enemy of the environmental movement; the opposite actually. China’s attack on Australian coal has suddenly reminded everyone how the country pays for its enviable living standard.
A full-blown Chinese ban on Australian coal, which is the illogical extreme of what might happen if the relationship with Australia turns really sour, could see the Aussie dollar dive below US50 cents and that’s the end of your overseas holiday, or that new BMW you covet.
If a fall from the current US71c to below US50c sounds like a wild exaggeration that’s probably because you weren’t paying attention to currency markets 10 years ago when the Aussie dollar dropped to US48c. I remember it well because I was on assignment in New York and it was my buy at a dinner for six – ouch!
What killed the Aussie currency in 2008-09 was its inability to compete with a stampede into safe haven investments such as the US dollar, the Swiss franc and gold.
Tough economic times, and 2008 was the worst since the Great Depression of the 1930s. It hit most asset values as investors ducked for cover – except the safe havens, and the point about gold for Australians is that it is the most accessible of the havens.
Back in ’09 while almost everything else was in decline, gold performed brilliantly, rising from $US985 an ounce to an all-time high of $US1895/oz in September, 2011, a 92% increase in just over two years.
In Australian dollar terms the rise was not as notable because the Aussie currency, which had crashed in ’09, staged a recovery, delivering a local gold price up by 17.5% from $A1513/oz to a peak at the time of $A1799/oz. Not as good as the US price but better than almost everything else.
The real point about the higher gold price, whether measured in US or Australian dollars, is that it occurred at a time when most other assets were falling. Gold, in effect, played its traditional role as an insurance policy.
History might bore some people but if you ignore it you might be condemned to repeat mistakes – and right now there is a whiff of those 2008 events in the air.
Whether what happens over the rest of 2019 turns out to be as bad is not the point in looking at today’s events and seeing the parallels of political uncertainty in most Western democracies, the yet-to-be-measured effects of the China v US trade war, and the collapse of residential property prices in Sydney and Melbourne.
Rarely has the outlook been less clear, or more worrying, and when you layer on the impact of a possible Chinese ban on Australia’s biggest export earner the country could well be heading into a recession.
And the Aussie dollar could slide sharply lower, especially if the Reserve Bank cuts interest rates later this year to try prop up the property market and the wider economy.
Talk of a recession is not new with most commentary focussed on the “wealth effect” of falling property values. That’s code for “when people feel poorer, they spend less”.
In much of Sydney and Melbourne, it’s gone way beyond feeling poorer; they really are poorer.
Selling less coal to China might please some people but the effect on the Australian economy could be significant, especially at a time when the domestic economy is under pressure, as seen in falling property values and declining consumer spending.
Longview Economics, a London-based consultancy, spelled out the recession case in a research paper published last week based on the “bursting of the housing bubble”, bruised banks which are limiting credit, and rising international interest rates which is forcing Australian banks to raise their mortgage rates.
It is a toxic brew, compounded by the uncertainty of a likely change of government in Canberra complete with the threat of higher taxes and other investor-unfriendly policies.
The case for gold is the same as it is for any other form of insurance, as was explained here in late December when a headline in Stockhead said it all: “Why gold could be a $2000/oz winner in 2019”.
At the time of that report the Australian gold price was $A1774/oz. At the close of play on Friday it had risen to $A1863/oz, up 5% in two months and on a clear upward trend towards the once unthinkable $A2000/oz mark.
What’s driving gold is fear of a global downturn with a growing number of nervous investment bankers and analysts tipping a severe recession as the bad political and economic news builds towards a crisis.
Central banks, the biggest owners of gold, are buying at a rate unseen for more than 50 years, led by Russia and China which want to cut their exposure to the US dollar. As they do, they drive down the value of the US dollar which, in turn, lifts the gold price.
Long-term critics of gold have also been “adjusting” their positions, with the latest being a real surprise – a story in the influential Economist magazine which explored the psychological appeal of gold as an asset class starting to outshine everything else as a safe haven.
Never a supporter of gold, what the Economist did was create a hypothetical situation of how people react when confronted by a profound set of unknown and unpredictable events – they seek safety and that brings gold into the picture.
“Consider the alternatives,” the Economist wrote. “The euro is flawed. It has no unique sovereign issuer to stand behind it. And the yuan is not a currency you can trade easily. The yen, admittedly, is good bolt hole… the Swiss franc has similar appeal. And the U.S. dollar? As a global currency it has no peer.”
But, the problem with the US dollar is that there is so much in circulation that the government-backed bond market has reached 100% of gross domestic product.
“There is growing concern that the dollar is a crowded trade…. It is why gold is starting to appeal again as a spot to converge upon.”
Gold bulls are re-emerging as uncertainty in other markets grows.
Sharps Pixley, a London bullion dealer and biased towards gold, calculated last week that gold’s Relative Strength Indicator (RSI is a technical measure which charts current and historic strength of an asset) has reached 73, its highest since September, 2011, the month when gold peaked in US dollars.
A measure over 70 in an RSI can be considered “over-bought” and poised to fall, though Sharps Pixley’s chief executive, Ross Norman, reckons that’s not the case today.
“There have been a few signals that echo the early stages of a bull run, including the stealth rally in gold in non-dollar currencies (Australia is just one of more than 70 where gold is at a record high), and perhaps most encouragingly news that central bank buying is at its highest since 1967.”
Tipping the future gold price is a risky business. Buying insurance is sensible, and that’s the best way to see gold, as an insurance policy against things going pear-shaped, which is what they’re starting to look like.