Gold Holds Purchasing Power – In Beer

Precious Metals Commentary

Gold held within its $1,480-$1,550 channel during a headline driven week. The metals were initially supported with weak manufacturing data out of Europe and then Boris Johnson’s suspension of British Parliament being ruled as unlawful.

 
The announcement of a formal impeachment inquiry against President Donald Trump was a further boost as was Trump’s surprisingly negative comments at the UN regarding China’s “massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property.”

Silver took the lead, reaching a high of $18.74, which saw the gold:silver ratio move from the 85s to below 82.
 

However, the move was not to last with precious metals giving up the gains after Trump flip-flopped and said that the US-China trade deal could happen sooner than expected.

With the Australian dollar weakening further from last week’s drop, $A gold held above the $2,200 level and is currently trading at $2,230 along with silver in the mid-$26.

Next week sees China’s Golden Week and their National Day, so demand out of the east should be weak but safe haven support from geopolitical factors like Brexit and Iran/Saudi Arabia tension should keep a bid under the metals.

Gentle Turning Point

In a recent speech, RBA Governor Philip Lowe noted that while the global economy was growing, geopolitics were creating considerable uncertainty resulting in risks being “tilted to the downside.”

But Mr Lowe says not to worry, as Australia’s long-term fundamentals remain strong and that while household spending is the main source of domestic uncertainty, after being through “a soft patch, a gentle turning point has been reached” and growth should pick up.

Lovely, we trust you now feel much soothed and will immediately go out and buy stuff to help push inflation up. The average person is not so soothed, with ANZ-Roy Morgan’s consumer confidence index down to a two year low at 109.3.

The chart below from Mr Lowe’s speech shows the problem, with currently no growth at all in consumption per person, which he notes “is an unusual outcome at a time when employment is growing strongly.”

 
His explanation for this is a lack of wage increases (except for the top end of town, we bet) and “strong growth in taxes paid” (and it would be foolish to expect any decline in that). We note that consumption has been in a downward trend for 20 years (as per our added red arrow). Regarding that strong employment, we found this chart of interest.

Looks like all the employment over the past year has been government jobs. That is not sustainable.

Another long-term downward trend is in housing turnover, which Mr Lowe considers as another explanation for weak household spending (less home moves means less new furniture, appliances, real estate fees, etc.).
 

We’d suggest that as housing prices have risen to greater and greater multiples of income, less and less people can afford to move once they have bought. If that trend continues will it mean we all end up living in our first home forever?

The government and regulators are doing their best to keep housing inflated, after the recent price fall scare (and it is a scare when a substantial amount of our money in banks is backed by mortgages).

The Grattan Institute blogged that home prices reversed smartly after the Australian Prudential Regulatory Authority changed it rules governing how banks assess loan applications, which were estimated to increase borrowing capacity up to 15%.

This will not stop the RBA’s relentless suppression of interest rates, with Mr Lowe saying that “an extended period of low interest rates will be required” to reduce unemployment and get to that all-important inflation target, particularly when interest rates in other countries were also falling.

Speaking of global interest rates falling, this chart from Bianco Research (via Macro Tourist) not only shows that long-term trend but that when more than 80% of countries have interest rates below the US, a recession or market crisis usually follows.
 

Maybe this was one of the factors behind the prediction from David Rosenberg (Chief Economist at US wealth manager Gluskin Sheff) that even if the US Fed cut rates to zero, a recession would still be less than 12 months away.

By the way, don’t worry that the US Federal Reserve’s temporary $75 billion overnight repo activity (that we only reported on last week) had to be expanded with an additional 14-day $30 billion repo and then on Wednesday the limits increased to $100b overnight and $60 for the 14 day. It is probably just a “soft patch”.

With interest rates on their way to zero, there is little to be lost by holding physical metal or cash. In the case of the latter, a recent RBA analysis on the life of banknotes didn’t bother modelling $100 notes because “they are overwhelmingly used for store-of-value purposes and so do not tend to wear out” (by the way, $5 and $10 notes last for around 5 years, $20 for 10 years and $50 for 15 years).

An earlier study estimated that “roughly half to three-quarters of outstanding banknotes are hoarded”, which given the total value of outstanding banknotes at $80 billion, means $40 to $60 billion worth. Putting that in gold terms, it is close to 800 tonnes, or ten times Australia’s gold reserves.

With the Currency (Restrictions on the Use of Cash) Bill 2019 having its first reading in the House of Representatives last week, maybe those cash hoarders should consider switching to some gold and silver hoarding instead.

Ultra-High-Net-Worths Spooked

Cash hoarding is not just for the “under the mattress” brigade, with Bloomberg reporting that 42% of ultra-high-net-worth investor family offices were raising cash reserves on expectations that the global economy would enter a recession by 2020.

Timothy O’Hara, of Rockefeller Global Family Office was quoted as saying that “more people [are] thinking about private investments, alternative investments or cash.” We are sure those “alternatives” include precious metals, if former Overstock CEO Patrick Byrne is any guide.

Blogging on his Deep Capture website (whose mission is to expose the deep capture of regulators, law enforcement, elected officials, national media, and the intellectual establishment by powerful actors) he said that he would be investing the $90 million from the sale of his stake in Overstock, the company he founded, into “investments that are counter-cyclical to the economy: Gold, silver, and two flavors of crypto.”

He says the gold and silver will be initially stored in Switzerland but “within two weeks, will be scattered in other locations that are even more outside of the reach of the Deep State.”

Hong Kong is unlikely to be one of those locations, with bespoke bullion broker and friend of ABC Bullion, Joshua Rotbart, quoted as saying that “at least hundreds of millions worth of gold has left Hong Kong, mostly to Singapore, but some to Switzerland” in response to anti-government protests.

Oktoberfest

With Oktoberfest in full swing, Incrementum have updated their famous gold/beer ratio which indicates how many Maß of beer, the traditional Bavarian one-liter beer mug, can be bought with an ounce of gold.
 

With a resurgent gold price this year, gold’s beer purchasing power has increased to 115 Maß from 93 Maß last year. In local terms, the price of €11.80 per one-liter beer mug at Oktoberfest equates to just under $22 for a two pint jug.

Incrementum’s chart made us wonder whether gold has maintained its beer purchasing power in Australia. To calculate this, we used the “Beer; Australia” index data from the Australian Bureau of Statistics converted back to the price of a carton.
 

Even with the Australian gold price going through bull and bear markets, the price of beer in gold has been remarkably stable, particularly over the past 10 years. What is also interesting is how similar the two charts are. Below we have overlayed our chart, which only goes back to 1975, on top of Incrementum’s chart.
 

Just goes to demonstrate the universal purchasing power of gold. So if you’re a gold saver you will be covered for a pint whether it be down at your local or in Munich, Bavaria.

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.

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