Gold & Silver in “The Lucky Country”

What a 24 hours! Yesterday we reported gold had its best session in 3 months but last night it had its worst in 4 months?! (down AU$23 and silver down AU$0.56).  If that isn’t confusing enough, it happened after we learned Angela Merkel failed to form a government throwing German politics into chaos.  Normally that would see a flight to safety but instead shares rallied and gold fell, albeit probably in a knee jerk to the USD rallying on the falling EUR.

And so continues gold’s ‘bounce along the bottom’ albeit with a steady rise off that November 2015 bottom.  Gold is up 6% year-to-date and silver up 1%.  By comparison, and it’s a comparison people can’t ignore, bitcoin is up 710% this year and hit a new all-time high last night.

It’s a pattern testing people’s patience with the ‘hard’ assets of the 3 noted above.  However if you remove the emotion and look pragmatically at the situation, you really shouldn’t be surprised nor disheartened.

US shares are hitting all-time highs and Aussie shares getting closer to revisiting their pre GFC high too.  Gold and silver are your uncorrelated investment so really you should be expecting them to languish in such an environment.  We will concede this financials bull market has lasted longer than most, but again unemotionally, despite the absurdity of what’s fuelling it, the amount of central bank stimulus put to this market should see it last longer than you’d expect.

FOMO or ‘fear of missing out’ is the emotion that needs to be held in check at such times.  Read again our Financial Maths 101 article.

Every day that this financials market breaks record highs is a day closer to that math playing out.

We mentioned yesterday we’d talk about Australia being ‘different’ – we are of course ‘the lucky country’ are we not?  For a start few realise that term was originally coined facetiously in the context of us squandering our gifted resources.  Over the weekend you may have seen an article picked up by many majors titled “Australia’s economy is built on shaky foundations” authored by Matt Barrie and Craig Tindale.  It is a must read for anyone in the ‘Australia’s different’ camp and we’d respectfully suggest it reinforces our point above about maintaining an uncorrelated balance in your wealth portfolio, ala physical gold and silver bullion.

You can (and should) read the full article here but if you are short on time let us highlight some key text.

“Our “economic miracle” of 104 quarters of GDP growth without a recession today doesn’t come from digging rocks out of the ground, shipping the by-products of dead fossils and selling stuff we grow any more. Mining, which used to be 19 per cent of GDP, is now 6.8 per cent and falling. Mining has fallen to the sixth largest industry in the country. Even combined with agriculture the total is now only 10 per cent of GDP.”

“With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed avocado.

Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other.

A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, “upswings” last 13 years).”

“Urban planners say that a median house price to household income ratio of 3.0 or under is “affordable”, 3.1 to 4.0 is “moderately unaffordable”, 4.1 to 5.0 is “seriously unaffordable” and 5.1 or over “severely unaffordable”.

At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of “severely unaffordable”. Melbourne is 9.6x.”

“Unsurprisingly, the CEOs of the Big Four banks in Australia think that these prices are “justified by the fundamentals”. More likely because the Big Four, who issue over 80 per cent of residential mortgages in the country, are more exposed as a percentage of loans than any other banks in the world, over double that of the US and triple that of the UK, and remarkably quadruple that of Hong Kong, which is the least affordable place in the world for real estate. Today, over 60 per cent of the Australian bank loan books are residential mortgages. Houston, we have a problem.” 

We remind you too that Australia’s sharemarket is dominated by our financial institutions than any other in the world.

And finally, and in a final reminder of our ‘maths’ fixation….

“We can’t rely on property to provide for our future. In 1880, Melbourne was the richest city in the world, until it had a property crash in 1891 when house prices halved causing Australia’s real GDP to crash by 10 per cent in 1892 and seven per cent the year after.

The depression caused by this crash was substantially deeper and more prolonged than the Great Depression of the 1930s. Macro Business points out that if you bought a house at the top of the market in 1890s, it took 70 years for you to break even again.”

“The luck country”  was coined 30 years ago and here is a reminder how:

“We took the view in the 1970s — it’s the old cargo cult mentality of Australia that she’ll be right.

This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through.

In the 1970s … we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart … If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems … Then you are gone. You are a banana republic.”