Gold Surges But AUD Spoils the Party… For Now

As widely expected the US Fed raised rates last night.  In a combination of the classic ‘buy the rumour sell the fact’ and what was perceived to be a slightly more hawkish stance going forward gold (up $25), silver (up 55c), bonds and shares all surged on the news.  The only loser of the night was the USD, and in a big way which saw our AUD soar over the 77c mark and wipe out all the gains in Aussie gold and most of it in silver.  We also saw the incumbent party prevail in the Dutch elections with the Freedom Party come in a distant second.  That could have been negative for gold but it wasn’t.  The resulting relief rally in the Euro no doubt added to the USD woes last night, and added to gold’s rally.

So the big question remains… just how long will this Aussie dollar remain so strong?  It may be a little instructive to look at our sister story of Canada (Canadia to Mr Abbott).  Like us, Canada experienced a wonderful mining boom courtesy of China.  Like us, Canada has experienced a rampant property market in part due to Chinese investment and record low interest rates fuelling speculation.

In the last two days we have seen another couple of warning signs about how this could end.  Firstly, courtesy of Fairfax yesterday:

“The Reserve Bank is considering tighter bank lending standards amid concern about how the financial system would handle a collapse in housing prices, beginning with Brisbane apartments.

The Bank's assistant governor (financial system) Michele Bullock told a business event in Sydney that the Reserve Bank was particularly uneasy about the "looming oversupply of apartments in Brisbane in particular, and possibly in some parts of Melbourne".

"There are indicators that, in the event of a downturn, there might be systemic issues for the banking system," she said.

"The worry is what happened in the United States: a big downturn in housing prices and negative equity. Hopefully what we've done with strengthening the resilience of the households and the banks means they can withstand that sort of thing if it happened."

"But what we saw from the global financial crisis has made us more focused on the fact that just because one institution doesn't look to be doing anything particularly risky, it doesn't mean that if you aggregate it with the others the end result won't look quite risky."

It is local investment speculators more than Chinese investors that has fuelled our property bubble, all fuelled by cheap credit.  Indeed investors now account for over half of all housing loans in Australia, the highest ever save for the peak last year.  The RBA know that if they raise rates they could not just risk popping the bubble but could be adding costs to all these loans to a point, in a near zero wage growth environment, they could become unserviceable.  To wit the RBA said…

"We don't want households to find themselves in a situation where they have to emergency sell or whatever because they can't afford it any more."

BUT, and this is the big but, they also know the underlying economy and that belligerently strong AUD could do with lower rates.  They are stuck.  For now.

Also yesterday, the BIS (Bank for International Settlements, or ‘the central banks’ central bank) flagged Canada as joining China in their recession ‘danger zone’ measure of the gap between Credit and GDP.   Have a look below who is next… Australia.  That rebound in GDP last quarter may have saved us but you’ve read enough by now to know that may not last.  At some stage our massive private debt burden will come home to roost.  Gold in USD is on the up.  Whilst we may not be enjoying that ride here yet, a 77c AUD does not feel like a permanent feature….