Gold - Where To From Here?

Early this year gold and silver commenced their next bull market cycle.  Technically a bull market is called when the price rises over 20%.  Both gold and (especially) silver have cooled off lately but in USD terms they are still up 25% and 37% so far this year.  Our strengthening AUD has turned that into 20% and 32% for us.  Such cooling off spells are completely normal in bull markets, it’s the overall trajectory that counts.  It’s why we call them bull markets not train markets, it’s a bumpy ride.  But hang on, buy on the dips, and the rewards are there.

So let’s take look at exactly where we are when comparing the last 3 bull markets courtesy of the following graph from Casey Research:

So that’s the big picture… Let’s zoom in a little.  We mentioned the difference between USD and AUD returns earlier and it could well be important going forward.  As this is written we have an AUD of 75.7c and are 3 sleeps away from the US NFP employment figures (easily the most anticipated since last November) that will dictate the next shift in the market.  So what could the next buck of the bull look like?  

If the NFP is strong it will be a hawkish sign, get the crowd expecting a rate hike as early as September, and rush to USD which would ordinarily put pressure on gold.  However there are two key things to consider here.  Firstly the stronger USD will likely see a weaker AUD in kind, and likely wash out most AUD gold losses in the process.  Secondly such hawkishness would likely see a considerable correction in US (and then global) shares (because they are supported by little other than monetary stimulus and a whole lot of debt).  PE’s are so elevated right now it could even trigger a crash…it is September after all.  That in turn could see a flight to gold, in which case gold may rise with the USD, a win win for Aussies.  If that crash is protracted, the Fed already outlined there would be more monetary stimulus beyond low interest rates.  That is very bullish for gold.  Just remember this bull market for gold and silver started the month after the last rate hike in December.

If the NFP is weak it will unleash dovishness – expectations of sustained low interest rates and promises of more stimulus fresh in people’s minds.  That would likely see the USD resume the slide it has seen most of this year, and both gold and shares rally (the former off the beginning of a bull market, the latter already over valued and nearing the end).  However, that lower USD could likely see the AUD climb further, and wash off some of the AUD gains as has been the case this year as pointed out at the beginning of this article.  The important bigger picture thing to remember here is that our central bank, the RBA, will not sit idly and let that happen. You would likely see further drops in rates here to force the AUD down and see you eventually enjoy more of those gold and silver gains.

Finally let’s all just remember that gold doesn’t care so much about nominal interest rates set by a central bank.  Gold is all about real interest rates. i.e. nominal rates less inflation.  Even a rate hike of 0.25% to 0.5%, less say 2% inflation = -1.5% real rates.  And that, in part, is why this gold bull market is still running, a bull market that started after the first rate rise in 9 years….