Aussie Inflation and the Game of Capital Preservation

The chance of an RBA rate cut roughly tripled yesterday after Australian CPI fell 0.2% when the average forecast was for a 0.2% increase. This represents the first decline since the last quarter of 2008 and is yet another “this hasn’t happened since the GFC” type observation that we often point out. In response, the AUD dropped over 1.2% in its biggest fall in two months.

With the prospect of lower rates on the horizon, the arduous nature of investing is becoming more of a topical issue. A good case in point are the comments from Singapore based Kay Van-Petersen, global macro-economic strategist for Saxo, who was interviewed by ABC’s Ticky Fullerton on The Business and later covered by outlets such as the AFR.

Mr. Van-Petersen sees the near term investment outlook as very confusing and risky and cites the “unprecedented” nature of central bank intervention with particular reference to the BoJ. Indeed our unexpected inflation drop yesterday is a good example of such risk and confusion and Mr. Van-Pertersen doesn’t see this environment accurately reflected by the VIX or broader markets. Consequently, he is recommending adoption of some downside protection stating that "no one knows how this ends, but one thing is for sure now: it's now more a game of capital preservation”.

The motivation behind this recommendation is based upon big picture issues whereby "we still have a lot of debt from the GFC, emerging markets are still not fixed and commodities are still not fixed", further emphasising the importance of capital preservation as a focus rather than the relentless pursuit of growth in an environment that isn’t supportive of it.

When it comes to capital preservation, Mr. Van-Petersen stated simply that “it has to be gold and silver”. In elaborating remarks, Mr. Van-Petersen said that precious metals look very attractive from a macro perspective and predicted gold to hit $US1,500 in six to 18 months. In support of this positive prediction, we leave you with an interesting chart overlaying the 1970 and 2000 gold bull market behaviours. It would be hard to argue with the correlation to date and bullion holders have prosperous times ahead if this trend continues.