Global stock markets were roiled earlier this week, with investors digesting the latest trade threats, as Beijing and Washington dialled up the tension in the ongoing dispute.
The Chinese yuan went above 7 against the US dollar for the first time in many years, as the central bank let the currency go and failed to intervene. With central banks (including NZ) cutting rates left right and centre, the currency war is well and truly 'on' and precious metals may just emerge as one of the biggest bright spots.
Gold in particular has pushed to record highs in a number of currencies (A$, GBP). The NZ$ price of gold has also hit a record this week above NZ$2320 thanks also to the 'shock and awe' move by the RBNZ. US$ prices (in which gold is conventionally displayed) have been breaking out to the upside, and reached US$1500 an ounce, a level last seen six years ago.
What's this all about? Of course, there is the safe haven appeal which gold is known for, but investors are starting to appreciate it seems that "A perfect storm" is brewing for gold and other precious metals. Central bank easing, currency manipulation and depreciation, along with rising geopolitical tensions, are providing the perfect fundamental back drop for a bull market in gold.
One of our early calls at Fat Prophets, almost twenty years ago, was about this very bull market in gold, when the precious metal was trading at US$255 an ounce. Gold went onto peak just shy of US$1900 in 2011.
Precious metals are reasserting themselves to the upside, with the move magnified by the fact that gold is very under-owned in the investment community (and by the public). Many investors are only just beginning to consider PGMs in their investment portfolios, while a subset have opted for 'cryptocurrencies' as a more trendy, but even more misunderstood, safe haven.
This week we have seen NZ, along with India, and Thailand, deliver bigger than expected rate cuts. Stand by for more of the same. The latest trade tensions and the resulting spill over impact into the real economy are going to see the central banks around the world – including the Fed – throw everything and the kitchen sink at the financial system. The Fed will almost certainly be giving plenty of consideration to the next rate cut, and potentially other monetary stimulus (QE I head you say?).
The fact that around $14 trillion of global government debt is in negative territory (and expanding by the day), also has much to do with the reason that the gold price is surging. The differential between gold not paying anything and the amount of government debt that is in negative territory (now around 43 per cent of the total globally), is expanding by the day. How will the markets react should that $14 trillion double or triple in size?
Bond rates in many countries, including New Zealand (the 10-year rate is now around 1.12 per cent), Australia, the US, the UK, and Europe, to name a few, appear to be
on an irreversible downward path. German ten-year bond yields for instance have hit record lows and are in negative territory. Now YOU pay the German government 0.5 per cent for them to return your money after ten years. Adrian Orr also didn't rule out NZ heading that way.
The yield disparity between precious metals (which pay nothing) and bonds (which increasingly pay nothing) is dissipating rapidly. So the question the market seems to asking is what is more preferable in this environment – a Government I.O.U where 'you pay' the Government interest for them to return your money and you get less capital back in ten years' than when you invested? Or you put your money into something outside the Government's grasp where the value cannot be manipulated?
Therein lies our hypothesis for the coming "uber bull market" in precious metals.
Governments and central banks can see this coming, are also getting in on this action. According to last week's sector trends report from the World Gold Council, gold demand in the second quarter was 1,123 tonnes, up 8 per cent year on year. H1 demand jumped to a three-year high of 2,181 tonnes, largely due to record-breaking central bank purchases.
Holdings of gold-backed ETFs also grew 67.2 tonnes in Q2 to a six-year high of 2,548 tonnes, underpinned by continued geopolitical instability, expectation of lower interest rates and the rallying gold price in June.
So the time could well be 'now' for having some exposure to precious metals. Ways to play it? Well you can buy some gold bars (as I did back in early 2000's), or another option of course is gold stocks. Sadly, in New Zealand the listed options here are virtually zero, with OceanaGold de-listing some time ago, and New Talisman Mines something of a speculative minnow.
High quality producers (or ETFs) are a good way to go in our view. In Australia the likes of Newcrest, Evolution, and Saracen, have been running hard for some time, with supernormal profit margins being generated on the back of record A$ gold prices.
Better value may arguably be further afield, with big Northern American producers Newmont Goldcorp, and Barrick Gold having seen their shares trade sideways for years – these will surely get going if the US$ gold price plays catch up with the record levels for bullion we are seeing in other currencies.
Disclosure: Interests associated with the author hold shares in Evolution Mining and Saracen Minerals. Greg Smith is the Head of Research at investment research and funds management firm Fat Prophets.