Sunday, August 7, 2011

S&P Downgrade US, Euro Bailout and Gold

We've had one of the most intense weeks for the metals and markets in a long time. With the S&P downgrading the US AAA rating (to AA+) and the severity of the Euro crisis increasing, Italy under pressure during the week with Germany now suggesting that they are too big to bailout... it's going to make for another very interesting watch for the week ahead.

Personally I'm of the opinion that the rating downgrade may have been already priced in and will have less short term impact on global markets than the current Euro situation. In the coming week Europe may once again start stealing the headlines (after weeks of US centric coverage on the debt ceiling, crashing markets and now S&P ratings downgrade).

What can we expect for the metals...?

Last Saturday (when Gold closed around US$1630) I suggested that Gold may be putting in a short term top (priced in USD). Although Gold has rallied strongly over the last few trading sessions (and surpassed $1630 by around 3.5% intraday, closing around 2% higher) it is still within the channel it has been trading inside for the past 3 years and a correction may still be imminent (at the same time I would still highly recommend that you consider physical Gold exposure if you don't already have a position). Of course what you do with my opinion and the suggestive nature of the below chart is your own choice, I have no personal exposure to the US price of Gold (being located in Australia) and have no intention of 'trading' the (short term) top (if it is one).


Of course given the uncertainty going forward we could still see the price carry on higher and break out of the channel as investors seek safety in what is becoming one of the very few 'safe havens' left. It will certainly be interesting to see whether the USD will continue to act as a safe haven given the ratings downgrade.

I also recently provided some guidance on my opinion for Silver (LINK) suggesting if it closed below US$39 for a few days that we would likely see low $30s again at a minimum. Silver closed below $39 on Friday, unless we see a quick recovery in this coming week then I think short term the price of Silver will fall. Likely a correction back to support around US$32.50-$33 or perhaps even lower.

But what about us Aussies?

Two months ago I suggested that the price of Gold in Australian dollars was about to soar (LINK, recommended reading as below carries on from same theme), based on the expectation that increased systematic risk from the Euro situation could send it higher (via AUD falling faster than the price of US Gold). Well, it's taken a little longer than I had expected for events to play out post QE2, however it seems this prediction is somewhat coming to pass.

Gold was around AUD$1430 when I wrote the below:
Even if we were to see Gold pull back a little to $1450 in US$, if we see the AUD dip at the same time to a level only seen around 8 months ago prior to QE2 at around .85 against the USD this would result in a local Gold price of over AUD$1700. Such a scenario is not beyond the realms of possibility and in my opinion pricing around these levels is somewhat likely later this year.
Over the past week the AUD has dropped from over 1.10 vs the USD to just over 1.04 (with the US price of Gold rising this has resulted in a local Gold price of over $1590!). My expecation is that the AUD will continue to fall as the Euro crisis intensifies. I don't expect the US price of Gold to correct to $1450 as suggested above. A bottom in a regular correction (within the weekly channel shown above) might see it drop back to a price around $1500. Combine that with an AUD/USD rate of .90 and still a target of over AUD$1650+ seems likely by the end of the year.

Of course listen to mainstream analysts and they will tell you that the AUD is on a beeline for $1.50 against the USD, however I think the reality is we will see sub 90c before we see over $1.30.

Priced in Australian dollars Gold has well and truly broken out making new highs for the first time in almost two and a half years (possibly the last currency in which to do so over recent months). As The Prince pointed out on Macro Business the other day, the local price of Gold has been forming an ascending triangle and the move in the past couple of trading sessions (combination of higher US Gold price and falling AUD against USD) has well and truly pushed the price of Gold into what looks like a breakout. Whether or not it holds is another question, but as I suggested in the previous post and above the price of Gold in Australia seems to do well during times of high systematic risk and right now with the US ratings downgrade and the Euro bailout still in question we have systematic risk coming out the gazoo.

The below chart plots a weekly chart of XAU/AUD (Australian Gold price) against the VIX, which is an indicator of volatility in the markets (which we usually see with an increase of systematic risk). As can be seen on the chart, the AUD price of Gold has generally seen a run up in price with sustained volatility which is a result of systematic risk (2008 with Lehman's collapse and GFC, early 2010 with the Euro crisis and now with the sovereign crisis intensifying):


I suspect that the world global financial/sovereign issues are far from over and this diagram from Gordon T Long (I updated the position of the 'we are here' triangle) provides a nice model of where we have come from and where we are likely heading:


The exact order, timing and severity of the events that lie ahead of us will be impacted by decisions and changes that are yet to be made by Governments and central banks alike. In these uncertain times though there is only really one place where I feel safe with my capital stored and that's in Gold.

Speaking of decisions that are yet to be made (and may impact on the markets and Gold), probably of the main events to look out for this week is the FOMC meeting on August 9th from which we might get hints as to whether the Fed is ready to proceed with further market intervention (QE3).

The general markets are looking somewhat oversold (and sentiment is crushed), so I would not be surprised to see a short term bounce next week. With so much doom and gloom hitting news sites everywhere, given my nature as a contrarian investor I can't help but expect that the stock markets end the coming week in the green.

Interesting times.


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  1. Hi BB,

    "I feel it is still within the channel it has been trading inside for the past 3 years and a correction may still be imminent"

    For an exponential growth in the gold price for an all time mega high we'd need to see the gold price break out of a linear channel. I suspect that this is it, that it might be time to switch to a log chart.

    I could be wrong though.

  2. Anon, you could be right and I agree at some point the growth curve will have to sharpen to the upside in the move to parabolic growth. If it does so on this occasion then it is my opinion we are entering the end game for this bull market/fiat currency implosion and we will see the peak of the metals before the end of 2013. Cheers, BB

  3. Silver is in better shape than gold but the PM stocks are oversold and will see a rebound.

  4. A few weeks ago I received a 1944 Mercury dime as part of my change. A tiny coin now worth about $2.80. How absurd that so little silver is worth so much. Just another indication of how worthless paper is becoming.

  5. Nice call on XAU/AUD! Up 4% today.

  6. Thanks Turdle GG.

    Looks like Gold has possible broken out of the channel in USD though. Continues to surprise to the upside. Can tell we are in a bull market!