Wednesday, November 16, 2011

Gold priced in AUD about to soar? Take Two!

Back in May this year I wrote a post suggesting that we would see the price of Gold in AUD soar before the year was out to over $1700 (Gold was priced around $1400 at the time, so a 20%+ move was required for this prediction to be filled). Here's a snippet from what I wrote:
...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. Bullion Baron
Here is a chart showing where the above was posted:

Wow! An almost perfect call, right?

Well... not really. As much as I would love to take credit and although the suggested price target was met within the time frame I suggested, it wasn't for the reasons I'd outlined.

This crisis and the effects I thought it would have on our Dollar (the AUD) have played out a lot slower than I expected. The AUD has shown more strength than I thought it would throughout the year, however that could soon change.

I pointed out in a recent post that the November RBA rate cut could lead to a cycle of cuts. Such action if it occurs is likely to further weaken the Australian dollar.

In a recent post by The Prince on MacroBusiness it was shown that Gold (USD price) hasn't always performed well during a credit crunch, a large correction played out during the GFC (2008). However, since 2008 Gold has shown mixed price action during periods of heightened systematic risk and tension in the credit markets, at times it has plunged like a stone, other times it has risen with the USD. While a repeat of 2008 where basically all assets (including the precious metals) are smashed can't be ruled out, it also can't be counted on that Gold will react in the same way.

The increasingly dangerous situation that is threatening to spiral out of control in Europe suggests that we may soon test whether Gold can hold it's ground in the face of another major crisis (or GFC2 if you will, even though most of us understand it's just the same underlying problems resurfacing).

I would suggest even if we see Gold correct (priced in USD) it's likely only to fall to $1600 (as suggested by The Prince on MB) and in the event of systematic risk and RBA rate cuts we could see  the AUD fall to 80c against the USD or maybe even lower. US$1600 Gold and 80c AUD gives us a local Gold price of $2000. There is of course the possibility that Gold acts more like a safe haven during the next crisis and rises at the same time as the AUD falls, the last few months show that either could happen during a period of volatility (Gold could rise when AUD falls or they could both fall together):

Shows US$ Gold can rise while AUD falls or fall with it. CLICK CHART TO ENLARGE.

If we saw Gold rise back to $1800-1900 in USD and the AUD returned to 80c then we could be faced with an AUD Gold price of $2250 - $2375.

However it plays out I would suggest AUD $2000+ Gold is likely in the short term, with the possibility it shoots even higher.

The final comment from The Prince on the post I mentioned above (Link):
At the moment, it does not pay to have a very large short position in gold, but as the left handside of the weekly chart clearly shows, during a credit crisis, gold is not a good short term hedge. The USD still remains supreme in that case. For now.
I agree with most of his post, however on this last comment that the USD remains the supreme short term hedge in a credit crisis... I would suggest the supreme short term hedge has in fact been Gold priced in AUD:


Will history repeat?


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  1. If the US does QE3 the AUD/USD will remain high. However, gold will also rise in USD terms.

    For the health of our overall economy I hope that interest rates do not fall further.

    The simple fact is, easing by the Fed or RBA will send gold higher!

  2. Good point Shervin (I agree), probably an angle I should have included. It will be interesting to see how quickly the Fed acts with initiation of further QE. They are damned if they do, damned if they don't.

    If Europe blows up it may be the case that no amount of QE from the US Fed can avoid destructive deflationary forces.

  3. I've not achieved the gains I thought I might with gold:aud. My strategy now is to hold gold in both aud and usd; and trade a small portion of it.

  4. Probably not a bad idea especially given the ease one can now get access to USD Gold via (A$ hedged) QAU on the ASX.

    The strength of the AUD over the past 6 months (reducing the gains we could have seen in the AUD price of Gold) has been a surprise although can't help but think better local gains are around the corner if this is the start of a rate cut cycle by the RBA.