Gold: It’s Only Just Getting Started

Here we are again. It’s the first Tuesday of the month.

That means we have to go through the charade of pretending the RBA knows what it’s doing.

In the lead up, bank economists waste countless hours trying to work out whether the RBA will cut rates or not. But none of them will call a spade a spade and admit that our central bank has lost the plot.

That’s exactly what has happened though. The global central banking fraternity is so enamoured with its one and only policy tool that they simply can’t see — don’t want to see — that it is blunt and useless.

Anyone without a degree in economics can see that lower rates have left the Australian economy — in fact the whole global economy — in a terribly fragile situation.

Seriously, only someone with an expensive and indoctrinated education could be so blind to reality.

Let me explain…

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Put simply, lower interest rates encourage debt accumulation. Debt is future consumption bought forward. But this increase in demand hasn’t come with a bought of inflation. In other words, supply has increased along with demand, so price rises are minimal.

But the geniuses with their hand on the interest rate lever see that as a problem. They want more inflation! So they lower rates again, which increases debt, creates more demand…and more supply.

And still there is no inflation!

When interest rates are at rock bottom, nearly anyone can stay in business. Therefore, low interest rates encourage an ample supply of goods and services. There is no discipline imposed with low interest rates. Everyone is a winner.

Yet, these fools keep cutting rates in the hope that it will create more demand than supply, and that the prices of goods and services will go up. In a globalised world, this isn’t happening. And it’s unlikely to happen.

I shouldn’t say that everyone is a winner though. Savers are shafted badly by such a policy.

But we live in an age where the rules we were brought up with no longer apply. Saving is no longer a virtue. Taking on debt is.

Australia has net debt of $1 trillion. Who do you think the RBA is looking out for given this situation — the debtors or the savers?

Sadly, they see their decision in purely economic aggregates. That is, for every interest rate cut, a dollar lost by savers is more than offset by a dollar gained by debtors.

But despite the efforts of the RBA in recent years, signs are now evident that the economy simply has too much debt. With interest rates at historic lows (and set to get even lower) credit growth in the month of May came in at just 0.2%, with housing credit growth of 0.2% and business credit growth of 0.1%.

Overall, that’s just 2.4% per annum.

Tax cuts can’t come soon enough

Tax cuts can’t come soon enough. Allowing people to retain more of what they earn, to spend as they see fit, is a far more responsible form of stimulus than trying to goad people into taking on more debt.

While interest rate cuts are all but useless for the economy, the stock market loves them. If you include the benefit of dividends, the Aussie stock market is probably close to, or at, all-time highs here.

Yet the economy is in the toilet apparently, and needs further rates cuts to sustain it. Go figure…

Interestingly though, the Aussie dollar has been strong in the past week or two. Late last week, it popped its head above 70 US cents, as you can just make out below…

Australian Dollar/US Dollar - AUDUSD (FX) 1 Day Bar Chart - USD - 02-07-19

Source: Optuma

[Click to open in a new window]

But the trend is still down, and the fact that the dollar has performed so poorly while iron ore (which along with coal, is one of our major export earners) has been in such a strong bull market for the past few years is extraordinary.

It tells you just how structurally challenged our economy is. With that in mind, perhaps the recent strength has little to do with anything positive going on in the Aussie economy. Perhaps it’s more about weakness in the US dollar.

Have a look at the next chart, which shows the US dollar index…


US Dollar Index - DXY (WI) 1 Day Bar Chart - USD - 02-07-19

Source: Optuma

[Click to open in a new window]

As you can see, the greenback has been in a strong bull market since April/May of 2018. But now, for the first time in a year, the moving averages (which indicate the medium-term trend of the dollar) could potentially cross to the downside.

A break below support (green line) would increase the probability that the trend is changing for the greenback.

This is, of course, related to the US Federal Reserve recently changing its tune on interest rates. Apparently, the lowest unemployment rate since 1969 isn’t enough for the feds to keep their hand off the interest rate lever. They need to do more.

A break lower would be good for the Aussie dollar, purely in a relative sense. But the best hedge against the collective madness of central banks is gold. Right now, you’re seeing a nice little correction play out in the gold price. That’s to be expected after such a strong run.

But as I’ve said before, this is a correction to buy. I think gold’s move is only just getting started.

Regards

Greg Canavan,
Editor, The Rum Rebellion

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Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

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