If Australia is an economic miracle — the so-called Lucky Country, beneficiary of more than a quarter century of uninterrupted growth — then its banks are its most visible sign of strength. After a near-death experience in the 1990s, they’ve reformed and bounced back dramatically: Returns on equity now average around 15 percent, compared to single digits in the U.S. Share prices and dividends have risen strongly over the past decade. At around twice book value, market valuations are well above global levels.
In fact, though, this ruddy good health masks some deeply worrying trends. The balance sheets of Australia’s biggest banks are far more vulnerable than they may seem on the surface — and that means Australia is, too.
To most observers, this might sound alarmist. Scared straight after a mountain of bad loans nearly brought them down at the beginning of the 1990s, the banks reformed and minimized their international exposure, which meant they were insulated from the worst effects of the Asian financial crisis and the 2009 crash. Today they face little competition in their home market and have benefited tremendously from Australia’s strong growth, underpinned by China’s seemingly insatiable demand for the country’s gas, coal, iron ore and other raw materials. During the 2012 European debt crisis, Australia’s banks were worth more than all of Europe’s.
But Australian financial institutions have made the same fundamental mistake the rest of the country has, assuming that growth based on “houses and holes” — rising property prices and resources buried underground — can continue indefinitely. In fact, despite a recent rebound in Chinese demand, commodities prices look set to remain weak for the foreseeable future. Banks’ exposure to the slowing natural resources sector has reached nearly $50 billion in loans outstanding — worryingly large relative to their capital resources.
If anything, their exposure to the property sector is even more dangerous. Mortgages make up a much bigger proportion of bank portfolios than before — more than half, double the level in the 1990s. And they’re riskier than they used to be: Many loans are interest-only, while around 80 percent have variable rates. With a downturn likely — everything from price-to-income to price-to-rent ratios suggests houses are massively overvalued — losses are likely to rise, especially if economy activity weakens.
Australian banks are also more vulnerable to outside shocks than they may first appear. Their loan-to-deposit ratio is around 110 percent. Domestic deposits fund only around 60 percent of bank assets; the rest of their financing has to come from overseas. While that hasn’t been a problem recently, Australia’s external position is deteriorating. The current account deficit is expected to grow to 4.75 percent in the current financial year. Weak terms of trade, a rising budget deficit, slower growth and a falling currency are likely to drive up the cost of funds. If Australia’s economy or the financial sector’s performance falters, or international markets are disrupted, banks’ access to external funds could be threatened.
Risks to the financial sector should be getting far more attention than they are in Australia’s ongoing — and terrifically anodyne — parliamentary election campaign. Banks have grown immensely since the 1990s and now make up a much bigger part of the Australian economy. The top four are among the country’s largest listed companies, accounting for more than a third of total market capitalization. Their combined assets are around 130 percent of GDP.
Any pain they feel could thus spread quickly throughout the real economy. Falling bank stocks could well drive down share prices more broadly. Shrinking dividends — which have traditionally been quite high, around three-quarters of earnings — would hammer investors, especially self-funded retirees, and threaten consumption. An economy addicted to a ready supply of cheap credit would struggle to keep growing.
Meanwhile, the government’s options are limited. Cutting interest rates further to spur economic activity would risk worsening the housing bubble and adding to sky-high levels of household debt, already around 130 percent of nominal GDP and nearly 200 percent of household disposable income. Raising rates, on the other hand, could trigger defaults, especially on riskier loans such as those to property developers. Fiscal policy is similarly constrained: Increasing debt beyond certain levels would threaten Australia’s credit rating and thus banks’ access to offshore funding.
Pundits have been saying for years that Australia needs to diversify its economy, boosting services exports — primarily tourism, education and health — rather than continuing to depend on resources and debt-fueled property growth. Banks need to do the same, reducing their exposure to the housing market and the mining industry. At the same time, they should move swiftly to shore up their balance sheets, aggressively increasing bad-debt reserves, raising capital and gradually trimming dividends. Even their otherwise enviable luck can’t last forever.
Satyajit Das at sdassydney@gmail.com
(Kitco News) – Gold got pummeled this week. The recent failed triangle breakout emboldened short-term speculators to sell on rallies. Swing and trend traders bailed out on long positions in gold after the market failed to hold onto the triangle breakout.
Trying to determine your next move in gold? Consider this:
Smart traders buy low and sell high.
Long-term investors of physical gold, buy low and hold for the long-term.
Who’s Buying On The Dip?
Asian buyers –Chinese and Indian citizens have proven to be price sensitive gold buyers. These market participants buy and hold gold for the long-term.
Central banks – global central banks, especially emerging market entities have been snapping up gold in recent years to bolster official gold reserves and to diversify away from dollar FX holdings. These players are price savvy and patient buyers of gold. Central bank buying of gold accelerated in the second half of 2015, with a record 336 tons of gold purchased, according to the World Gold Council. That trend remained strong in the first quarter 2016 as central banks purchased 109 tons, the World Gold Council said.
China continues to have a voracious appetite for the yellow metal and the country has been on a massive gold buying spree in recent years. The country now buys roughly 40% of all gold that comes out of the ground. According to recent data from the Census and Statistics department from Hong Kong, gold imports to China – through Hong Kong – have skyrocketed 700% since 2010.
Individual investors. Demand for physical bars and coins has surged. American mint gold coin sales rose by 51pc in the first three months of the year against the same period a year earlier. Individual and institution players also dived into gold exchange traded funds – 364 tons in the first quarter.
Four Ways To Trade Gold
No matter how you trade gold, the metal is dipping now. Consider these plays:
physical coins,
gold futures,
mining stocks or
gold ETFs
Gold Futures
Here are the key support levels to watch. See Figure 1 for a daily chart of the Comex June futures.
Gold Exchange Traded Fund
See Figure 2 for a chart of the Market Vectors Gold Miners ETF (GDX).
Gold Mining Stocks
In the wake of the first quarter reporting season, Credit Suisse hiked its target prices by an average 29% to reflect updated net asset value and cash flow estimates for Alamos (AGI), Eldorado (EGO) Franco-Nevada (FNV) IAMGold (IAG) New Gold (NGD) and Yamana (AUY).
Bottom line: Smart traders buy low, sell high. They scale into positions. Dips are used as buying opportunities.
What are you doing now?
Silver may not be as scarce as gold, but its attractiveness to investors has been gaining momentum in 2016. Many are asking why are silver prices rising, and the answer is twofold.
Silver prices are up after several years of declines due to a host of economic factors combined with a surge in demand for the product. Here is a more in-depth discussion of those elements that answers the question: “why are silver prices rising?”
Why Are Silver Prices Rising? – Economic Factors
Weakened U.S. Dollar – The U.S. dollar continues to be weak in 2016, and this is good news for investors who are digging into the mystery of why silver prices are rising. It’s not that mysterious because the price of silver has an inverse relationship with the dollar. Investors generally shun precious metals when the dollar is strong, so a weakened dollar remains a positive signal for rising silver prices.
Interest Rates – Silver prices have a strong relationship with movements in interest rates. In fact, the price of silver took a short-term hit at the end of April, when the Federal Open Market Committee meeting took place to discuss a potential interest rate hike. Even though no increase in interest rates occurred, just the possibility was enough to send silver prices for a brief tumble. Regardless, the price of silver was up 15% for the month and has surged more than 20% so far in 2016. Silver prices have a reverse relationship with interest rates, yet the recent remarks of the Fed are encouraging. Also, even if there are some short-term pullbacks in the market for silver, Money Morning Resource Specialist Peter Krauth believes that the long-term prospects for silver are positive because of the gold/silver ratio.
Gold/Silver Ratio – When former President Richard Nixon ended the conversion of U.S. dollars into gold by foreign governments in 1971, there was a change in the way that precious metals were valued. From this point forward, gold and silver prices became more correlated than in the past, making the gold/silver ratio a valuable pricing indicator. This ratio is essentially the price of silver relative to the price of gold and can be an indicator of when to invest in silver. When the ratio shoots up past 80, which is a rarity, this is a strong signal to investors that silver is severely undervalued. Periods of higher than average gold/silver ratios, as we’ve seen this year, are excellent signs for investors that the price of silver is going to continue to rise.
Why Are Silver Prices Rising? – Supply and Demand for Silver
Supply of Silver – When the supply of anything tightens, prices will rise, and that is exactly what is happening with silver this year. In 2016, mine production of silver is falling. In Canada alone, silver mine production has declined 13% year over year. Mexico is the world’s largest producer of silver, and its production of silver dropped 10% in the first month of the year alone. As supplies dwindle, people’s appetite for the product continues to grow, which is great news for silver prices.
Demand for Silver – The demand for silver is one of the driving factors that answers the question “why are silver prices rising?” Not only is silver a popular safe-haven investment and a hedge against economic uncertainty, but it is also in demand for ornamental and industrial purposes as well. Silver jewelry has seen a resurgence in popularity in the past several years, and this growth is expected to continue. Silver is also used in such things as batteries, medical technologies, windows and glass, nanotechnology, and electronics. One of its growing applications is in photovoltaics for solar energy, where a single solar cell employs two-thirds of an ounce of silver.
How to Take Advantage of Silver Prices Rising
With still plenty of traction left in this silver bull market, there are many opportunities for silver investors to jump in for both safe-haven benefits and long-term portfolio diversification. Now that you know the answer to the question of why silver prices are rising, here are several ways that you can own silver:
Silver Coins and Bullion – Purchasing physical silver is the most traditional and direct way of silver investing. Silver American Eagle coins are the most popular silver coin investment. The coins generally come in 1-oz sizes, are 0.999 pure, and are selling in record numbers in 2016. Another choice is the Canadian Silver Maple Leaf, which is 0.9999 pure silver. Silver bars are available in a variety of sizes and will likely get you the most silver for your money. When investing in physical silver, avoid anything that is ornamental or collectible and be sure to consider additional charges such as premiums, shipping, and storage that could cut into your potential profits.
Silver Pooled Accounts and Certificates – If you would prefer not to own physical silver, certificates and pooled accounts are an option. Some require a minimum investment, and you will pay a small fee for administration.
Silver Futures Contracts – Futures contracts are an excellent way to gain leverage on precious metal price changes, but they can also be risky. If you have experience with futures contracts, you can incorporate this into your silver investment strategy.
Silver ETFs – Silver exchange-traded funds (ETFs) are another popular option for investors who would rather not store stacks of silver in a home safe. The iShares Silver Trust ETF (NYSE Arca: SLV) is the most popular silver ETF. The fund holds approximately $6 billion in physical silver in two vaults and has seen returns of 24.41% year to date. Another popular ETF is the Sprott Physical Silver Trust ETV (NYSE Arca: PSLV). This one is also backed by stores of physical silver that are held in Canadian vaults. The returns on PSLV year to date are 25.62%.
Why are silver prices rising? A combination of economic factors, contracting supply, and surging demand are producing some of the best conditions for silver investors in years. As any precious metal investing is speculative in nature, be sure to keep a reasonable level of diversification in your overall portfolio when investing and reevaluate your positions at least annually. To learn more about investing in silver, check out this free analysis: The Essential Guide to Buying Gold & Silver.
Gold has edged lower for the third straight session and notched its biggest weekly slide in nearly two months on growing expectations for an increase in US interest rates as soon as next month.
Spot gold was down 0.2 per cent at $US1,252.1 an ounce by 2.43pm EDT (0443 Saturday AEST), down 1.6 per cent this week in its third straight week of losses.
US gold futures for June delivery settled down $US1.90 at $US1,252.90.
New York Fed President William Dudley on Thursday said there was a strong sense among central bank officials that markets were underestimating the probability of policy tightening.
Advertisement
That came a day after the minutes of the Fed’s April meeting revealed that most policymakers felt a rate increase might be appropriate as early as June, sending gold to a three-week low of $US1,244.
It has since bounced back, as ultra-low yields and concerns over economic growth lent support.
“Those minutes from the last FOMC (Federal Open Markets Committee) meeting I think really gave quite a bit of light to the possibility for that June rate hike,” said Phillip Streible, senior commodities broker at R.J. O’Brien in Chicago.
“I think that the Fed is now challenged and the market is getting more confident that it’s going to happen, provided that the data supports it.”
Gold is highly sensitive to interest rates, gains in which lift the opportunity cost of holding non-yielding bullion. The metal has rallied 18 per cent in 2016 as investors bet the Fed would hold off from further increases.
The US dollar retreated from its highest in nearly two months against a currency basket, but cruised to its third week of gains, keeping up pressure on gold.
“The gold environment now is substantially different from what was apparent several weeks ago, when a weaker dollar and a benign rate environment were providing an element of support,” INTL FCStone said in a report.
“This is no longer the case.”
Holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Shares, rose by 4.5 tonnes on Thursday to their highest since November 2013.
Streible also said if there was some foul play discovered in the disappearance of an EgyptAir jet this week, that could lead to gold prices rising, spurred by safe-haven buying.
Gold demand in Asia was subdued this week by a firmer US dollar and weak seasonal demand in major trading centres.
Among other precious metals, silver was up 0.2 per cent at $US16.51, while platinum was up 1.05 per cent at $US1,020.13 and palladium 0.6 per cent higher at $US557.75.
Palladium posted the biggest falls this week, down 5.3 per cent. A deepening deficit in the palladium market this year was predicted by industry experts gathered for Platinum Week in London.
From SMH
(Kitco News) – Famed newsletter writer Dennis Gartman says days like Wednesday, are the reason he prefers owning gold in non-US dollar terms.
“[W]e are able not to absolutely “throw up!” With gold plunging in US dollar terms, it fell but fell only marginally in terms of the EUR and of the Yen,” Gartman wrote in his Thursday edition of The Gartman Letter
Gold prices notched a three-week low in early U.S. trading Thursday, on follow-through selling pressure in the wake of bearish FOMC minutes released Wednesday afternoon. June Comex gold futures were last down $27.6 an ounce at $1,247.
“If the monetary authorities here in the U.S. are intent upon tightening monetary policy then it is proper to err in favor of owning gold in terms of the currencies where the monetary authorities have no choice but to err toward ease instead,” Gartman said. “[A]s the news of the Fed’s minutes become clear, we chose to move away from dollar/gold and back to gold/euro and gold/yen.”
In terms of the latest Fed minutes, Gartman added that the minutes are evidence that the Committee members are giving themselves ‘room to maneuver.’
“If the economy improves and is truly shown to be by the data to be released between now and mid-June, then the Fed will raise rates in June… or very soon thereafter… but the course is not fixed; there shall be room to move in both directions,” he said.
(Kitco News) – May 19 – Markets don’t go in a straight line up or down. There are squiggles, pauses, rips and dips in trends.
Gold bulls got slapped back this week as traders pulled back on some short-term long positions as the spotlight shone brightly on the June Federal Reserve meeting. The release of the latest meeting minutes triggered speculation the June confab is now a “live meeting” for a potential interest rate hike.
Can’t See the Forest For The Trees
Time for some perspective folks.
Don’t get stuck looking at the trees.
It’s important to see the trees as part of a larger forest.
Perspective #1: The federal funds rate remains at historically low levels.
The current 0.25%-0.50% range is well below historical norms. Even one, two or three rate hikes (the latter being very doubtful) this year would still pull the funds rate to a still well below ‘normal’ rate level. No matter how you slice it and dice it, U.S. monetary policy remains extremely accommodative and even at a 1.00-1.25% level (supposing three rate hikes this year) would be at the lower reaches of where the Fed pulled rates during recessions.
Fact: Prior to the current easing cycle, The last time the federal funds rate stood as low as 1.00% was June 2003 –and that was the “bottom” of the easing cycle.
Perspective #2: This business cycle is getting old. According to the National Bureau of Economic Research (they are the folks that get to make the call on when U.S. recessions start and end), the current economic expansion cycle began in June 2009. (The recession that ended in June 2009 lasted 18 months, or the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months, the NBER says.)
What matters now: The average US business cycle expansion since WWII is 56 months or 4.5 years. The current cycle is set to hit its seventh birthday in June.
The latest GDP figures were gloomy. First quarter U.S. GDP slid to a 0.5% increase from the fourth quarter’s still-paltry 1.5% rise. The so-called “trend growth” of the pre-global financial years of 3.5% or more appear to be history.
The odds are: that the next recession will hit in the U.S. before the Federal Reserve has the chance to hike interest rates back to a more historically “normal” level –say in the range of 4.00%. In the last interest rate hike cycle, rates peaked out at 5.25% in June 2006.
Why this matters to gold now: In all likelihood, even if the Federal Reserve manages to pull the trigger on one or two interest rate hikes this year (don’t forget we’ve got a presidential election here in the U.S., which can throw another monkey wrench into rate hiking plans), rates are still well below average historical norms. Translation: even .50 basis points of rate hikes don’t mean much.
Key point: When the next recession hits, the Federal Reserve may be forced to join its counterparts: the ECB and the BOJ with a move toward negative interest rates, and that is bullish for gold.
See the forest: There are bigger forces at play in gold and a rate hike or two won’t knock the global demand away.