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

Gold fell below $1,200 for the first time in more than three months on Monday, as the dollar hit its highest since end-April against the yen after U.S. Federal Reserve chief Janet Yellen said the central bank should raise interest rates.

The Fed should increase interest rates “in the coming months” if the economy picks up as expected and jobs continue to be generated, Yellen said on Friday, bolstering the case for a rate hike in June or July.

Gold fell 0.8 percent to $1,202.80 per ounce at 0313 GMT, after earlier touching $1,199.60, its lowest since Feb. 17.

U.S. gold was down about one percent at $1,202.20.

The dollar on Monday rose above 111.00 yen for the first time since late April, with the move underpinned by comments from Yellen at the end of last week.

“After $1,200, gold will try to break $1,160,” said William Wong, assistant head of dealing at Wing Fung Precious Metals in Hong Kong.

“I think the market will be quieter today as U.S. and the UK have a holiday. So, after the Asian markets, the prices won’t change much,” Wong added, however.

Bullion has been under pressure since the prospect of an imminent rate hike was indicated by the Fed’s April meeting minutes that were released earlier this month, with key central bank officials consistently supporting an increase.

An increase in rates raises the opportunity cost of holding gold, which does not earn interest.

With the price of gold continuing to hold at near record levels, Australia’s gold miners have switched to mining lower grades while also hedging their exposure to ensure ongoing access to the high price.

The latest quarterly survey by Surbiton Associates found a 2 per cent decline in March quarter gold production to 71 tonnes when compared with the previous quarter.

March quarter output is usually weak due to the industry slowdown for summer holidays and the impact of the cyclone season, which slows output in mines in the country’s north,
“A feature of this last quarter has been the decline in the grade of ore being treated,” Surbiton director Dr Sandra Close said. “This is not unexpected as the gold price in Australian dollar terms increased, due to a recovery in the US dollar price of gold and a weakening of the Australian dollar.

“Many mine operators have the flexibility to trim their grades and still make a reasonable profit.”

Mining lower grade ore gives miners the ability to maintain profitability at times of gold price weakness, since they can then switch to mining higher grade material and still make a profit.
In Australian dollar terms, the gold price high of $A1750 an ounce in mid-February and has mostly held above $A1700 an ounce since earlier this month. The record price for gold in Australian dollar terms was a little over $A1800 an ounce touched in August 2011.

The strong price of gold has encouraged several producers to hedge their position to ensure they can access the higher gold price over the next few years and Newcrest Mining, Evolution Mining, Alkane Resources and Blackham Resources have all launched hedging programs.

In the March quarter, Newcrest’s Cadia mine in NSW emerged as the largest gold producer for the first time, producing 192,024 ounces, followed by Newmont Mining’s Boddington mine at 189,000 ounces, the survey found.

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Conventional wisdom, as expressed by those who have turned very bullish on European and U.S. financial stocks, says the Fed will raise rates in June.

We think a rate rise is a bit more of a possibility than it has been but we won’t really know until jobs and inflation data for May come in next week. Tomorrow, Friday, we will also get revised U.S. GDP figures for the first quarter. Predictions are that number will go from 0.5% to 0.9%. That’s quite a change, but even a jumbo shrimp is still a shrimp.

But, if we were to bet the family farm, we’d say, “Not just yet.” We’re also predicting that at Harvard tomorrow, Fed chairwoman Janet Yellen will soften some rough hawkish edges that have popped up recently in comments by a minority of regional Fed presidents, namely non-voter James Bullard of St, Louis.

Employment numbers, seemingly the big spook in the house, will be issued on June 3 (next Friday). The Consumer Price Index will be released on June 16, too late to have a direct effect on the FOMC meeting of June 14 and 15.

Total nonfarm payroll employment increased by 160,000 in April. Over the prior 12 months, employment growth had averaged 232,000 per month. Unemployment stayed the same at 5.0%. Doesn’t seem like we should be calling Ghostbusters just yet.

As measured by the CME FedWatch probability of a rise, after an initial rise in expectations that a hike is coming, things have quieted down. Check here. http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Gold is being buffeted by the rising U.S. dollar more than although today a weaker dollar helped. Instead, regular trading activity drove the price down today.

Gold at the moment is an actor in search of a play. There are too many alternatives for making money other than gold. We think that much of the weakness is psychological because silver, platinum and even crazy uncle palladium prospered today.

Gold, however, is imbued with a special kind of holiness in the investment church. When gold does turn the corner, we feel it will turn abruptly and sharply upward.

As we have said a number of times recently, even if the Fed does raise rates in June, how much of a slowing effect on the U.S. economy can it possibly have? The rate may be going from 25/50 basis points to 50/75. It’s not going to 1.25 in a day, after all.

U.S. equities have quieted down today in the face of all these concerns. To those worrying events, you can add the edge-of-the-seat worries adopted by those who will be dissecting Janet Yellen’s comments tomorrow.

Not to short-circuit ourselves, we also have to remember that we are heading into a long holiday weekend in the U.S. and the unofficial kickoff of summer trading. Does the word “lethargy” mean anything to you? How about “volatility?”

For those who would like a deeper analysis with detailed buy and sell recommendations, I invite you to try our daily video newsletter. Simply use the link at the bottom of this report to sign up for a free trial.

Wishing you as always, good trading,
Gary Wagner

Gold lost its early gains on Thursday, hovering just above the prior session’s seven-week low as the U.S. was bolstered by hawkish comments from a Federal Reserve president.

A U.S. rate hike may come “fairly soon” if data confirm the economy is continuing to grow and labor markets are still tightening, said Federal Reserve Governor Jerome Powell, a permanent voter on the Fed’s rate-setting committee.

Gold lost its early gains on Thursday, hovering just above the prior session’s seven-week low as the U.S. was bolstered by hawkish comments from a Federal Reserve president.

A U.S. rate hike may come “fairly soon” if data confirm the economy is continuing to grow and labor markets are still tightening, said Federal Reserve Governor Jerome Powell, a permanent voter on the Fed’s rate-setting committee.

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Spot gold was down 0.29 percent at $1,220.18 an ounce. The metal had fallen to its lowest since April 6 at $1,217.25 on Wednesday. U.S. gold settled down 0.3 percent at $1,220.40 an ounce.

Earlier, the dollar had extended losses and gold prices firmed after data showed orders for long-lasting U.S. manufactured goods surged in April.

“Gold has entered a phase of consolidation due to stronger views that the U.S. Fed will raise rates this summer,” said Carlo Alberto de Casa, chief analyst at ActivTrades.
The prospect of an interest rate increase, as indicated by U.S. Fed meeting minutes released last week, and a strengthening dollar have pushed gold down more than 5 percent so far in May, putting it on track for its biggest monthly decline since November.

(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

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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

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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?