Markets crashed last night.
The Dow fell 10%.
The S&P 500 and the NASDAQ fell around 9.5%.
Gold outperformed, but still declined nearly 4%. Thanks to a falling Aussie dollar though, AUD gold actually finished the session higher, at $2,530 an ounce. I’ll have more on AUD gold in a moment.
First, let’s continue with the carnage…
The UK FTSE 100 was down 11%.
The German Dax Index cratered 12.2%.
Curiously, the Shanghai composite only finished down 1.5% yesterday. A government manipulated market? Or signs that the coronavirus is under control and things are slowly returning to normal?
My best guess is a bit of both.
Clearly, you’re seeing unprecedented times. 2008 wasn’t as bad as this in terms of the relentlessness of selling. You’re witnessing some of the most extreme, oversold technical indicators in market history.
This morning, Publisher James Woodburn, Shae Russell, Dan Denning and I recorded this video discussing the recent market action. Please have a watch before continuing…
In yesterday’s essay, I explained — albeit very briefly — gold’s role as money. I tried to convey gold’s uniqueness as a ‘no liability’ asset. If you missed it, you can read it here.
Today, I want to talk about gold in a less abstract manner. I’m going to tell you why gold is important for Aussie investors. Because there’s an angle to it that you may not be aware of. And even if you are, it’s worth reminding yourself of it.
When you watch the news or read the business pages, the price of gold is always quoted in terms of US dollars. But when your income and assets are denominated in Aussie dollars, US dollar prices are not relevant.
Don’t get me wrong, the US dollar gold price is very important. The US dollar is the world’s reserve currency. Prior to 1971, that was gold’s role. So gold, in terms of US dollars, is a vital benchmark price.
When gold rises at a solid pace, in terms of US dollars, it signals a loss of investor confidence in the structure of the global financial system.
But that’s not the topic of today’s essay. I’m going to kept it local. I’m going to talk about gold in Aussie dollars.
This is especially important given what’s going on in the world right now.
As you know, the coronavirus emanated from China at the end of 2019. It’s had a massive impact on the Chinese economy already. The official manufacturing PMI (a gauge of manufacturing activity) fell at the fastest pace on record in February.
China is Australia’s largest trading partner. When its economy falters, our economy is at risk too. The financial markets know this all too well.
So when the coronavirus became an increasing concern at the start of the year, markets ‘sold Australia’.
How do they do this?
They sell the Aussie dollar.
Take a look at the chart below. In mid-to-late-2019, the Aussie dollar had formed a base and started to move higher. By the end of the year, it breached the 70 US cent level and looked like heading higher.
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| Source: Optuma |
But the rally quickly gave way. I’m sure the economic cost of the bushfires probably had a bit to do with the initial move lower. But more than that was the growing fear about the spread of the coronavirus.
Note how the dollar reacted to this threat far quicker than the stock market? While the Aussie dollar headed south, stocks surged to new all-time highs.
A floating exchange rate is an economic shock absorber. When Australia’s economy is under threat, the market automatically adjusts the price lower. A lower Aussie dollar makes Australian dollar denominated assets cheaper in the eyes of foreign investors. It ensures capital continues to flow into the country.
But how do you protect yourself against a falling dollar if you’re a local investor? You could buy other foreign currencies, like the US dollar, for example. Or, you could buy gold.
As I mentioned yesterday, gold is a monetary asset. And while it no longer fulfils an official role as money, it always has been and always will be. So if you want to escape a depreciating Aussie dollar, holding gold (a ‘no liability’ asset) is a sound option.
The chart below gives you an idea of how well gold protects your wealth in times of central bank insanity. It shows the performance of the Aussie dollar gold price and the US dollar gold price over the past five years.
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| Source: Optuma |
Over that time frame, AUD gold is up 67%, while USD gold is up around 42%.
Why the difference?
It relates to the falling AUD against the USD.
Given our economy is so exposed to China (and global economic growth in general), and China is so exposed to the coronavirus, gold’s role as a wealth protector is really shining through right now.
So far, I’ve only talked about gold in terms of physical bullion. But if you look at Aussie gold miners, they are really benefitting from gold’s rise.
You see, miners who produce gold here in Australia sell their production at the Aussie dollar gold price. It’s trading at record highs around $2,500 per ounce. Average total costs for well-run miners are around $1,300 an ounce (although they obviously differ individually). So that’s a whopping $1,200 margin per ounce of production.
Even more favourable for gold miners now is the plunging oil price. Energy makes up a large proportion of costs for gold miners. A combination of declining costs and rising revenue works wonders on profit margins.
While a market in full-blown panic mode is selling these stocks right now, I would guess that the Aussie gold sector is the only one experiencing the conditions for even higher profit growth in the months to come.
The large producers are gushing cash at these prices. Explorers sitting on gold resources are increasing in value. And if they’re not, it’s because the market is freaking out about funding. That means there may be plenty of opportunities amongst the junior gold sector coming up.
That’s just the reality of how markets work during a panic. Companies producing gold see their share prices sold off for no good reason. Those sitting on good resources but without the immediate funding to get those resources into development and production are sold off too.
So keep this in mind when looking at Aussie gold stocks. Despite AUD gold being at an all-time high, you can’t buy gold stocks indiscriminately. There is always nuance involved, even for a sector in a raging bull market.
In tomorrow’s edition, you’ll hear from gold expert Shae Russell. Amongst many other things, Shae interviews other gold specialists from all over the world. I hear she has a couple of interviews for you tomorrow…
And before I sign off today, just a reminder that our special week of markets updates will culminate in a ‘market crisis summit’ on Tuesday evening at 7pm. So make sure you tune in for that.
| Until then… |
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| Greg Canavan, |
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