Yesterday I took a look at the US dollar gold price and concluded it was at a critical juncture.
Today, I’ll take a look at the Aussie dollar gold price, which adjusts for the difference between the US and Aussie dollar exchange rate. This is a far more important price to watch for Aussie gold stock investors.
Before I do that though, let’s have a look at the latest economic news out of China, from the Wall Street Journal:
‘BEIJING—Fall-offs in factory output and investment in buildings, machinery and such are weighing on China’s growth, complicating Beijing’s task in managing the world’s second-largest economy amid a trade conflict with the U.S.
‘The Chinese economy clocked a 6.7% expansion rate in the second quarter from a year earlier, down slightly from 6.8% in the January-March period, the statistics bureau reported Monday. While that rate is within Chinese leaders’ comfort zone, some economists said more troubling are the drop-offs in business activity and domestic demand.
‘Industrial output rose 6% in June from a year earlier, markedly down from a pace of 6.8% in May. Meanwhile, investment in fixed assets grew 6% in the first half of the year—a notch down from the 6.1% rate in the first five months and a level not seen since the late 1990s.
‘The slack is partly due to a government campaign against debt that has made businesses skittish about spending. While Beijing is already shifting gears to support growth—and fend off any ill-effects from the escalating trade fight with the U.S.—some economists expect the slowdown to worsen in coming months before the lingering effects of the credit-tightening dissipate.’
China’s slowdown effect on commodities
In short, the pace of economic activity is slowing in China. But we’ve seen this movie before. It’s a controlled slowdown and the central planners appear to be firmly in control. The wildcard here is the trade war. It’s too soon to tell what the damage is, or will be.
The slowdown in China is already having an impact on commodities. As I pointed out last week, the copper price recently fell to its lowest level in nearly 12 months. Oil has been under pressure lately too. Overnight, prices plunged 4%, although the reasons cited are more about increased supply than a drop off in demand.
Still, China’s month on month crude oil imports have slowed in recent months, with June imports volumes down 9% on May levels.
Another China barometer I watch is the Caterpillar Inc. [NYSE:CAT] share price. The heavy machinery manufacturer is heavily reliant on China. But in June, the share price broke down below support.
That could be thanks to the trade war brewing between the US and China, or it could be due to the slowdown in fixed asset investment, which CAT obviously benefits from. It’s probably both…
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The upshot of all this is that you should expect commodities to have a breather for a little while. The sector has been in a bull market since the start of 2016. But with the pace of global growth potentially topping out, it wouldn’t surprise to see the sector correct and consolidate for a while.
That’s already happening with copper and some other industrials metals. It might be happening now with oil too.
Gold is still going strong
Gold, however, is a different story. While it’s enjoyed a bull market since early 2016 too, the pace of gains has been subdued. For example, the chart below shows the gold-oil ratio since the commodity bull market got underway in early 2016.
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Relative to oil, gold has been in a bear market. The ratio is the lowest it’s been since 2014, when the oil price plummeted. It doesn’t tell you what’s going to happen in the future, but it does tell you that gold, as a commodity, hasn’t kept up with the sector over the past few years.
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That could change though if we get a pick up in ‘risk-off’ sentiment later in the year.
So, how does gold look in Aussie dollars? Let me bring up your final chart for today. It shows gold priced in Aussie dollars (AUD) since the bull market got underway back in late 2014.
AUD gold rallied very strongly and got back toward all-time highs in mid-2016. It then corrected sharply, but has since made its way higher again. Earlier this year it broke out of the consolidation range marked by the downward sloping green line. This sent the gold price up to around $1,760 an ounce.
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But the price came off the boil and it’s now heading back towards the long-term upward trend line. If it finds support around here, then the bull market is intact. A break below it, however, will be a concern and suggest that gold, too, is going nowhere for the time being.
The inconclusive nature of the gold price is just another example of the confusion going on in global markets right now. It’s a battle of the bears and the bulls. No one has the upper hand right now.
This is what a change in the cycle looks like.
Editor, Crisis & Opportunity
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