Shane Oliver: Gold and Australian dollar further to rise

See the latest Australian dollar analysis here:

Macro Afternoon

From Shane Oliver at AMP comes a good wrap of gold and the AUD:


The price of gold has now broken out to a record high and the Australian dollar has risen 30% from its coronavirus panic low in March and broken above $US0.70. What’s driving this and what does it mean for investors? This note looks at the main issues.

The US dollar looks to have peaked

The recent surge in gold and the Australian dollar have one thing in common – namely an emerging breakdown in the US dollar. The $US surged during the early phase of the coronavirus panic in response to safe haven demand. The US economy has less exposure to cyclical sectors (like manufacturing, materials and financials) and a greater exposure to growth sectors like IT & health (that benefit from coronavirus) compared to the rest of the world. This means capital flows into the US when global growth slows and back out again when it picks up. Right now, the $US looks to be breaking down.

Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital

From its March coronavirus panic high the US dollar index has fallen 9%. There are several reasons why the US dollar has likely peaked and will decline over the next six to 12 months.

  • First, the gap between US and global interest rates has now collapsed as the Fed has cut rates to zero making the US dollar less attractive to investors.
  • Second, the trade weighted US dollar has become expensive based on relative price levels (or what is often referred to as purchasing power parity).
  • Third, the Fed has been relatively more aggressive in its quantitative easing program than many other central banks which has increased the relative supply of US dollars.
  • Fourth, the Eurozone seems to be getting its act together relative to the US in terms of fiscal stimulus which makes the Euro (the main anti-dollar) relatively more attractive.
  • Fifth, a recovery in global growth (albeit a faltering one given the ongoing threat from coronavirus) is likely to hurt the US dollar reflecting the relatively lower cyclical exposure of the US. In other words, safe haven demand for the US dollar is likely to recede. This may be accentuated by the US’ relatively poor control of coronavirus.
  • Finally, for the technically minded, in early July the US dollar registered a so-called death cross with the 50-day moving average falling below the 200-day moving average. It’s also seen a double top with its late 2016 high

Historically, a falling US dollar is often seen as a sign that global reflation is working and that confidence may be gradually returning regarding the outlook for the global economy. If the $US has peaked then its good news for emerging countries (which often have US dollar debt) and positive for commodities including gold, and consistent with a rising trend for the Australian dollar – both of which we are now seeing. This partly reflects the reality that it’s all relative and so a falling US dollar naturally pushes up the price of gold and the $A as they are priced in US dollars. But there are other factors at play as well.

Gold taking out its 2011 record high

The next chart shows the price of gold since 1900 both in nominal and real terms. Until the early 1970s, the US dollar was fixed against gold. This was subject to periodic devaluations, such as in 1934. From the early 1970s to 1980 gold was in a secular upswing as investors turned to gold for protection against inflation. However, from 1980 to 1999 gold was in a secular downtrend as inflation was brought under control. The 2000’s saw gold enter another secular upswing in line with other commodities and despite a brief interruption at the time of the GFC, this got a further push along with the Eurozone debt crisis and more central bank monetary easing into 2011 which saw gold peak at $1921 in 2011. But this gave way as global growth improved with gold falling into 2015. However, since then, gold has surged again, and has now surpassed its 2011 high, albeit its yet to take out its 1980 price peak in real terms of $US819 in today’s prices (albeit it was just a one-week spike).

Source: Global Financial Data, AMP Capital Investors
Source: Global Financial Data, AMP Capital Investors

Along with the fall in the US dollar several other factors have helped push the price of gold up:

  • First, some have been buying gold as a hedge against inflation on the basis that quantitative easing (which involves using printed money to buy financial assets) will generate higher consumer price inflation.
  • Second, gold is seen as a good alternative to major paper currencies which some see as being at risk thanks to renewed money printing and surging public debt levels. Notably on this front gold has risen against most currencies.
  • Third, and perhaps most importantly, the opportunity cost of holding gold versus cash or government bonds as an alternative store of value has collapsed again thanks to the renewed collapse in interest rates and bond yields.

Gold likely has more upside until central banks start to tighten and bond yields rise significantly, which looks to be a while off.

Some might see the surge in the gold price as a bad sign, but given the mixed factors driving it higher its ambiguous as to whether its good or bad. But the fall in the $US is more clearly a positive than a negative in terms of what it signals about the global economy and falling safe haven demand from investors.

Should investors consider gold?

There are numerous ways to get exposure to gold, all with their pros and cons:

  • Physical gold – gives pure exposure but its costly to store.
  • Gold futures – no storage problem here & easy to leverage up but need to roll futures contracts over as they expire.
  • Gold exchange traded funds – these are highly liquid but do involve counterparty risk.
  • Gold shares – these reflect gold prices but are also affected by the performance of the individual companies.
  • Gold funds provide an exposure to gold – these may reflect a combination of the above.

But its worth stressing that gold is highly speculative. It’s not grounded by an income stream like most shares, property, bonds and cash. Virtually all the gold ever produced still exists and can potentially come back on to the market. At the same time, actual production and demand for jewellery and industrial use is trivial relative to the huge gold stock. As a result, ‘animal spirits’ can play a huge role in the determination of the gold price. This can make for a volatile ride and history has shown that the gold price goes through long term upswings and downswings. Sooverall, we think there may be a role for gold in investors’ portfolios as a hedge against major paper currency weakness/inflation, but it should be limited to maybe no more than 5% (depending on an investors’ circumstances).

Five reasons why the $A is likely to head higher too

The $A has broken above $US0.70 having bottomed out at the height of the coronavirus panic in March at around $US0.55. Just like gold it’s being driven higher by a combination of:

  • First, a falling US dollar for the reasons noted earlier.
  • Second, the Fed printing more US dollars than the RBA is printing Australian dollars.
  • Third, the interest rate different between Australia and the US looks to have bottomed with the Fed cutting to near zero. As can be seen in the next chart, periods of a low and falling interest rate differential between Australia and the US usually see a low and falling $A and vice versa.
Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital
  • Fourth, rising commodity prices with iron ore above $US100/tonne, metal prices up nearly 30% from March lows to be around pre coronavirus levels and oil prices having more than doubled since April.
  • Fifth, high commodity prices along with strong export volumes to China and a rising net equity position in Australia’s favour is helping to maintain Australia’s current account surplus. This in turn means that Australia is not dependent on foreign capital.
  • Finally, there is reason for optimism that Australia will recover faster than the badly coronavirus hit US.

For all these reasons I expect the Australian dollar will continue to rise and is likely to be above $US0.75 by year end.

At this point, the Australian dollar is still around fair value (which is around $US0.73 based on purchasing power parity) and the rebound is consistent with underlying fundamentals such as commodity prices. But if it rises rapidly above fair value in the absence of fundamental support such that the RBA starts to see it as a threat to the recovery, expect it to respond with more quantitative easing, not negative rates and foreign exchange intervention as the RBA is not keen on either of these.

Source: RBA, ABS, AMP Capital

What does a rising $A mean for Australian investors?Basically, it means that the case to maintain a large exposure to offshore assets that are not hedged back to Australian dollars has weakened. Of course, maintaining a position in foreign exchange for Australian-based investors against the $A provides some protection should things on the coronavirus front deteriorate badly here in Australia or globally.

Houses and Holes


    • Yes good work from Shane. Its taken a while for him to not just give AMP spin and stick to the facts. Please stay with this program Shane and continue the good work. Thanks

  1. * I would like to say how good MB has been on gold all the way to $1900……..! DLS picked all the technical breaks up better than anyone I have read

    BUT Re GOLD Red flags are now flashing right in front of me.

    We are up 50% thereabouts in a year

    JPM Gold to the Moon
    ABC Breakfast yesterday “get rich buying gold”
    I have had a few people call me about buying gold that really have no idea
    Shane Oliver……I really like the fossil but I am not sure about his calls, he’s a great guy but comes out after the fact
    The list goes on with the Johnny Come Lately’s now jumping into the golden shower

    Honestly why couldn’t a few of these people tell us at $1200 or at least $1400 to buy Gold, It would make investing so much easier.

    Really to tell us about Gold at the top……

    “Basically, it means that the case to maintain a large exposure to offshore assets that are not hedged back to Australian dollars has weakened”

    Really the paragraph above, honestly it would have helped me at 55c not 72c like a few others that were caught short AUD or unhedged in US exposure all the way up from 55 to 72c, I would Q that paragraph too,.

    I would be very cautious here in the 1900’s, you also often get this volatile violent swings at the highs and lows

    For me we are close to a high, at least for the medium term, I agree MB long term gold but we need to take the “robin hooders” out

    I think we are very close to the top in Gold, I think just be cautious up here.

    Shane Oliver “Gold is expensive to store” NOT TRUE ……You can store $1M of gold for $300 per year
    AMP, $1M investments parked with AMP, what does that cost you to store with them, I’d say minimum $5K

    AUD looks bid but if Gold turns down and takes ASX lower with it AUD will probably get dragged lower too.

    Think it’s a time to be cautious and not be too sucked in to the commentary

    • Current tendency of assets seems to be they go up but not down.

      I don’t think we should be that bothered by a handful of dilettantes taking an interest in gold. They’ve been drooling for FANG and property for years and those haven’t managed to crater.

      Besides, what’s a good investment these days lol. Gold was just the last admission to the everything bubble. The only thing you don’t want is cash.

      • Rocky
        I would Q that cash comment.
        IMO we are headed into a deflationary crash in asset prices, i think to increase your balance of cash in this environment…..could work ok, gives you fire power to buy lower.

        Rocky there are too many robin hooders now sitting in GOLD SILVER and FAANGS. I can’t remember a time in history that these young speculators don’t get smashed. I think we aren’t far away from their first lesson on trading (the painful one) that many more experienced on here haven’t learned the hard way. The parents on here know you can’t tell these kids, they don’t listen, think they know everything and only learn through a loss.
        Rocky it’s coming and it’s going to be ugly

          • I think we could see a 40 to 50% further crash in the ASX over next 6 to 9 months, maybe from a little higher, not sure in. Sept 1929 after a major crash like we had in equities there was a very solid bounce and then sold off again. It feels similar to the 1930’s again to me and there is still a large equity sell off possibly ahead of us. You’d have to give me a very strong argument to say we aren’t in a depression similar to 1930’s, that is being masked by huge Gov stimulus that does wear off…maybe also drags out the downturn longer, but can’t see us avoiding this time.

            That being said it can be painful if you miss the boat, for me I’d rather miss the boat than get crucified. I am not falling for FOMO, being caught the wrong way in heavy losses is worse and I think it’s always good to have some fire power when/if needed

            Time will tell, it’s very hard to pick anything with conviction

          • Can’t compare a world on the gold standard to a world where the money supply expands by 25% in a year with a lot more in the pipeline. Can’t compare a world where the unemployed walked across the country looking for jobs to a world where the unemployed don’t even want the economy to get back on track because that would mean a paycut. The economy may be just as bad but the economy has been bad for years and years and equities have generally not noticed except to enjoy the interest rate cuts.

            If we get anything like the New Deal, then it’ll be more bullish still. And I think we will have to, since handing out cash to the population and expecting nothing in return and offering no form of social advancement gets you the US riots.

            It’s not even about making gains anymore. It’s just about protecting wealth from this ridiculous print-fest. It seems plain to see that a “functioning market” is one where the S&P500 goes up every year no matter what happens. The correlation between asset price appreciation and the market functioning according to the Fed seems to be 1:1.

            We also have the benefit of experience. We’ve been through this plenty of times and we know that a depressionary environment doesn’t mark the end for equities… if anything, it’s an inflationary environment in a good economy that means bad news for stocks.

          • Some ‘expert’ on the ABC last night claimed gold was in a bubble would be substantially lower in a few years time. The only way that could possibly be true is if the Fed were to abandon printing money altogether and actually start to drain dollars from the market, to the tune of several trillion per year.

            There is more chance of Elon Musk setting up camp on Mars by the end of August. Some people really don’t get it.

        • I am very, very happy to be in cash at present. Especially to buy a PPOR/OO/P&I home for family.


          • Being in cash between selling one property and buying another doesn’t really count…

    • It’s all a bit fast, isn’t it?

      I sold everything yesterday (accidentally at the peak!), and will be watching on the sidelines for a little while…

      • Given in for the long term – do I keep buying now or do I hold for a bigger pull back hmmm.

    • “You can store $1M of gold for $300 per year AMP”

      Could you explain how you do this please bcn? Also, given that gold might be at the top, where would you store cash?

      But given that the world’s in a far more precarious position today than after the GFC and any recovery will take much longer, and that ECBs are looking at a return to a gold standard, and with fiat currencies looking vulnerable, I’m wondering why you and DLS are so cautious on gold now?

  2. Gold in this context sounds identical to Crypto

    But its worth stressing that gold is highly speculative. It’s not grounded by an income stream like most shares, property, bonds and cash. Virtually all the gold ever produced still exists and can potentially come back on to the market. At the same time, actual production and demand for jewellery and industrial use is trivial relative to the huge gold stock. As a result, ‘animal spirits’ can play a huge role in the determination of the gold price. This can make for a volatile ride and history has shown that the gold price goes through long term upswings and downswings.

  3. I believe that the Gold price is only just starting to be affected by morning breakfast reports and the subsequent trickle down to BBQ yarns. When the average punter starts to get a giddy-on for buying PMs we will see a real spike. As usual, they’ll probably buy Silver bullion as its cheaper so Silver will play its usual alpha role to Gold