Gold News

Low Rates' Silver Lining for Aussie Gold

No-one's noticed, but Australian gold miners have turned higher with the metal...
 
GET READY for another week dominated by interest rates, says Greg Canavan, editor of Sound Money. Sound Investments  writing in The Daily Reckoning Australia.
 
The Reserve Bank meets Tuesday. The market thinks another rate cut is a certainty.
 
And why not? It's the only thing this country has when it comes to economic policy.
 
In a bit of trouble...who you gonna call? Glenn Stevens.
 
That's why the market continues to hold up despite signs of visible economic weakness. On Friday, Australia's largest retailer Woolworths (ASX:WOW) issued a profit warning. It's share price fell nearly 10%, which is an incredible one day decline for such a large company.
 
Lower interest rates clearly aren't doing much for Woolies. They're not forcing management into smarter decisions or magically boosting profits.
 
But that hasn't stopped the market believing lower interest rates won't help everyone else. Low interest rates are good for the market...until they aren't.
 
That is, while the weak economy isn't yet having an impact on earnings, the market will push share prices higher and higher. But as soon as earnings projections take a hit, the market will punish the company in question.
 
So by all means celebrate the short term boost that another (forecast) interest rate rise will bring, but watch out for landmines along the way. The Woolies bomb just went off.
 
China's been flying under the radar lately, but you can be sure its economy is struggling too. On Saturday, the People's Bank of China cut interest rates on the threat of...you guessed it...deflation.
 
The Financial Times reports:
"The People's Bank of China, the central bank, cut the benchmark one-year lending rate by 25 basis points to 5.35% and the one-year benchmark deposit rate by the same amount to 2.5% on Saturday night, effective from midnight."
As I've explained before, cutting interest rates in a nation of savers like China doesn't have the same effect as cutting in a nation of debtors, like Australia. Lower rates reduce the return on savings and depress consumer confidence to a greater extent than they do here.
 
But that won't stop China from easing. When a vast credit bubble pops, interest rates always fall as deflation spreads across the economy. That's why I expect lower and lower growth for China in the years to come.
 
Lower and lower interest rates are good for gold, but no one is taking any notice. You might remember I've been talking about gold entering a new bull market in Aussie Dollar terms. I made a special presentation about it a few weeks ago.
 
So far, the response to my presentation has been underwhelming. Which is unfortunate, as there's a huge opportunity brewing in this sector but people are disinterested.
 
I'm not at all bothered by it though. In fact, I'm encouraged by the lacklustre response. This is exactly what happens when bear markets end and a new bull emerges.
 
That is, people don't believe it. They've heard the turnaround story before. They lost money during the bear market and don't want to know about it anymore. Besides, there are other stocks that offer better yield, more security...or whatever.
 
But while investors, and perhaps you, are looking the other way, Aussie gold mining stocks continue to perform well. Let me give you just one example of what's happening right now. Australia's largest goldminer, Newcrest Mining (ASX:NCM), is up around 30% since the start of the year. I'm not talking about a speccy gold stock here. This is one of the largest gold miners in the world.
 
Yes, while the market shuns commodity stocks and chases yield plays instead, Australia's biggest gold stock is up 60% since bottoming in early November.
 
The casual observer might look at this and think 'the stock has already taken off...I'm too late'. That might be the case in the very short term. But consider the fact that Newcrest is still nearly 70% below its peak price of $44, reached in late 2010.
 
If we are at the start of a new upward trend for Aussie Dollar gold and gold stocks, share prices have a long way to go before they even reach their old highs. Newcrest would have to rise over 200% to meet its old high.
 
Amongst the gloom of low interest rates, there is a silver lining.

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as LewRockwell.com and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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