Gold Is Glittering for Aussie Punters
Mr Market got another punch on the nose overnight. The Dow Jones closed down 2.93%. The Aussie market should be off the boil today.
It hasn’t been a fun week at all.
The market was in ‘wait’ mode prior to the interest rate announcement from the US Federal Reserve. Now we have Trump’s tariff plan spooking everyone.
Mind you, I’m not convinced it’s the disaster that the ‘trade war’ headlines are suggesting.
I’ll explain why…
The US president is playing the media cycle to his advantage
The ABC reports…
‘Under the terms of the memorandum, Mr Trump will target the Chinese imports only after a consultation period, a measure that will give industry lobbyists and legislators a chance to water down a proposed target list which runs to 1,300 products.’
The report adds that China will have a chance to respond to this measure.
I believe all this is politicking more than anything.
Trump grabs some media exposure that makes it appears as if he’s acting in the interests of the average American. When the time comes, the whole thing could be reduced to a few insignificant sectors or products. And the media cycle moves on…
Go back to the Trump campaign. He made dozens of promises and claims, but he’s actually acted on very few.
US allies — like Australia — are already getting a free pass.
However, we can only watch to see what happens. The first test is to see where the market finishes the week.
Long term, I remain positive about global growth. Consumer confidence in the US recently hit its highest level in 40 years according to the US Michigan Consumer Confidence Survey.
Jobs and wages are growing, and inflation is modest.
Regardless, the short-term news is not doing our stock market any favours.
The Aussie market is going sideways again.
Is there anything from here to drive it up?
One suggestion is stock buybacks. Repurchasing stock is a flexible way for companies to return money to shareholders.
A recent report says buybacks are actually at a record high in Australia.
There are 121 companies with active programs announced, and the top 22 still have $5 billion worth of stock to go.
I’m not convinced the number is big enough to give the market much of a lift…the full buyback figure is only 0.41% of the total All Ordinaries index.
Compare that to the current buybacks announced in the US: 3.3% of the S&P 500, which is at least US$800 billion!
But there’s scope for buybacks (or dividends) to rise even further in Australia.
Some of the bigger companies are selling assets.
Rio Tinto Ltd [ASX:RIO] has sold off several coal assets and is banking the cash, at least for the moment.
BHP Billiton Ltd [ASX:BHP] is considering selling its US shale division, which could be valued as high as $12 billion.
Commodity producers across the market are still reluctant to spend large amounts of money on acquisitions. But many of them are generating good cash.
Meanwhile, the big banks have been offloading some of the non-core parts of their business.
The longer the market doesn’t move actually makes the case for buybacks even more compelling.
The best time to buy back your shares are when they’re cheap.
Again, it’s a wait and see kind of thing.
There is one sector of the market that’s getting a lift from all this…
Watch this sector for strong stocks
Gold is currently at $1,729 an ounce priced in Aussie dollars.
Some gold miners can produce for around $1,000 an ounce. So the current price provides them with very good margins.
I’m actually surprised by this. I’m not much of a gold bull overall.
But with gold holding up and the Aussie dollar coming down from 81 cents in January, the sector has a good tailwind.
I can’t help but wonder if this will lead to some merger and acquisition activity.
Gold grades and known reserves have fallen away in recent years. This is true of a lot of commodities.
Big gold producers are going to have to add projects to their existing base soon. Or they won’t have any gold to mine at any price!
The easiest way for them to bring in new production is to buy up the smaller producers with good projects.
The strong margins they’re getting now can give them the cash to do it — or help raise what they need.
Daily Reckoning Australia strategist Jim Rickards says gold is now well into a new major bull market.
Nobody’s paid much attention to this. But gold shares in Australia could be primed to break into strong highs if this continues.
If Jim is right, this is just the beginning of a major bull run in gold.
Editor, The Daily Reckoning Australia