For the last few years I have been warning that steps needed to be taken to prepare the Australian economy for when the commodities cycles would turn downwards. Back when I first started writing about this, it was almost considered treason to even suggest the mining boom may draw to a close. But these days even the RBA, Treasury and Wayne Swan are talking about the end of the commodities boom.
So what can I say about the 2013 Federal Budget that I have not said over the past few years? Not much really. Back in 2011 for example, when that work of budget fiction was put together by Wayne Swan I wrote:
“…Swan’s budget has done nothing to tackle tax reform or prepare the Australian economy for a world where commodities prices are lower and the Chinese economy is no longer growing at nearly 10% per annum. Maybe a downturn in the commodities cycle will be short, say just six months or a year, but it could also drag on for two or more years and due to the economic madness that has gripped Australia, there is no Plan B.”
Fast forward to today and the Gillard led Government (led perhaps being too strong a term) have finally admitted that the budget would not be balanced as they promised. As a result they are scrambling to clean up a budget mess which they created by relying on overly optimistic forecasts.
Of course Gillard, Swan and Co. will be living quite nicely on an overly generous taxpayer funded pension while others try to repair over the next decade, the budget damage they have caused.
There is still no Plan B and nothing in this years budget will stem the decline in the manufacturing sector. Within a few years I believe at least one of the car manufacturing operations in Australia will either stop production or dramatically scale back production in favour of importing vehicles from facilities located offshore.
By the way, I reckon the first significant move will be made by Toyota when the import tariffs on vehicles drops to 5%. In case you have not heard, this is currently being discussed with Japan and in return they will lower the tariff on Australian beef.
That type of arrangement pretty much sums up the limits of Australian trade strategy – we export raw materials and food while on the flip-side we import technology, equipment, processed materials etc.
In the mining sector for example, automated trains and trucks are being imported to help improve productivity. It isn’t just the underlying technology being imported by the way, but the entire truck or train.
But Federal Budgets are generally full of spin anyway – they are after-all politically inspired exercises and are increasingly being put together by politicians of declining competence.
We are unlikely to see any improvement in the quality of politicians in Australia until the perks and pensions they gouge from the nation are slashed.
Politics should not be the career path of choice for an assortment of under-achievers, professional manipulators, ex-union officials and ex-journalists.
We should be aiming to have more successful people serve for one of two terms and then they can get back to doing what they do best. This would mean that they don’t need to hang around waiting to qualify for a overly generous pension, be given a plum role on some semi-government board or handed a diplomatic posting.
As long as the nation is guided by what is effectively the second eleven down there in Canberra, we can only hope to get by on luck. It’s getting close to commodities or bust.
Now onto gold and as regular readers of my ramblings will know, I have been a gold bear for some years. As I said at the start of the year, I expect gold to finish closer to a $1000 USD and ounce than $2000 – which was the call being made by some gold bulls earlier in 2013.
ASX Listed ETFS GOLD versus ASX All Ords Index
The gold price in AUD terms has been trending downwards now for the last year and shares in gold miners like Newcrest Mining (NCM) have been hit hard recently.
Also gold in AUD terms has underperformed the ASX All Ordinaries Index by a wide margin and I don’t expect that this will change much in 2013.
I have written many times that I didn’t know when the gold price bubble would pop, but that I was confident it would at some point and I reckon the popping has just started.
That’s not to say that there won’t be short term rises and opportunities for shorter term traders to make money. Also for investors who got in early, say below $1000 USD, they are probably not that worried at the moment and I suspect many of them have already cashed in some healthy gains.
The gold price hasn’t fallen enough yet to tempt me, but the stock prices of some of the gold miners have and I will be watching them closely over the next few months. But trying to catch a falling knife is risky so it might be wise to just steer clear of anything to do with gold for a while.
Finally let me just bore everyone again with a chart of the Baltic Dry Index.
Baltic Dry Index 5 year price chart
This chart suggests to me that the outlook for global economic growth is at best weak and this means we can expect prices for commodities like iron ore & copper to remain under pressure for at least this year.
Yes the mining boom sure looks like it is over. The question now is..what happens next?