Brace for impact as RBA decision looms + Why gold is going ballistic

Hi everyone,

Last week I talked about preparing for an ugly inflation figure this week, and interest rate consequences because of the drop in unemployment rate and rising building costs. It certainly was an ugly figure.

Details are below.

But I was interested to read this morning that the biggest beneficiary of inflation is the Federal Government and its Federal Budget. Inflation pushes up wages, pushing workers into higher tax brackets, and increases personal tax revenue into the Federal Budget.

In its mid-year budget update in December, the government forecast that personal income tax collections had been revised up by $8.2bn for the 2026 financial year to $358bn, compared to the pre-election budget outlook.

The Treasurer also explained he would collect an additional $17bn in personal income taxes over the next four years, wiping out the $17bn in tax cuts Labor took to the election.

In this newsletter:

• RBA under pressure to lift interest rates

• Watch your debt levels as rates rise

• Gold price going ballistic

• It’s high risk at these levels ... but the investment options for gold

• Property values keep rising, even in January

• Who controls the world’s rare earth minerals

Reserve Bank under pressure to lift interest rates

The much-anticipated December quarter inflation rate was a shocker. And when the Reserve Bank Board meets next week, they will have to seriously consider raising official interest rates when they announce their decision on Tuesday afternoon.

It’s not just the actual figures that would be concerning the RBA, it’s more the upward momentum behind those figures that would be scaring them.

In the September quarter result, the trimmed mean CPI (which is the RBA’s preferred measure of inflation) was 3.2 per cent ... higher than the RBA’s preferred 2-3 per cent target zone, but when it was released a lot of commentators said it was a one-off spike and the December quarter would likely drop back to within the RBA’s target band.

It didn’t. In fact, it gained momentum to 3.3 per cent. It didn’t slow at all. And that’s the worry.

The headline CPI figure also picked up speed to 3.8 per cent.

There needs to be a brake applied to this accelerating inflation - and that is always raising interest rates.

Naturally, politicians came up with a string of excuses; one of them saying that accelerating inflation was a global phenomenon because of tariff wars. Not so. Look at this chart, which shows inflation among advanced economies is below 3 per cent.

Australia has broken out from the pack.

And the trimmed mean inflation figure is now above the Reserve Bank’s own forecasts. The RBA’s own economic gurus predicted that the September quarter CPI would stabilise at that level for a few quarters and then start to ease.

That forecast was made in November. It’s wrong after just two months.

I also heard Treasurer Jim Chalmers say that government spending was not to blame for inflation, and that there was no mention of that as a factor from the Reserve Bank.

I beg to differ. Government spending (from all levels of government) is at near record highs and is largely creating the job shortage and the pressure on building costs ... which all feeds into inflation.

Last year, RBA Governor Michele Bullock in very diplomatic governor-speak did say high levels of government spending were adding to inflationary pressures. The International Monetary Fund and the OECD have all warned Australian governments to cut spending because of the inflationary and debt consequences.

And while we’re talking about governments, one of the biggest drivers of inflation is what’s called “Administered Indexed Prices” rather than prices for traditional goods and services.

What are “administered indexed prices”?

They are government set prices which are often indexed to inflation. Things like council rates, electricity prices, tolls, etc. In other words, prices that governments control. So, they are spending at record levels and putting up their own prices to fund that spending spree.

But we end up paying for it through higher interest rates as well.

Watch your debt levels as interest rates rise

Compare the Market monitors credit card and Buy Now Pay Later use through its Household Budget Barometer survey.

According to the latest survey, Gen Xers are the most likely to carry credit card debt (31 per cent), while Millennials are the most likely to use Buy Now Pay Later schemes (40 per cent).

In 2025, 50 per cent of respondents said they had some credit card debt - up 9 per cent on the previous year. Meanwhile, just over a quarter of people (26 per cent) surveyed said they used Buy Now Pay Later services in 2025, compared to 18 per cent in 2024.

With rising interest rates, we should always think twice before taking on debt.

Things like credit cards and personal loans create a bit of an illusion that we can afford things that we really can’t, and that can get some people into a lot of trouble.

New cars, weddings and even holidays are expensive, and if you’re going into debt to pay for them, be ready to pay a lot of interest as well as fees if you don’t make payments on time.

Some people might think that drawing equity from their home loan is a safer option, but you’re still turning a short-term asset into long-term debt and taking on risk if you can’t meet your repayments. You’ll also have less equity to draw on for future needs like emergencies (they happen to the best of us) and, of course, your retirement.

If you’re looking to make some big purchases on a credit card or take out a personal loan this year, it’s really important that you have a plan to clear that debt as soon as you can. Run the numbers on a credit card calculator and really understand what you’re getting yourself into - it might make you think twice. 

But it’s not just luxuries. I hear that a lot of people go into debt just to pay for essentials like groceries, and that can be extremely stressful. If you are under financial strain, please know that help is out there. Insurers, energy retailers and banks all offer hardship programs and support, and you can get free advice from the National Debt Helpline, which offers a confidential service.

The price of gold is going ballistic

The long lines of investors queuing outside gold bullion shops are back as the precious metal tops $US5000 an ounce and the silver price tags along upwards as well.

As this chart shows, gold has gone on a massive run. Well done, if you’ve ridden that ride - it has been a great result. If you’re just getting on board the gold train, be very careful as the risks are increasing even though some of the gold bugs are predicting US$7000 an ounce.

Gold’s rally continues to defy market expectations, having recently only passed the $US5000 (AU$7219) an ounce mark on Tuesday and then hitting a new record US$5602 (AU$7901) on Thursday, before sliding back to US$5542 an ounce.

It’s interesting that gold has had a huge run up, but bitcoin hasn’t. In the past, the crypto experts have said crypto has replaced gold as a safe haven in times of turmoil.

Financial markets hate uncertainty ... and President Donald Trump is more unpredictable than any US President in history. The current tensions with Iran and the threat of war is creating peak fear. For many big global institutional investors, that unpredictability is enough for them to increase their investment weighting in gold as protection against those uncertainties.

Likewise, it seems many central banks and governments have been snubbing US bonds (previously regarded as being the safest and most liquid investment in the world), moving to gold instead.

And that switch seems to have been accelerating. Which means central bank and government buying of gold pushes the price up, and the selling of US Government bonds weakens the US dollar.

One bright side for Australia is the impact on our trade surplus. As one of the world’s biggest gold miners and exporters, gold is a huge export earner for us.

How to invest in gold

Talk to your adviser, but most experts say that if you’re adding gold to your portfolio, keep it under 10 per cent to avoid putting all your eggs in one basket. Here’s how to invest in gold:

• Bullion, bars, and coins: You can buy physical gold, but remember to factor in storage and insurance costs. Purchase from dealers, banks, or mints.

• Gold coins: Smaller amounts that can be more easily bought and sold, but usually it comes with a premium over the gold price.

• Gold ETFs: There are a range of exchange-traded funds available, which hold a portfolio of gold mining shares through to actual physical gold. Buy through an online broker, but don’t forget that there are management fees.

• Gold mining stocks: Invest in gold mining companies. There is potential for higher returns if gold prices continue to rise - but do your research because there are good and bad mining companies.

• Gold mutual funds: Diversify with funds that invest in gold-related assets like physical gold or gold mining stocks. Management fees apply.

• Gold futures: These are contracts to buy or sell gold at a future price, offering potential high returns but with added risk. Requires a brokerage account.

• Gold certificates: This is ‘representative ownership’ of gold stored in a vault, but you don’t have physical access to the gold. Available through banks or dealers.

• Gold-backed cryptocurrencies: Cryptos like Paxos Gold (PAXG) combine gold with crypto flexibility, but are subject to crypto market volatility. Available on platforms like Binance.

Which one to choose?

Which gold investment suits you will depend on what you want. If it’s:

• Physical ownership? Go for bullion or coins if you don’t mind storage.

• Liquidity and ease? Choose gold ETFs or mining stocks.

• Diversification? Consider gold-backed funds or certificates.

Home values continue to rise over summer

Despite the lazy days of the Christmas and New Year summer holidays when the property market usually goes into hibernation, values continued to rise.

According to real estate giant Ray White, Australia’s housing market continued to push higher in January, lifting annual growth to 12.5 per cent for houses and 9.1 per cent for units. This is despite growing concern that interest rates may rise again at the Reserve Bank’s meeting next month.

Higher rate expectations do not yet appear to have been priced into the market. Price growth remained broad-based over summer, suggesting buyers continued to transact as though borrowing costs would remain unchanged. This is a clear contrast to the start of last year, when expectations of rate cuts began influencing behaviour as early as January, well before the first reduction was delivered in February.

The same markets that have driven this cycle remain in the lead. Darwin and Perth recorded the strongest annual house price growth, with increases of close to 20 per cent, while Brisbane also continues to post solid gains. Adelaide, the Gold Coast and the Sunshine Coast are also recording ongoing increases, albeit at a more moderate pace.

In the larger capitals, growth is slower but still positive. Sydney, Melbourne and Canberra remain below the national average on annual measures, reflecting weaker economic momentum and more subdued population growth. Even so, prices in these cities continue to edge higher, with no broad-based declines evident.

House prices across regional Australia rose again in January, with annual growth now above 12 per cent. Regional Western Australia and regional South Australia remain standout performers, underpinned by low stock levels and ongoing demand pressures.

The unit market is showing a similar pattern. Perth, Brisbane and Adelaide continue to record the strongest gains, while Sydney and Melbourne remain more subdued. Nationally, unit prices are now more than 9 per cent higher than a year ago, highlighting the depth of demand in a segment where new supply remains constrained.

While prices have held firm so far, this does not mean higher rates would have no impact if delivered. A rate rise would be expected to slow activity, particularly in more interest-rate-sensitive markets. What January’s data suggests is that the adjustment has not yet begun. Unlike last year, expectations alone have not been enough to alter behaviour.

There are still very few homes available for sale, and new construction continues to fall well short of what is needed to keep up with population growth. This means that even if higher interest rates lead to fewer buyers, the market would still be characterised by tight supply. As a result, any slowing driven by higher rates is more likely to appear as a moderation in price growth rather than a sharp fall. For now, January’s results show that house prices have continued to rise, even as the interest rate outlook becomes more challenging.

Which countries control rare earth minerals

You often hear commentary about the race to control so-called ‘rare earths’ - it’s what drives a lot of Donald Trump’s decisions.

Rare earth elements (REEs) are 17 specialised metals critical for high-performance magnets, electronics, green energy, and defense technologies. Key uses include neodymium magnets in electric vehicle motors and wind turbines, phosphors for screens/lighting, catalysts for cars, and, crucially, in guidance systems for aerospace. 

This chart shows China dominates the world’s rare earth reserves, which is why the US is keen to build links with “friendly” countries to maintain its supply.

Have a great week, everyone.