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LAWRIE WILLIAMS:  Equities and Bitcoin crash as Gold soars.

It’s nice to be right on occasion and it looks as though our price predictions for gold in our recent articles may even be understating actuality!  After quite a serious stutter in European trade earlier, gold took off almost vertically when U.S. markets opened Wednesday and $1,900 gold seems very much in sight – and perhaps rather sooner than we had envisaged.  As is usually the case the market moves have been more severe than investors are happy with, and corrections quickly set in, but the speed and severity of the initial price rises and falls have to have set off warning bells.  The markets look very much due for an overall re-rating.

We had also been nervous on equities for some time.  These had risen far further than current earnings patterns would seem to justify, and have been coming down in almost all markets.  Overnight Japan’s Nikkei index came off sharply, although has since made something of a recovery, while in Europe on Wednesday all the major stock indexes saw heavy falls - something seen again in New York with all three of the Dow, S&P and NASDAQ opening down heavily, but making something of a recovery. But still ending sharply down on the day.

We have always been pretty negative on bitcoin where again the recent rise had been almost meteoric, but may now be crashing back towards reality.  In our oft-stated view, bitcoin mania has been something of a Ponzi-like market.  There is no substance behind the cryptos and with governments and central banks, as well as some recent individual supporters, now seemingly coming down against these hybrid computer-generated ‘currencies’, they are seeing a long overdue crash.  Again, as with equities, after an initial very sharp fall something of a recover has set in, but at the time of writing BTC was had just about regained the $40,000 level and was hovering above and below that.  This compares with around $60,000 only a week or so ago.

In precious metals, gold had been the initial major beneficiary with silver blowing hot and cold while it tried to make up its mind whether to rise alongside gold, or to stutter alongside the industrial metals among which it should probably be categorised nowadays.   The rise in the gold price has not been matched, at least so far, by the platinum group metals, which are very much industrial counters these days, although platinum seems to be doing marginally better than palladium.  They all fell back Wednesday, suggesting that recovery from the Covid pandemic may be somewhat slower than had been being thought.  Certainly the global death rate has remained high and there is a general suspicion that infection and deaths figures are being substantially under-reported across much of Asia, Africa and Latin America.  We may be a long way yet from any return to normality.  As long as infections are yet to be brought under control in considerable parts of the world, the risk of infection spread remains as limited global travel resumes.

While equities and bitcoin are seeing some tentative signs of recovery as investors start to believe there are bargains to be had, history tells us this may well prove to be a false dawn.  Once downwards momentum develops it most likely continues until markets bottom – which could be some time hence.  Even gold could be vulnerable as funds and individuals suffer liquidity issues and are may be forced to sell good assets to ward off potential bankruptcies.  We saw this happen in the 2008 selloff, but back then, gold was relatively quick to recover – well ahead of equities – and then went on to set new record levels, while the riskier assets continued to fall for many months longer.  Bitcoin was not a significant part of the equation back in 2008, but is potentially even more vulnerable than equities if the recent price movements do indeed presage a major downturn in risk assets.

The rising gold price was stopped in its tracks by a new Fed statement suggesting a tentative degree of tightening ahead, but again this possibility still seems to be well down the road, and prices recovered somewhat by close of play Wednesday.  They were taken back down in European trade Thursday, but recovering again to the low $1,870s,  after some initial gains in Asia.  Markets seem to be volatile for the moment, but probably remain gold positive, but it’s probably best to avoid equities and bitcoin until it becomes evident which way the investment wind is blowing.  We suspect that $1,900 gold remains in sight, but the latest price movements suggest that this may not happen this week, although that had looked a distinct possibility until the new Fed statement dampened the picture.

20 May 2021

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