LAWRIE WILLIAMS: A better week for gold brought short
While the gold price is still well below where we had foreseen early in the year, the past week had given us some encouragement that prices may yet move substantially higher by the year end. While we say ‘substantially’ that is a pretty indeterminate amount, so to put an actual figure on it we think the price could approach $1,900 or higher before the year end, but still remain well short of the $2,000 plus level that had looked to be achievable early in the year.
In truth things did seem to be recovering, perhaps more quickly than anticipated at the various COVID infection high points, from the strictures imposed by various governments around the world. However these are still in place in some nations to a greater or lesser extent which will mean not all economies will recover quite as fast. It’s something of a political trade-off between infection levels and mortalities against economic recovery. The enormous vaccine roll-out has somewhat changed the game and at the moment, unless some devastating new variant rears its head, looks like enabling us to live with the virus. It seems to be becoming controllable much as is seasonal influenza without overwhelming our hospitals. Infections may continue, but deaths are being radically reduced almost everywhere. However the northern winter, when such infections tend to increase with the onset of colder weather, is beginning to be with us and nobody yet knows how well we will cope going forwards.
Certainly the pattern of life has changed somewhat for many of us. Mask wearing to protect ourselves, and others, may become more common outside east Asia and seasonal infections may reduce as a consequence. Many of us will have succumbed to the convenience of shopping for food and goods online with home deliveries. This will limit outdoor interaction with strangers to an extent, and thereby decrease the likelihood of person-to-person disease transmission. In the words of a UK supermarket chain, ‘every little helps’.
Meanwhile the underlying economy goes on. Those who adapt well to the ‘new normal’ and take advantage of it will thrive, while those who cannot, or will not, adapt will struggle. More and more people will work at least part time from home reducing travel and work interactions with others. Arguably these all offer disease-transmission reductions and the world may become a more disease-free environment to the benefit of humankind. But then less social interaction may result in a loss of immunity from some diseases. Swings and roundabouts.
Gold’s price performance over the past week has brought both positivity, followed rapidly by disappointment as the midweek gains were brought down sharply as the week drew to a close. The gold price did end up a little in price on the week, but in the event only marginally overall, despite its sharp upwards moves on Wednesday and Thursday which even saw it break through $1,800, albeit only exceedingly briefly and not by any significant amount.
As the excellent Murenbeeld & Co Gold Monitor puts it “With this week's data releases markets are now expecting a somewhat faster taper schedule with a higher probability of the first rate increase by third quarter next year. The CME FedWatch Tool shows an implied probably of more than 90% that the first fed funds interest rate increase will be on or before the December 14, 2022 meeting, with a 61.5% probability of two or more rate increases by then.”
The newsletter goes on to note that “High inflation plus slow growth equals stagflation, which does not bode well for the Fed's maximum employment mandate. This, along with the high government debt levels, will keep the Fed on a lower for longer trajectory of fed fund interest rate increases.”
These do seem to be partly contradictory statements regarding the timing of interest rate rises and serve to emphasise the difficult position in which the Fed currently finds itself. We did cover this in a little more detail in our article earlier this week on gold’s potential role as protecting one against the potential perils of a period of stagflation – see Gold – your protection against stagflation, but in short the Fed has to weigh the potential for an interest rate rise and size against the possibility that raising rates might derail the economic recovery, such as it is, and decimate equity markets.
There is a slight worry which will no doubt occur to those who base their investment decisions on charts, that the gold price pattern, which has occurred over the past year and a half. is somewhat similar to that which immediately preceded the gold bear market of 2011-2015. But it is probably too early yet to give this much significance. In our view the gold price still has legs and should rise into the year ahead, although whether it will regain the August 2020 high remains in the balance.