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LAWRIE WILLIAMS: A decidedly more positive week for gold

Last week we wrote about gold thus: “There certainly has been the impression that the price had been stabilising and was thus poised to move higher once the current consolidation phase came to an end.”   And so it seems to have come to pass, perhaps even sooner than we were anticipating.  The gold price on the week surged past the $1,750  level and closed in New York on Friday at $1,776.50 – up around $32  - despite some strong resistance kicking in without which it might well have run even higher.  Whether it is allowed to stay there next week remains to be seen, but at the moment we are anticipating another consolidation period in the $1,770s ending with a strong run at regaining the $1,800 level, perhaps sooner rather than later.

There is little doubt that global investment demand for gold is remaining high at current price levels.  Demand seems to be picking up in the two main consuming nations, China and India – interestingly in spite of horrendously high coronavirus infection levels in the latter and reports of a small uptick in the former, although these figures might be considered small in relation to their massive population sizes.  Pandemic fear might even boost gold demand in India with those with cash – particularly in rural communities after last year’s strong monsoon rains – who may be looking to protect themselves against a Covid-related economic downturn.  Agriculture accounts for a little under 20% of India’s GDP and employs around half the nation’s workforce, so a ‘good’ monsoon is beneficial for the economy and for disposable income –a significant proportion of which has always tended to find its way into gold from this sector of the nation’s populace.

Again, as we noted here recently, outflows from the world’s gold-backed ETFs appear to be slowing down, while recent U.S. economic and employment data has been largely supportive of gold.  Also investment demand for pure gold coins and small bars also anecdotally appears to be running at a high level – and that applies to the other precious metals too.

Writing about those ‘other precious metals’ these become more and more industrial-sector -associated as we go down the list – silver, platinum, palladium.  Silver and palladium have done reasonably well price-wise in the past week, platinum less so.  Silver has a tendency to move pari passu with gold despite probably over 60% of its usage nowadays classified as industrial.  Indeed it appears to move in a more exaggerated manner both up and down.  In the past week it gained around 2.7% as opposed to gold’s 1.8%.  However, year to date gold is actually down over 6% and silver only 1.6%.  Silver has, though, been playing catch-up from its horrendous falls of last year, when it dipped hugely from mid-February through April, before bouncing back sharply in July.

Platinum and palladium have actually been the best performing precious metals this year so far, with the former up around 12% and the latter 13% - presumably in the light of anticipated recovery from the coronavirus pandemic in the West’s industrialised nations along with estimated supply deficits for both metals. 

We still urge caution about the longer term future for palladium in particular, however, given the growth in electric vehicle (EV) sales, particularly in Europe.  In Norway, for example, sales of EVs last year exceeded those of internal combustion (IC) engine driven vehicles – perhaps the shape of things to come!  EVs have no need for palladium and as legislation forces car plants to cease manufacturing and selling IC powered vehicles, which use palladium-rich exhaust cleaning systems, as they are doing in several European nations over the next decade or so, the longer term future for palladium looks decidedly bleak, although it may yet have another few years in the sun. 

China, currently the world’s largest car market, is already probably leading the world in EV manufacture and sale.  The big hold-out of course is North America where the IC engine still dominates, and will continue to do so for some years, but the writing is on the wall even there!

Other factors currently supporting the gold price, and to an extent the other precious metals too, has been a continuing fall in the dollar index – the gold price tends to be inversely related to the value of the U.S. dollar – together with the global trend towards ultra-low, and even negative, interest rates.  Inflation may be rearing its head in the U.S., but the Federal Reserve has intimated strongly that its priority is a return to what it judges to be maximum employment and that inflation is somewhat less worrying for it, particularly since it has been undershooting its 2% target for some time now.  A period of plus 2% inflation would just redress the balance, although if it surges to 3% or above that might prompt a reaction.  But a jump in inflation to a level the Fed would see as worrying does not look to be on the cards at the moment.

So, if anything we see gold as likely to challenge the $1,800 level as a likely scenario within the next few weeks.  From there onwards and upwards, although whether it can rebuild the momentum necessary to take out $2,000 again this year is somewhat less certain. 

Silver should behave positively on the back of gold – it is very much a sentiment-driven metal and if gold rises the sentiment towards silver tends to too.  The pgms may yet have a positive run if the economy really does be seen to be improving, but don’t bank on that – the latest U.S. and European Covid-infection figures have to be disturbing in that respect.  Gold stocks are probably due a bit of a run too, and the better ones pay dividends as well which is something of an investment bonus.

17 Apr 2021 | Categories: Gold, Silver, Palladium

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