LAWRIE WILLIAMS: A poor week for Gold. Correction or downgrade?
The gold price ended the current week virtually unchanged at just over the $1,460 level but since then has retreated further to the mid $1,450s. Most days the price picked up in Europe and Asia but was brought down again in U.S. trading, perhaps because of some seemingly overtly positive news on progress in U.S./China trade talks, although we think this is spurious optimism. There was also government data released which might be seen as mildly positive, although any seemingly negative data was largely ignored by the markets – and there was some!
The main driver of the price still seems to revolve around the U.S. Federal Reserve and its likely interest rate programme moving forwards. Prior to the last FOMC meeting at the end of October when interest rates were dropped, as widely anticipated by 25 basis points, there had seemed to be the possibility of a further small rate cut at the forthcoming mid-December meeting and even possible further cuts early in 2020. However Fed chair Jay Powell’s post-FOMC statement suggested that the U.S. economy was progressing strongly enough to rule out further rate cuts in the short to medium term. Indeed should the U.S. economy continue to make progress in thje Fed’s eyes, the market might even be anticipating a resumption of interest rate increases at some time on 2020/21 which is seen as distinctly negative for gold.
Even so, the consensus from bank analysts mostly seems to be that the current gold price setback is likely to be a temporary one (November has seemed to be a difficult month for gold for the past five years in a row) and several are predicting a decent price rise next year. Even Goldman Sachs, which in the past has been very bearish on gold, is looking for a price of $1,600 an ounce next year, although is decidedly less bullish on silver which it feels may reach only $18, citing heightened global uncertainty coupled with modest global economic growth as likely to support gold prices through 2020. Of course the tos and fros of the U.S. Presidential election campaign late in the year will add another tranche of uncertainty into the picture.
We would however concur with the Goldman position as far as the gold price is concerned, but would be a little more positive on the silver price. The $1,600 gold and $18 silver prediction would put the Gold:Silver Ratio (GSR) at close to 89, near historic highs. We think the GSR will come down into the high 70s at the least, putting the silver price at above the $20 level and while we take the Goldman point that, all things being equal, silver’s big industrial demand element may remain weak, we suggest the white metal’s historic correlation with gold is more likely to win the day with the investor.
So, overall we see the recent dip in the gold price as being a correction, rather than a longer term downgrade with perhaps a level of $1,450 providing something of a floor from which a longer term price advance should develop. So saying, the gold price does remain U.S. data driven and could experience ups and downs dependent upon whether the data is seen as positive or negative for the U.S. economy in particular. Similarly overt progress, or otherwise, on U.S.-Chinese trade negotiations will likely have an impact, although we feel the sides are too far apart on several key issues for a deal, satisfactory for both sides, to be negotiated.