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LAWRIE WILLIAMS: An excellent week and month for gold and silver

Contrary to what has been the recent norm, gold was allowed to close the past week at above $1,970 an ounce and silver over $24.  Indeed gold has spent virtually the whole of July at above $1,800 an ounce and, as I write, is at $1,978.  It looks poised to breach $2,000 – perhaps this month – considerably earlier than most projections had suggested.  But be warned – gold seldom moves in a straight line and there could well be a correction on the horizon.  U.S. investors in particular are quick to seize on any news or data on the economy which might be even marginally construed as positive and drive equities up and gold down, although such recent moves have not been sustainable in the current pretty dismal coronavirus-driven economic recession.

Silver has performed even better in percentage terms.  It started July at around the $18 mark so has thus risen in price by over 30%,  compared with gold’s monthly rise of around 11% - still impressive but less than half of that of silver.  Silver has been in the doldrums price-wise for the best part of three to four years, having been completely unable to maintain its price relationship with gold as will have been apparent to followers of the Gold:Silver Ratio (GSR).  At its worst the ratio rose to over 120 in March (the higher the ratio the worse it is for silver), a huge new record high compared with a long term average of between around 50 and 60.  It still has a long way to go to get back to these levels – maybe it never will – but the momentum is with silver currently and certainly a price of $25 or higher has to be on the short term horizon.  However, the metal’s status as a largely industrial metal nowadays may be holding it back.

When I logged on to my computer on Monday morning, I received the latest version of one of my favourite newsletters – Grant Williams’ Things that make you go hmm... and this latest edition focuses on gold and silver. 

Grant always starts his newsletters off with a series of quotations from both historical and contemporary figure and I’ll pick out three of these as being particularly apposite under current circumstances with central banks piling up debt beyond all belief and gold (and silver) looking as though they may provide some respite for the beleaguered investor:

“Aiming for 2% inflation every year means that, after a decade, prices are more than 25% higher and the price level doubles every generation. That is not price stability, yet they call it price stability. I just do not understand central banks wanting a little inflation." – Paul A. Volcker

"My advice to you, my violent friend, is to seek out gold and sit on it.” – John Gardner, Grendel

“Through it all, just as Hall and Jastram have separately noted, gold endures, holding its value but returning no income. Well, you can’t have everything." – James Grant, Grant’s Interest Rate Observer.

Gold looks to have a number of things going for it at the moment.  True its Asian adherents, who provided much of the yellow metal’s demand-related strength over the past decade, are offloading it to compensate for the coronavirus shock to the economy (i.e. gold is doing its job) or at least they are not buying, and central banks seem to be cutting back on purchases with Russia and China sitting on their hands, but this being offset by enormous, and continuing, flows into the major precious metals ETFs.  Those even with relatively short memories will remember it as Asian buying that supported precious metal prices when gold was being heavily offloaded out of the big ETFs from 2011-2013.  Now the reverse is happening and the Western investment interest in gold is driving prices to new dollar highs.  It may not have yet reached its inflation adjusted high of 1985 - calculated at $2,787 in today’s dollars – but that just becomes yet another target.

The gold price in U.S. dollars has been shown to correlate extremely closely to the inverse of the 10-year Treasury Inflation Protected Securities (TIPS) yield in the U.S. and this is currently at an all-time low level of -1.02% suggesting a continuing gold price rise.  Currently almost all factors favouring a continuing gold price increase are in alignment – as Martin Murenbeeld puts it in his latest Gold Monitor newsletter “Everything is lining up favorably for gold just now; the dollar is weakening, the TIPS yield has hit an all-time low, and the S&P 500 is giving more cause for investors to consider gold”.

 To this we’d add a seemingly ever-present ramping up of geopolitical tensions between the world’s two largest economies (The U.S. and China) , lower gold output from mines due to coronavirus-related mine shutdowns and safety concerns, continuing huge flows of gold (and even more so for silver) into the world’s ETFs, a general equities sector which looks ripe for collapse and continuing demand for gold from the world’s central banks, albeit perhaps at a lower level than in 2019, general equities still moving higher despite the massive recession, and thereby overdue for a crash which could boost gold’s safe haven appeal.  The list of assumed positives seems to be almost endless at the moment.  The only real negative as I see it is the huge overhang of short positions on the COMEX in gold and silver, which could be responsible for driving the metals either way – downwards as the short holders try to protect themselves from financial disaster, or upwards in the case of increased short covering.  In this respect it is probably worth noting that the biggest short holder of all, JP Morgan, seems to have extricated itself from its short positions and is thus poised to make a killing in the markets as precious metals continue to rise.

For value investors though don’t forget the major gold and silver mining equities which are poised to make record gains.  Most are seeing margins of $1,000 or more per ounce on gold sales so Q3 earnings could be immense.

04 Aug 2020 | Categories: Gold, Silver

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