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LAWRIE WILLIAMS: An interestingly positive year for gold and silver in prospect

As 2020 begins we can look back and see 2019 has been a relatively good year for precious metals. All have performed positively – rather better than the average forecasts of the London Bullion Market Association (LBMA)’s panel of ‘experts’ drawn mostly from the more conservative mainstream analytical community, but not nearly as well as the plethora of mega-bulls out there would have us believe.  Plus ça change.

In truth, geopolitical events have not necessarily been as prevalent as drivers of precious metals prices as predicted at the beginning of the year.  Equities markets have not (yet) crashed as many commentators had been predicting, thus have still been providing positive investment sentiment which may have negatively affected precious metals – particularly gold and silver which underperformed the principal equities indexes.  However trading on the final day of the year did give gold a bit of a boost.  Platinum group metals, particularly palladium, have performed rather better than gold over the year though due to some more positive supply/demand fundamentals.  Year–end closing prices in New York for all four major precious metals were as follows:  Gold - $1516.80, up 18% on the year; Silver - $17.82, kept from closing above $18 (up 15%); Platinum did reasonably well closing at $964 (up 21% on the year) while Palladium – again the best performing major precious metal – closed at $1,923, up 52%.  To compare with equity performance, the DJIA closed at 28,538 (up 22% on the year), the S&P500 at 3,231 (up 29%) and the NASDAQ at 8,973 – up 35% on the year.

Gold in particular does seem to have caught something of a year-end bounce as equities around the world have been stuttering again in relatively thin year-end holiday markets.  Whether this is yet a short term indicator of precious metals and equities re-ratings in 2020 remains to be seen, but it does parallel the year-end markets seen over the past few years where precious metals have seen some good gains at the year end continuing into the first few weeks of the succeeding year.

On the geopolitical front, conflict seems to be re-erupting in the Middle East with the U.S. using its military muscle against Iranian-supported militias – technically on the same side in the seemingly ever-ongoing battle against the resurrection of Islamic State in Iraq and Syria.  This was presumably more of a warning to Iran over its influence campaign in the region, but has nevertheless been strongly condemned by the Iraqi government, such as it is, and could lead to a request to the U.S. to withdraw its military presence from the country.  Whether the U.S. would comply with such a request is, perhaps, dubious, but this will further inflame tensions in the region and perhaps positively drive alliances by Iraq’s and Iran’s respective governments with Iran as one of the region’s military powerhouses.  The U.S. also seems to have left one-time allies – the Kurds – who were hugely important in the fight against ISIL, to their fate at Turkish hands, too.  Such strategic alliances tend to be shortlived in Middle Eastern geopolitics!

In the Far East, North Korea’s President Kim seems to have withdrawn from his suggestion of initiating a ‘Christmas present’ for President Trump, which many assumed would be the test launch of a missile with the capability of reaching North America although is threatening anew to resume nuclear and ICBM testing.  North Korea wants the U.S. to water down, or totally withdraw, its sanctions programme against the country, but President Trump is demanding North Korea’s de-nuclearization as a quid pro quo for even a partial easing of sanctions – something President Kim does not seem to be prepared to concede, at least for now.

U.S. relations with China seem to blow hot and cold.  A Phase One agreement on trade differences seems to be imminent, but will probably not bring to an end the continuing disagreements over the long term future of U.S./China trade.  The latter nation runs a significant trade surplus with the U.S. which President Trump is anxious to see substantially diminished.  However China has the long term goal of making the nation self-sufficient with its population soaking up most, if not all, its industrial output.  It has the population base to be able to do this and a track record of converting huge swathes of its populace into the middle classes with ever-higher buying power, but this takes time to come about.  The U.S.-imposed tariffs may just have the effect of accelerating this process with China digging in its heels on trade-related concessions.

The world’s other big economic area – the EU – is faced with uncertainties over the effects of Brexit, due to be initiated at the end of January.  Contrary to many ‘expert’ predictions the pound sterling and the U.K stock market have not collapsed as the UK’s withdrawal becomes inevitable.  Indeed the reverse has happened with the pound and equities rising as the official withdrawal date approaches.  It seems to have been forgotten by those who wanted the UK to remain in the EU that the UK is one of the world’s biggest economies in its own right and is a key destination for exports from most EU nations.  In our view economic pragmatism will exert itself rapidly and any trade disruptions as a result of Brexit will, in most cases, be relatively quickly resolved.  The effects on precious metals prices is hard, if not impossible, to quantify.  Indeed Brexit has been a bit of a non-event as far as gold, silver and equities markets are concerned.

There is anecdotal evidence that gold demand in hard money nations like Germany and Austria has increased towards the year end, in part because of the Brexit uncertainties, but this has been insufficient to counter significant downturns by top gold consumers, China and India.  Probably more significant for precious metals prices has been continuing central bank buying of gold, and positive flows over the past year into global gold ETFs. Whether both these carry on in 2020 remains to be seen, but we think that they will as likely – particularly if the gold price continues to grow.

So, as per my forecasts of a few days ago (see: 2020 Forecasts – gold, silver, pgms and geopolitics), we do see 2020 being a positive year for gold, and silver will likely follow.  The U.S. Presidential election looms towards the year end with the prospect of President Trump being impeached remaining unlikely.  Indeed at the moment we see the strong likelihood of him being re-elected.  Whatever one thinks of him on a personal basis, he has delivered on many of the promises on which he was elected and has a loyal hardcore following.  Meanwhile the Democrats are hugely divided and we certainly don’t think the U.S. is ready for a swing to the left. Socialism remains an unpopular word with much of the U.S. populace.  For now it looks like President Trump will likely even gain increased support in November.

The U.S. economy remains fluid though and, failing an outright recession, the Fed will likely remain neutral overall on interest rate rises.  As a result, the U.S. dollar seems unlikely to rise – indeed may continue to drift downwards, which would be another positive for precious metals.  Prospects for the precious metals investor thus remain upbeat, while the seemingly overpriced and over-hyped equities market continues to look vulnerable.

01 Jan 2020 | Categories: Gold, Silver

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