LAWRIE WILLIAMS: Be patient on the gold front – Murenbeeld

The gold commentators whose opinions we mainly follow tend to be cautiously bullish on the likely progress of the gold price over the year ahead.  We would coin a phrase for these – the Sensibulls – as opposed to those predicting huge rapid rises in the gold price this year and in the near future – the Ultrabulls.  The latter may well be correct on where they see the price going in the ultra long term, but realistically they are probably somewhat ahead of their time and the politicians and central bankers will probably muddle through – at least for the next year or so.

The Sensibull element is largely looking for a gold price range in the current year from where the yellow metal is now, up to say $1,450, although the likely level may well depend on equity performance – and the key U.S. equity markets in particular.  Despite something of a recovery after the big downturns seen in December, markets still look nervous as can be seen in intra-day price volatility with stock indexes swinging from positive to negative and back seemingly in the blink of an eye.  And there does seem to be an interesting inverse correlation between equities and the gold price – highlighted in Murenbeeld & Co’s latest gold monitor (www.murenbeeld.com for info)  in a graphic comparing the S&P 500 index with the gold price.  While the inverse correlation may not be immediate, or direct, the overall relationship is generally fairly consistent.

Although Murenbeeld is cautiously bullish on the gold price he also sees U.S.  equities making more of a recovery in the current year, which could be a contradictory  indicator!  Frank Holmes of U.S. Global Investors however sees ann move by the U.S. Fed to cut interest rates, rather than raise them, as extremely bullish for gold.  However, contrary to the opinion of the Ultrabulls in particular we don’t see the Fed changing course to that extent – at least not in the current year.  We see it as slowing down its planned interest rate normalisation policy – perhaps ceasing rate rises altogether this year – which would be a positive for gold given it might result in a weaker dollar, but perhaps also a positive for U.S. equities nervous about the state of U.S. economic growth.

There are of course, as always. a number of geopolitical unknowns on the horizon which could influence gold and U.S. , and global, equities in either direction.  A disorderly Brexit seems to be looming in Europe, which could be debilitating for the UK, but perhaps even more so for a number of EU countries; the continuation of the President Trump inspired trade wars and his own domestic political differences with the Democrats, who now have control of the House of Representatives, but not the Senate which would likely block any moves to impeach the President ; a continuation of inflammatory flashpoints in the Middle East, the Ukraine, North Korea and, potentially, the South China Sea.  Nearer to home jockeying for position between Russia and the U.S. in Venezuela could also blow up into a major confrontational crisis.  And there may well be a few ‘black swans’ (or unknown unknowns) out there too!  Any of these could influence the gold price positively during the current year.

But to set against this, in recent years gold has been remarkably unreactive to what seem to be major geopolitical events..  As I write it is sitting at a little below $1,280 – around the bottom of its recent range.  Reaction of Asian and European equities is somewhat mixed indicating continuing market nervousness.  The U.S. equity market reaction today may well provide some gold price direction, but whatever that direction is our advice, for what it’s worth, is to follow the Murenbeeld lead and be patient.  Consensus opinion seems to be that gold will rise this year, but probably by not nearly as much as the ultrabulls have been predicting.  A relatively small rise this year – perhaps between  5 and 10% might be on the cards, but we don’t think the Jim Rickards-promoted $10,000 gold price revaluation this month (See:  Gold Down As Equities Correct Upwards - But For How Long?)is imminent – or indeed likely.  Such a plan might provide a move towards  a cure for the World’s financial ills in theory, but in practice it is probably a non-starter, at least until things get far worse that they are at this moment in time.  We just see gold as little more than a continuing wealth protector with ups and downs most likely relative to dollar strength or weakness.  Yes, we’d love to see $10,000 gold but we don’t see it as happening in the near future.

24 Jan 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com