LAWRIE WILLIAMS: Buy gold and save yourselves! Better safe than sorry!

The equity markets defeat my analysis.  Perhaps undue optimism relating to the gradual winding down of coronavirus restrictions is leading to what I consider a totally unwarranted positive reaction in the stock markets, yet almost all the high end comment is forecasting a prolonged recession which is bound to impact the markets hugely negatively sooner or later.  We see references to ‘strong data’, but in truth the data all remains extremely weak compared with pre-coronavirus days.

The U.S. Fed and European central banks are pouring unprecedented amounts of money into the system, which seems to be primarily finding its way through to the equities markets, making the already rich, richer, which is not the point.  But when the full equities crash comes, it will all end in tears for rich and poor alike – apart, of course, from the mega investors who are wisely sitting the current market shenanigans out!

The enormous debt build-up which is materialising will come back to haunt the global economy for many years to come.  It will probably never be unwound and will ultimately lead to a rejigging of the global financial order which could see the mighty U.S. dollar lose its prime reserve currency status – which will be a heavy long term blow to the world’s largest economy.

As to gold, it is currently range-bound, hovering between $1,700 and $1,750 an ounce. Attempts to take it down below the $1,700 level have so far seen resistance come in strongly and any time spent below that level is quickly corrected – yet the same is happening at the top of the current range.  Forays above $1,750 are quickly put down and recently gold has seen occasional tops in the $1,740s that trigger extensive selling in the futures markets to bring it back down again.  Sooner or later one of the two current extremes will be breached conclusively and we would suspect that will be to the upside – particularly when the true recessionary economic realization hits the markets which it will do once the Q2 figures start to come out..

The U.S. Federal Reserve at its recent FOMC meeting had little positive to say about the likely path of the U.S. economy looking forward for the next two years.  What has to be particularly worrying here is that, if anything, the Fed has tended towards over-optimism in its forecasting in the past and if that is true again of the latest FOMC deliberations then the likely U.S. economic recovery could be even slower. 

What is happening in the U.S. is being mirrored elsewhere in the world’s major economies – and as for the emerging nations, which in concert provide a significant part of the demand which contributes to global economic growth, it has to be worrying that the coronavirus is only now peaking in Central and South America and the Middle East, and is only in its early stages of virulent growth in Africa.  Figures in the U.S. are still pretty horrendous – we will likely see the virus death figures there hit 120,000 today and total infections 2.3 million this week.  However President Trump is correct in saying that if the U.S. had not tested so many people we would not know the true state of infections.  The U.S. leads the world in number of virus tests undertaken with nearly 26 million carried out.  Similarly in mainland Europe the U.K. tops the list of infections by country, but here again the nation has undertaken far more tests than any other mainland European country, and in terms of tests per million of population even leads the U.S.. although is marginally behind Spain. Thus the published global ’league tables’ can be, to say the least, misleading.  However, this should not be taken as suggesting that fewer tests should be undertaken, but that most countries are under-reporting infection numbers due to lack of testing.

Thus  investors should cease viewing figures from just their own countries as likely to affect markets and demand for goods going forward.  These are themselves dire in most cases, but the ongoing effects on the global economy will be cumulative in their effect and lead to a global economic downturn which could last for several years – perhaps longer if a dreaded second wave of infections results from the easing of national lockdown restrictions. 

As we have noted before, governments find themselves between a rock and a hard place.  They need to balance the potential death tolls (a PR nightmare) with an easing of the destruction of domestic economies in an attempt to get businesses moving again.  That is why so many are easing their lockdowns, perhaps even before the scientific community may consider it wise.  It’s an economic and public relations balancing act.  There are probably no winners here!

Because there is so much uncertainty around the likely length and depth of the economic downturn facing us all, it is probably wise to hold cash, rather than equities, or put one’s faith in the traditional safe havens like gold to protect one’s wealth such as it may be.  Indeed cash may not be that safe either as the measures central banks have been taking to prop up domestic economies, could well result in serious inflationary pressures ahead due to the huge growth in money supply – and inflation destroys the inherent value of cash.  Again I repeat the mantra of Michael Lewitt of The Credit Strategist fame: “Buy gold and save yourselves”.  The global economy is in the midsts of an unprecedented downturn which could run and run.  Who knows when it will end.  Better be safe than sorry!

17 Jun 2020

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).

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