LAWRIE WILLIAMS: Can gold recover its lost ground?

The past month has to have been an extremely disappointing one for gold investors. During the last week in March, the gold price slipped back under $1,700 again and, although it made a mild recovery back to above the key $1,700 level right at the month end, this did not seem to be a particularly confident recovery with prices volatile and erratic in European trade this morning.  There is obviously a significant degree of volatility in current pricing for all the precious metals and they appear weak – a pattern mirrored somewhat in  global equities. 

There is a theory going around that investors may be deserting gold in favour of bitcoin, which has been riding high of late.  But the writer is exceedingly wary about investing in bitcoin, which appears to have little actual substance behind it and could thus be prone to a crash of massive proportions.  Gold as an investment has stood the test of time and thereby is probably far less of a gamble than bitcoin.  Its price can, and does, fluctuate, but even in its worst moments seldom loses a major proportion of its value.  In short it is, and always has been, a great wealth protector, seldom prone to the volatility excesses of the equities markets – and more recently of bitcoin.

Gold has almost certainly been adversely affected by recent dollar strength – the gold price tends to be inversely associated with dollar strength and the dollar index (DXY) has over recent weeks moved up from a low of near 89 at the start of the current year to comfortably over 93 at present.  However, on the positive side, gold tends to benefit in a low interest rate environment, and from ‘free’ money being pumped into the economy, and both these factors are in play at the moment with the U.S. Fed reckoning to keep interest rates very low for the foreseeable future and the Biden administration adding huge sums of money into the economy, some of which is certain to find its way into the markets.  Some may even move into precious metals, although the likelihood is that most will find its way into equities and bitcoin as the most popular investments du jour.  But this could well be a temporary phenomenon, particularly if doubts arise, as they already seem to be doing, regarding the continuing strong performance of both stocks and cryptocurrencies.

Gold and silver, which tend to move together in price, are stuck in a hiatus period at the moment.  There is still investor and safe haven demand as can be noted in relatively steady sales of gold and silver coins and small bars, although even this seems to have quietened down in recent weeks.  Platinum group metals do seem to be particularly volatile at the moment, but they are very much industrial metals nowadays and price movements seem ever less dependent on gold price performance.  In other words the precious metal element is no longer so prevalent in their price performance which seems to be very much tied to the state of the global economy and the automotive sector in particular.  They are searching for direction, which probably takes away one of their prior strengths, falling into a kind of limbo between precious and industrial demand.

At the moment equities and bitcoin, helped along by social media recommendations and ongoing hype, seem to be the favoured investments, but this could change in the blink of an eye if either the stock market, or bitcoin pricing, or both, suffer a major correction.  Investment sentiment is not currently with the precious metals complex, but we suspect this could well change as the year progresses.

 

 

01 Apr 2021

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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