LAWRIE WILLIAMS: Could this be the turning point for gold and silver?

We wrote here recently about the short term headwinds facing gold and the longer term positives, but some of the short term negatives seemed as if they fell away at a single swoop yesterday!  Could the 800 point fall in the Dow be the start of the much predicted equities collapse?  Indeed the Dow and the S&P 500 were both down around 3% on the day and the NASDAQ down a massive 4%.  These falls have been mirrored by big falls in general equities in Asia and Australia, and this morning in Europe.

And yesterday a massive 273,851 ounces of gold were added to the SPDR Gold Shares ETF (GLD) – that’s over 8.5 tonnes and is the first positive movement of gold into GLD for nearly 3 months, and a very sizeable amount to boot.  We have stated here before that one should watch GLD additions or withdrawals as a guide to institutional sentiment towards gold and since April we have mostly seen withdrawals – an enormous 141 tonnes of gold had been taken out from GLD from end-April until yesterday.  Again could this be a turning point for gold?  One day’s figures are perhaps not a sufficient indicator of what’s to come, but are a start and it is essential to monitor this indicator as a guide to precious metals sentiment.

As always commentators’ views are mixed on the likely effect of yesterday’s falls in equities valuations.  Some see them as a buying opportunity in an ongoing bull market pointing to a similar fall in February from which the major indexes made a fairly rapid recovery.  All eyes will be on the Dow and the S&P today to see if the falls will continue, or if there will be a bounce back. 

We are entering a time where Fed tightening by raising interest rates may well be making markets nervous.  President Trump has been quick to lay the blame for yesterday’s fall on the Fed’s policy of raising interest rates thus leading to a stronger dollar (which has adversely affected the gold price in dollars if not in some other currencies).  This fall in other currencies against the dollar has had an adverse effect on some of the Administration’s tariff impositions.  Yet even so some U.S. manufacturers are already warning that the tariffs on Chinese goods in particular will have an adverse impact on input and consumer prices.

So, we are likely going to see a steady increase in U.S. inflation, and unless there is a slew of positive data on job creation, wages and in PMI forecasts, we could see sentiment turning down which could further impact U.S. equities markets.  If equities are seen as likely to fall further this could see an increased move towards safe haven assets like gold and silver.  Although be warned, if equities markets really do tank as some are predicting, then precious metals prices could suffer too as individuals and funds/institutions struggle to maintain liquidity and are forced to sell off good assets with the bad.  We saw this happen in the 2008 market crash, although it should be noted that gold, in particular, was far quicker to recover than equities and climbed back to pre-crash levels while equities were still falling.

And what of silver?  This has had a pretty torrid time of late as represented by a gold:silver ratio (GSR) at around its highest level for around 20 or more years.  When the GSR has been this high in the past it has tended to precede either an economic crisis or a big stock market turndown, or both.  We have often said we don’t anticipate a return to the supposed old average GSR of around 15 as the out and out silver bulls will suggest, but a return to the 70 level, or even 60, could be on the cards with a huge positive impact on the price of silver.

This morning, gold has already regained the $1,200 level which has seen major resistance to an increase coming in.  if this sustained and equities continue to fall, then we could see a big surge in precious metals prices in the days and weeks ahead.

Bitcoin too has been stuttering with BTC down around 5% and the smaller cryptos, like ETH, mostly down over 10%.  We have long warned that we have no confidence in the stability of a bitcoin investment and this kind of volatility perhaps makes the point for us.  Some observers reckon that BTC will fall to around $2,000 by the year end and some of the lesser cryptos to close to zero.  We wouldn’t be surprised if this were to come about!

11 Oct 2018

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