LAWRIE WILLIAMS: Dollar being allowed to fall; Gold up; Silver disappoints so far
As the final trading session of the year is already under way in Europe and has just begun in North America, precious metals are trending higher, but most of the increase is due to the gradual decline in the dollar index (DXY). Since end 2016 the DXY has been allowed to drop from 102.65 on December 29th last year to 92.29 as I write on December 29th this year. That is a fall of around 10%. Again as I write, the gold price in the US dollar is up around 12% over the full year after its recent rally. Silver, on the other hand, is only up a little over 4% over the same period – a particularly disappointing experience for the silver investor given that historically silver tends to outperform gold in a rising gold market.
Silver though is, or should be, somewhat anomalous vis-a-vis gold as it is much more of an industrial metal, although its performance as such may not be the real reason it has underperformed its sibling precious metal in 2017. Silver is a much smaller market than gold and its price can thus be even more subject to futures trading patterns where big money is involved. Silver followers reckon the price is being manipulated in a major way on the futures markets and point to the huge short positions taken in the metal by the big bullion banks and traders as being key to the price patterns. These big shorts do not relate easily to some huge accumulations of physical metal by the same big banks that dominate these short positions – a point being made continuously by silver analyst Ted Butler (probably the world’s No. 1 expert on this anomalous situation) who reckons the activity in the silver markets by the big players – notably by JP Morgan - is, in effect, a criminal activity to which the market regulators continue to turn a blind eye.
Of course gold bulls also see the gold market as being manipulated too by many of the same players as in the silver market. But here the motivation, if the gold price is indeed being held down, may be in support of governments and the dollar given the huge global debt position. The gold price is considered by many as a bellwether for the state of the economy and a big rise in gold could be seen as a huge fall in confidence in global economic management. That does not suit the big money and the markets, let alone government policies. Whether there is collusion between major governments/central banks and the bullion banks to keep the gold price suppressed remains arguable, although there is considerable evidence to suggest that this has indeed been policy in the past and thus probably still is the case today.
The big question today is whether gold will indeed stay back above $1,300 on the year’s final trading day and what will happen when trading resumes in the New Year. Silver could also possibly break back up through $17 and as I write gold has indeed breached $1,300 and silver looks well placed to break out above $17. These price advances have survived the New York market open and whether they will survive the full trading period at these levels remains to be seen, but the force is certainly with them at the moment. Gold at $1,300 and silver at $17 would put the gold:silver ratio (GSR) at 76.5 which is certainly not unreasonable given that the GSR has ranged between around 67.7 and 79.4 over the past year. Indeed we have gone on record as suggesting the GSR will come down to 70 during the year. Some feel this is a very conservative prediction.
Platinum is also moving up along with the other precious metals apart from palladium which has come off a few dollars. We think there’s a good chance that platinum will be back at a higher price than palladium by the end of 2018, although I have received a recent email from former Stillwater CEO, Frank McAllister, who would strongly disagree having published a paper back in 2012 that palladium and platinum should at least be on a par with each other. He further suggested that the demand for palladium in the autocatalyst sector could well drive its price ahead of platinum. He has certainly been correct in this viewpoint.
Ted Butler’s latest theory, is also worthy of comment. He avers that JP Morgan was in effect given a 10-year carte blanche by the U.S. Government and regulators as a reward for its assumption of the huge Bear Stearns short position in silver, at the government’s prompting, when that bank collapsed in the 2008 financial crisis. That 10 year period will now be up in 2018 and, if Butler is correct in his suggestion, JP Morgan could now be in a position to reap multi-billion dollar rewards from unwinding some of its silver market activities. Butler though has been permanently bullish on the silver price and some of his theorising, however well supported in fact, may just be wishful thinking. BUT – he could also be correct and if he is there could be a run up in the silver price that would at least match that of 2011 when the metal peaked at just short of $50. Silver investors will certainly be nailing their colours to that mast! And if silver runs in this manner it could drag gold up with it too. The tail wagging the dog!
There have been many changes in both the gold and silver markets over the past several years and most would seem to be price supportive – not least the continued flow of bullion from generally weaker hands in the West into stronger hands in the East. Global gold production has probably peaked –it has certainly at least plateaued – and the year-end figures will be viewed with particular interest when they come in. We would suspect global gold production in 2017 could be down as much as 1% overall. It is falling in some countries, although still rising in others, but cutbacks in capital programmes and in exploration spending, particularly by some of the majors, suggest that there could be several years of declining global output, although not at a particularly high rate
Eastern demand appears to be holding up fairly well. While neither of the two leading consumers – China and India – are importing gold at their past record levels, demand appears to have been increasing in 2017 over that of 2016 and we would expect that trend to continue along with the gradual increase in percentages of their populations falling into the middle class (and potentially gold-buying) categories – a growth that is being echoed around the world.
Geopolitics could also be playing a role here, although the gold price has been showing little sign of any sustained upwards movement with some of the worrying events taking place around the world and President Trump’s seemingly increasingly combative rhetoric which could be considered destabilising. However we have noted that the passing of major holidays often seems to mark an inflection point in market behaviour and perhaps Christmas 2017 is yet another one of these. So far the portents for gold and the other precious metals look positive. It remains to be seen how they play out through the year ahead.