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LAWRIE WILLIAMS: Equities markets nervous as gold nears $1,300

As we’ve pointed out in other articles here on Sharps Pixley there are a host of geopolitical and geo-economic uncertainties looming and these appear to be stimulating safe haven demand for the precious metals – notably for gold which has risen by more than $35 an ounce over the past three trading days.  Silver seems to be lagging a little, but will likely see its price accelerate  should gold maintain, or exceed, its latest price levels given silver tends to advance faster than gold in a rising precious metals environment.

At the time of writing, gold has settled into the mid-$1,290s and obviously has a good chance of exceeding $1,300 over the next few days (See: Could gold hit $1,300 this week?) – definitely so if the UK election provides a shock result – even despite the likelihood of a U.S. Federal Reserve announcement of another 25 basis point rise in interest rates at the FOMC meeting next week.  Should a subsequent scheduled statement from Fed Chair, Janet Yellen, suggest the Fed may be slowing down its planned interest rate raising programme and balance sheet reducing activity in the light of some apparently underperforming U.S. economic data, then the price could receive a further boost.  25 basis point increases may no longer have the power to put much of a dent in the gold price given interest rates will remain effectively in zero or negative territory which is positive for the yellow metal.

Eyes are now on US and European equities which are currently looking vulnerable in the light of continuing warnings of a sharp downturn from a number of highly respected financial commentators.  A recent Bloomberg article suggests that hedge funds may at last be getting back into gold as a more stable asset in case the general equities markets should collapse.

President Trump remains under attack on a number of fronts by his opponents.  First up is testimony from fired FBI Director James Comey as to whether he was asked to drop investigations into contacts between the Russian Ambassador and then security adviser Michael Flynn (since let go) – and there is, of course the further investigation by special prosecutor, and former FBI Director, Robert Mueller, into any collusion between the Trump team and the Russians both ahead of the Presidential election and ongoing.

To this observer this could all be fuelled by American paranoia over Russia, quite possibly because the country’s powerful military/industrial complex and security services needs an enemy to justify the nation’s huge military and security spending.  I suppose to an extent this boils down to ‘deep state’ conspiracy theories which are prevalent among a sector of the Trump supporters.  To a mere, hopefully unbiased, commentator this is a difficult subject, albeit some things done in support of a particular political agenda may well fall outside the bounds of universally acceptable actions. One probably has to accept that some aspects of the American political system, given its underlying money-driven lobbying background, has to be subject to potential abuse by the wealthy and powerful.

Be this as it may, the Trump Administration is likely to be mired in challenges of this nature throughout its life given the intense polarisations following what was perhaps the most contentious Presidential election ever.  This is resulting in delays in getting proposed flagship policies through Congress and is impacting too on foreign policy, which will not be going unnoticed by the country’s opponents and detractors.  There are likely to be stand-offs and provocations as a result.  All this has to be gold positive - $1,300 gold, whether it comes this week, next week or at some unspecified time in the future, is likely to be the beginning of a sustained runup.  Where, and when, it will end no-one knows.  Maybe Jim Rickards’ suggested $10,000 gold is in the cards, but if so probably not soon.  We’d go for a two steps forward, one step back progression - or maybe slower.  Perhaps gold could reach $1,400 by the end of this year, although some mega black swan event could see a more rapid rise. 

The most likely such black swan event might well be an equities market crash of 50% or more as some have been predicting, but if this happens the gold price would likely come crashing down too as the hedge funds, apparently now buying gold, would need to sell strong assets to preserve liquidity.  This happened in 2008 and would likely happen again.  But then it was gold which bounced back quickest and went on a tear for a couple of years resulting in its all-time high of around $1,900 an ounce by September 2011 ahead of the turn-down which coincided with the U.S. Labor Day holiday that year.  Will history repeat itself? – and if it does the lows and highs could well be even more extreme.  Be careful what you wish for.

06 Jun 2017 | Categories: Gold

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