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LAWRIE WILLIAMS: Gold and silver - correction or crash?

It had seemed that the meteoric rise in gold and silver prices might be unstoppable, but the beginning of the current week has seen the oft-predicted correction come in – and come in sharply!  There were too many big players holding short positions that were vulnerable to collapse if gold nd silver prices kept on rising at their recent rate for prices to continue upwards without some kind of comeback!

As we predicted in one of our recent articles, even the most ardent of bull markets seldom see continuing rises without a price setback occurring at some stage. Thus the beginning of the week did indeed see something of this happening in the precious metals space.  After last Friday’s take-down for both key precious metals – perhaps on the back of slightly better than expected U.S. job rehiring figures (despite an overall unemployment total which would have been deemed horrendous only a few months ago)  gold started Monday nervously, and by the close came back a few more dollars, but silver seemed to go on from strength to strength and rose by over a dollar an ounce.  The Gold:Silver Ratio (GSR) came down below 70 for the first time since April 2017.  Indeed silver performed almost incredibly well, at least initially, with the price seemingly accelerating (it hit over $29.50 spot at one time, before closing a few cents below that level at the end of Monday’s trading.)

But Tuesday and Wednesday were something of a different story with gold seeing a continuation of its decline, and this time silver also followed suit.  At the time of writing, something of a recovery seemed to be setting in for both metals, but whether this is sustainable in the short term remains to be seen – we think it is.  Thus we do anticipate that gold and silver’s sterling performance is likely to resume unless the U.S. Labor Day holiday at the beginning of next month presages a total change in sentiment - as has sometimes been the case in the past.

The U.S. and global economies have been hit hard by the coronavirus and will take months, if not years, to get back to anywhere near normal.  Indeed for some industry sectors things are never likely to be the same ever again.  Once the realisation sets in amongst the investing public and funds that any recovery is only likely in the far distant future, equities will likely start to crash again, while the precious metals sector – notably gold and silver – will see a resumption of safe haven interest and resume their upwards paths.

I had held back on commenting on the price performance for gold and silver earlier in the week, waiting for the dust to settle and markets to resume a more normal trading pattern.  The U.S., which is very much setting precious metals prices at the moment, appears to be a nation of optimists with the slightest hint of positive news leading to mainstream equity rises in the midst of the worst economic figures seen – ever.  Roll back a few months and an unemployment figure of greater than 10% would have seen the equity indexes crashing through the floor – and then some!  But now an official  unemployment figure of only 10% is seen as a positive and markets, at the very least, appear unmoved and even supportive.  The NASDAQ is at a record high for example.  While it is a tech-focused index, and although the tech sector has been less affected by the coronavirus than most, the longer term effects on some of its key component companies could be severely negative.

As for the Dow and the S&P, their positive performance beggars belief.  Bankruptcies are rising and performance figures out of many household-name companies are dire in the extreme.  The realisation will have to sink in soon and the crash, when it does materialise, could be extreme.

Matters are not too rosy on the domestic and international geopolitical arenas either.  Domestically a number of major cities are seeing a continuation of rioting and looting based around ‘peaceful’ black lives matter protests which are being hijacked by anarchists and criminal elements, amidst crazy calls to defund, and hamstring, the police.  However faulty American policing may be, calls to abolish the police force, such as it is, are hardly a recipe for making the streets safer for individuals.

The coronavirus incidence is rising daily at dramatic rates, despite the U.S. President’s false statement that the incidence of American deaths per head of population is among the world’s lowest   It is not!  And if the figures continue rising at the current rate it will be among the world’s highest within the next month or so.  So much for the rather confused and contradictory policies to control the virus spread engendered by the U.S.’s Federal system with Republican state governors swinging one way and Democratic ones often in a different direction.  As one current meme puts it, why are people who claim that face-masks prevent them from breathing almost wholly Republicans.  U.S. politics has seldom been quite so divisive – and given this is an election year things will only get worse as November approaches.

On the international front President Trump seems to be set on picking fights with all and sundry over what he sees as unfair trade practices – or maybe this is partly U.S. protectionism at play.  This may well be justified in some cases but the disputes with China seem to be verging on the extreme and could lead to more serious physical confrontations, notably in the South China Sea and the Taiwan Strait as trade tensions rise and morph into military ones.  There are other international flashpoints on the horizon too and if any of these escalate or blow up then these could well give a new boost to gold and silver prices.  The fact that gold breezed so easily through $2,000 only just over a week ago, could give the gold bulls new confidence.

Silver is showing its volatility with price rises and falls higher in percentage term than that of gold.  As I write the gold:silver ratio is between 73 and 74 – a fairly sharp rise from the 69 of only a few days ago.

Precious metals equities should perhaps be doing rather better than they are at present.  The profit margins being achieved at current gold and silver price levels are enormous, which bodes well for even the more marginal producers.  As for the gold majors, most are profitable with a $1,000 gold price.  Imagine their profitability at a gold price of around double that level!

All in all we retain our confidence that the recent gold and silver price falls have been an overdue correction and both metals are set to resume an overall upwards path, with their associated equities probably adding additional leverage.  If you are invested in gold and silver and/or their equities, the best may be yet to come.

14 Aug 2020 | Categories: Gold, Silver

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