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LAWRIE WILLIAMS: Gold and silver in hiatus as equities fail to crash - for now!

Some continuing, and in our view totally unwarranted, strength in equity markets has continued to adversely impact the gold price.  This remains hovering above and below the $1,700 level, while the gold:silver ratio (GSR) remains stubbornly in the low hundred and teens (bad for silver) – still not far off its all-time highs.  This, as far as the gold price is concerned, seems to be counter to logical interpretation of the continuingly depressing economic data which should be impacting the markets. Indeed as I write gold and silver prices are again under attack with gold falling back nearly $20 and silver by similar percentage levels. 

PGMs are also trading downwards, although we doubt that nowadays they should even be considered as part of the precious metals complex.  We would not, therefore, be too surprised if the once high-flying palladium price ends the day below that for gold – something that would have been considered hugely unlikely only a few days ago!  As readers of my articles will be aware I’ve been hugely bearish on palladium for some time now given that the global light auto sales sector, on which this PGM is hugely reliant for its demand, has petered away to near zero over the past few months.

U.S. equities, of course, are being buoyed up by continuing strength in the tech stocks, several of which, but far from all, are benefiting from the lockdown economy.  The strength of Microsoft, Google, Amazon etc., major gainers from the global digital economy which have replaced manufacturing as the principal market drivers, has dragged up other so-called ‘tech’ stocks with them, many of which may never turn truly accountable profits, thereby ignoring the multitude of major non-tech companies which are filing for bankruptcy protection, or seeing profits decimated by the knock-on effects of the coronavirus.  U.S. unemployment is soaring and the economy is diving into recession/depression, yet equities keep recovering in the expectation that Fed bailouts will keep companies solvent and raring to go once virus-related restrictions end.

So where does that leave gold (and silver) prices?  As far as the former is concerned we do believe that sooner or later the realization will sink in that perhaps the economic fallout from the COVID-19 coronavirus is unlikely to see any signs of recovery for many months at the very least – particularly as the Q2 reporting season approaches. 

Economic data to date suggests that there will be an enormous downturn in corporate profitability – even some of the high-flying FAANG stocks may not be immune – and the currently inflated values of equities will look even more suspect than they are already looking today.  Surely, gold as a primary safe haven investment will look more and more appealing to the mainstream investor?  We are already seeing record flows into the easy gold investment option – gold backed ETFs - and sales of small-sized gold bullion coins and bars are picking up nicely for those who prefer the physical over paper-related versions of what some might term the ultimate safe haven counter.

We are currently facing a plethora of seemingly enormously adverse economic data being released by governmental statistical entities, and this data is likely to get worse before it gets better.  Indicators like unemployment levels, PMI readings, retail sales figures, manufacturing output etc, are all continuing to get worse.  At some stage this all has to adversely impact the overly optimistic tone of the investment public, and when it inevitably does overwhelm, then we are likely to see an enormous equity downturn which will confound the snake-oil salesmen on Wall Street and other bourses whose job is to try and talk up markets regardless.  After all the bankers and financiers of this world benefit the most from rising markets being able to continue to drag investors into the financial merry-go-round.

Indeed investor logic may no longer be that significant a part of the investment equation.  Much stock market activity – probably most in fact – is nowadays made by computer and once the algorithms that drive the computer-generated trades start to turn negative, the fall-out could be devastating for the equities investor.  But what may be disastrous for general equities investors could well be hugely beneficial for gold which, in turn, could drag silver up with it.

But don’t necessarily expect the kind of leverage over gold in a rising precious metals price scenario historically reflected in silver prices to be evident this time around.  Silver may look appealingly cheap today, but the realization is currently ever-growing that it is no longer a true monetary metal like gold and is increasingly reliant for its demand on the industrial sector, which is itself in a major downturn.  And silver, by all accounts, is in a substantial surplus and such a surplus at a time of falling industrial demand is not a good position to be in.  The metal may gain some traction due to its historical association with gold, but its now industrial demand relationship may continue to mitigate price rises as it has with the PGMs.

There is increasing advice out there that, if one is to place one’s reliance on gold to see you through the current virus-related economic crash, it is wise to invest directly in bullion, rather than in paper versions thereof.  That does suggest that it may be sensible to have your own total control over an asset rather than rely on a third party for your investment, but if the holding is substantial it does raise security issues which could be costly in themselves.  Even bullion held on your behalf in secure vaults, or safe deposit boxes, does rely on a third party, which could itself be subject to pressures outside your direct control.

Gold mining stocks may be another way to increase leverage in a rising gold price scenario, but mining can be a risky business so if this a route you may wish to follow it is probably wise to invest in companies which have a wide diversification of producing assets.  This may reduce the potential for massive gains, but the bigger gold mining companies should still do well in a rising gold price scenario – and most do have the benefit of issuing regular dividend payments that, in most cases, exceed the kinds of returns one can expect from a bank deposit scheme, assuming you can find one which pays any kind of return in these times of ever falling, and often negative, interest rates.

06 May 2020 | Categories: Gold, Silver

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