Lawrie Williams: Gold and silver make gains in nervous markets
The gold price picked up nicely, and silver even more so in percentage terms, when markets opened in Europe and the U.S. on Monday, although it remains to be seen whether the gains so made can be sustained throughout the day, let alone the week ahead. The principal stimulus appears to have been renewed safe haven demand following President Putin’s announcement on Friday that Russia was annexing Ukraine’s Luhansk, Donetsk, Zaporizhzhia and Kherson oblasts as integral parts of the Russian state. This followed on from the hastily-arranged dubious referenda which had appeared to confirm, according to the Russians, that that was the will of the people in those regions by huge majorities. The outcomes of these referenda were largely dismissed as false and unrepresentative by the world at large.
However, the official annexation of these territories into the Russian state, even though some of them are only partially under Russian control, could give President Putin the excuse to describe any Ukrainian attacks on them as an ‘invasion’ of Russia itself and a reason for a massive escalation of hostilities. His partial mobilisation of reservists to support his existing forces could just thus be the beginning, but how the Russian people would see this could be something of a gamble. There already seems to be evidence of a growing build-up of opposition to the existing partial call-up – or is this just Western propaganda?
In any case, the prospects of an escalation of the Ukraine conflict, which currently, at least according to Western media, appears to be going badly for the Russians, has certainly given precious metals prices something of a boost. Equity and bitcoin prices were trending higher too with the U.S. dollar index falling. This had all come about given a sharp fall in market sentiment on the market’s view of the likelihood of yet another 75 basis point rate rise at the November 2nd FOMC meeting. This has now, according to the CME’s Fedwatch Tool come down to a near 50:50 chance of only being a 50 basis point rise and may well slip further during the month between now and the actual meeting date. This has been somewhat coloured by the Bank of England’s recent supportive move, seen by some as a return to Quantitative Easing, in support of the U.K. economy and the pound which had been on a sharp downturn following the recent budget announcement from the new UK Chancellor Kwasi Karteng. The BoE move seems to have stabilised the UK situation and one of the tax reducing measures in the original budget announcement – the withdrawing of the 45% higher tax rate for high earners – has been reversed and the pound has seen something of a recovery on the foreign exchange markets. Nonetheless, the fact that one of the world’s major central banks seemed to be returning to a more stimulative policy raised hopes that the U.S. Fed might consider doing so too.
In the U.S. though, the latest Personal Consumption Expenditure (PCE) index figures were released. This is the Fed’s preferred inflation measure, and it didn’t make for happy reading, particularly as far as the core inflation index measure was concerned. This rose by 0.4% month-on-month indicating that the Fed’s interest rate raising programme is having little or no effect so far. As it is the core index level which will be of most concern to the Fed this does not suggest that it will likely consider any reduction in its approach to an aggressive interest rate raising policy unless there are strong signs of an inflation turn around within the time period before the next meeting takes place. This is certainly not outside the bounds of possibility, but it would probably be wise to play safe and steer clear of general equities for now. Recession is almost certainly upon us – it is only the depth thereof which is in doubt.
Meanwhile keep a close eye on the Ukraine war and the Russian reaction to any Ukrainian advances in the Russian-claimed territories. If Russia is prepared to seriously escalate its reactions, precious metals – or at least gold and silver – could see further advances, with gold back into the $1,700s and silver maybe into the $21s. There is also a rumour that the OPEC nations may cut oil output which could boost energy prices too. Still difficult times ahead as we enter the northern winter season.