LAWRIE WILLIAMS: Gold and silver prices choppy in thin markets

Gold and silver prices are up one day and down the next – mostly the result of thin markets in the USA and the rest of the northern hemisphere with the Summer holiday season in full swing and keeping many of the big players away from their desks.  What this means is that relatively small investment, or disinvestment, in the precious metals markets can move the price unduly and the markets, which can be very much data driven, particularly in the U.S., just go with the flow.

This peak summer period can thus be a dangerous time to invest because of the enhanced volatility and we will really have to wait until after the U.S.’s  Labor Day holiday, which marks the end of the U.S. vacation season,  and which falls this year on September 5th, to see any lasting definitive movement in gold and silver prices one way or the other. 

In most years, September can be a positive time for gold as it also brings us into the Asian buying season which can see heavy demand for precious metals, particularly in India.  But this year so far Indian and Chinese demand has been, to say the least, lacklustre due to what appears to be a reluctance to buy at a time of rising prices and Festival-related buying has proved to be very weak.  There are hopes that Indian buying may pick up sharply in the final few months of the year as a result of good monsoon rains which tend to strongly boost agricultural incomes, but this remains to be seen and it is still northern hemisphere buying this year, particularly in gold and silver ETF investment, which will likely again drive the market forward once the holidays are over.  Or, of course, if this fades we could see a price retracement!  Remember 2011 when gold prices soared during the summer months in thin markets, but came back sharply after Labor Day and continued on a downwards trend for the next four and a quarter years, despite strong Asian demand buying the gold price dips.

So will gold and silver continue to perform?  The latter will be largely dependent on the former, doing even better in a rising gold price scenario.  We have seen the gold:silver ratio fall this year from around 83, but has been stagnating in recent weeks between 66 and 68.  This does show that silver has been performing mostly as expected, but we wouldn’t expect the ratio to fall further unless gold gets another significant price boost.

Gold thrives on uncertainty – and on negative interest rates – and supposedly on the onset of inflation.  We certainly have the first two factors in play and there is always the likelihood that the latter should pick up, but it is showing few signs of so doing in any significant manner yet, although official inflation statistics seem to under-represent reality.  If Asian demand does pick up and ETF inflows resume at anything like the rate we’ve been seeing earlier in the year, then the gold price could surge, the gold:silver ratio come down to 60, or perhaps even less, and silver really take off.  But with gold nothing can be certain.  There will be big-money vested interests trying to move the price one way or the other through playing the futures markets, and assumed positive, or negative data, will continue to move the markets short term.  We’re probably in for a bumpy ride, but we see the overall tendency as still being positive.

12 Aug 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

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