LAWRIE WILLIAMS: Gold and silver recover, but will the better prices hold this time?
The past few days have seen the gold price recover to upwards of $1,820 and silver back to the $23 level, although seems to be struggling to hold on to this. This is a pattern we have seen several times over the past year, and each time the precious metals prices have been brought solidly back down to earth with gold falling back to around the $1,720s, although the dips have tended to lessen on each successive occasion. The big question is will this time be different and can gold, in particular, maintain this apparent breakout and perhaps go on to better things?
It has been apparent that on this latest occasion we have seen a corresponding sharp fall in the dollar index over the past few days, although this still remains comfortably above its nadir and at a current 94.8 is around 5% higher than it was only a year ago. There are well respected economists who feel that the U.S. dollar is substantially overvalued against competitive currencies and if they are correct, and there is no sharp recovery in the dollar index, or perhaps a further decline, then gold has a great chance of at least retaining its current price level, and even, perhaps, moving substantially higher in the medium to long term.
If we look at the current state of the U.S. economy, it is suffering an inflation level not seen in decades. This is particularly relevant to gold in that it is the U.S. markets which are currently dominant in setting the metal’s price level. The latest U.S. CPI figures have come in at around 7% and are still trending upwards. Economists reckon that high inflation levels will continue for at least another couple of years.
The country is also seeing new Covid infections running at their highest ever rate, with over 800,000 new cases reported per day. The deaths toll as a result is approaching 2,000 per day – admittedly below the late 2020/early 2021 peaks, suggesting the latest virus strain is not proving to be quite so deadly, but having a huge impact nonetheless. Assuming those testing positive for the virus will be self-isolating, the impact on economic growth is likely to be significant.
But it’s not just the U.S. which is seeing ultra-high inflation and huge Covid-19 infection rates. European nations are also suffering from similar economy-affecting statistics, and even Australia, which had seemed to be keeping the virus at bay, has seen a huge increase in infections recently. India too is seeing another virus resurgence and even China is having to take drastic action to try and contain a new virus resurgence with a reported over 20 million people currently being subjected to draconian lockdown restrictions, the like of which would probably be unenforceable in the West. In short high inflation and a new wave of Covid infections is a global problem rather than one just confined to the U.S. and Europe.
There are worries that the U.S. Federal Reserve may raise interest rates at an enhanced rate to try and control inflation. If so, this could have a severely limiting influence on any U.S. economic recovery and lead to a period of stagflation, as it is probably the growth in money supply which has been the principal contributor to the country’s high inflation problems. Interest rate rises may thus have a limited effect on mitigating the problem, although above expectation rises could put a temporary dampener on the gold price. So far, though, the Fed has tended to be cautious on policy implementations that might depress U.S. economic growth and, as we have said before, it may be able to live a little longer with a high inflation level given that its target level had previously been undershot substantially for such a long period of time.
Whatever the Fed decides on interest rates though, any increases are unlikely to lift real rates into positive territory – at least for 2-3 years - and negative real rates have always been positive for the gold price. If there is a more aggressive approach to interest rate rises, equity prices would almost certainly fall, and gold could be seen as the safer investment. It is doubtful if this would lead to a huge increase in the gold price itself, and a probably corresponding rise in silver given that it still seems to follow gold’s path. Even so, both precious metals would probably behave positively in such a scenario. Gold and silver would thus continue to act as wealth protectors rather than investments that would see huge value growth. That is perhaps all one should ask for in an investment choice in such uncertain economic times.