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LAWRIE WILLIAMS: Gold and silver still flooding into PM ETFs

If there’s anything out there that demonstrates the continuing momentum which will likely drive gold to new heights, and drag silver up with it too, it is the continuing flow of gold and silver into their respective metal-related ETFs.  Those of you who read my article of Wednesday -  Unsustainable equity markets. All the more reason to invest in gold and silver - should hopefully have taken notice of the comment about the huge inflows into U.S. gold and silver ETFs in May and the first couple of days of June.  Now the World Gold Council (WGC) has released a report citing the exceptional level of inflows into global gold ETFs in May – inflows which have continued so far almost every working day in the current month.

According to the WGC gold-backed ETFs added 154 tonnes – net inflows of US$8.5 billion (+4.3%) - across all regions in May, boosting global holdings to a new all-time high of 3,510 tonnes. Year-to-date, inflows (623 tonnes, $33.7 billion) have now already exceeded the highest level of annual inflows (591 tonnes) recorded back in 2009.  And, as we pointed out in Wednesday’s article, recent silver flows into ETFs have probably been even more spectacular.  All this increase has happened despite some fairly volatile movement in the gold price which, at one time even spent much of the first half of May back below the $1,700 level, which many had reckoned to be the new base price for the yellow metal.  This volatility has continued into the current month with the gold price being driven down to around $1,680 yesterday, before recovering back to around $1,720 as I write.

What is surprising to the writer is the fact that the equities markets also saw something of a major recovery in May despite the continuing issuance of the kind of data which, under normal circumstances would have sent stocks crashing and burning.  American and European unemployment is at record levels: in the U.S. it is now probably worse than it was at the time of the Great Depression of 1929 to the late 1930s when stocks fell nearly 90%.  But there was also precedent for the recent equities market recoveries.  In late 1929 stocks had recovered most of their then lost ground, but the true  crash happened in 1930 and beyond when stocks started falling and continued to do so.

Perhaps one of the principal differences back then was that the U.S. was on the gold standard, the rigidity of which prevented the U.S. Federal Reserve from printing and pouring money into the  economy to try and stabilize it.  Banks were forced to close and investors lost everything given many had been buying on margin and were unable to repay the loans when the stocks on which the loans had been utilised to purchase crashed making the investors unable to meet their financial commitments.  If one looks at the markets today many of the same factors which had been driving equities ever higher, and ripe for the crash which ensued, are exactly the same as those which have been driving today’s equities markets up to what we consider are probably unsustainable levels. 

Wikipedia notes that by mid-1930, interest rates had dropped to low levels, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment were depressed. By May 1930, automobile sales had declined to below the levels of 1928 (this time around the auto sales situation is far worse).  Prices, in general, began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931.  While a severe drought in 1930/31 exacerbated the situation as far as the agricultural sector was concerned this time around the potential downturn is much more widespread, and unemployment even higher,  due to measures taken to try and curb the spread of COVID-19 – indeed most would say that the downturns we are now facing are actually far more serious than those which led to the depths of the Great Depression.

The big difference this time around, though, is that the Fed – and other central banks - have been able to pour unprecedented amounts of money into the system to try and allay the effects of the shutdown of much of the economy.  But much of this has just tended to gravitate into the equities markets – hence the probably unsustainable rises we have been seeing.  Markets have been buoyed up by any release of data which has not been quite as bad as anticipated so far (although would have still been considered disastrous under pre-coronavirus conditions). 

But we think the worst data is yet to come when Q2 figures, which will show the true effects on the economy of the virus peak period, are released.  Q1 figures were bad but they only included a couple of weeks of virus related lockdowns in most Western economies, while Q2 will show the effects of a virtually continuous lockdown period throughout the quarter.  And don’t expect a rapid recovery in Q3.  A return to ‘business as usual’ is stillmonths, if not years, away.

Despite the pressure under which gold and silver prices currently find themselves we think the momentum generated by the enormous flood of money going into the precious metals ETFs is indicative of things to come for the sector.  We suspect that the $1,750 current ceiling for gold will be breached comprehensively by the northern hemisphere fall and $2,000 gold will not be too far behind, although there will be periods of resistance along the way.  Anecdotal reports suggest that demand in China and India, the two leading gold consumers, is beginning to to turn up again, while global new mined gold production seems at last to be beginning to fall, both because of coronavirus related production losses and through other factors as we are already seeing in Australia, the world’s No.2 gold mining nation and as we have been seeing in China, the world No.1, for several years already.  With the accelerating gold-related ETF rises worldwide, and as the world comes out of the coronavirus lockdowns, gold’s supply/demand fundamentals may be improving. While what we expect to be a severe equities plunge, coupled with perhaps a declining dollar index, should further enhance gold’s appeal as the ultimate safe haven investment – which should drag silver up with it.  In our view the prospects look positive for both principal precious metals.


05 Jun 2020 | Categories: Gold, Silver

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