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LAWRIE WILLIAMS: Gold and Silver subdued despite rising virus cases

Well the USA recorded over 50,000 new COVID-19 positives yesterday and over 600 deaths.  Perhaps a warning to the rest of us over relaxing lockdown restrictions too early.  It puts Presidents Trump of the U.S., Bolsonaro of Brazil and Modi of India on the same page as the leaders of the countries currently recording the most virus infections recorded on the planet.  But they are all high population countries and major European nations, the UK, Italy, Spain and France have all suffered just as badly, if not worse, in terms of infections and deaths per head of population.  Indeed relatively small Belgium pretty much leads the field in terms of deaths per million of population!

What this shows is that the pandemic is not just going to fade away in the northern hemisphere summer months, although incidences do appear to be falling, at least for now, in Europe, but it well may take another few months to see a similar pattern appear in the currently worst affected nations.  The virus is hitting Latin America and the Middle East particularly hard at the moment and is only just beginning to get a grip on Africa where most nations are probably least able to control its spread.  Scientists are extremely worried about a second wave of the virus as lockdown restrictions are eased within those countries which might appear to have things under control.

Given the above circumstances one might have thought this would all be extremely positive for gold, which tends to thrive on uncertainty.  However the gold price was taken down sharply yesterday regardless, but seems to be making something of a comeback as I write with the price back in the mid $1,770s in Europe this morning.  Somewhat mysteriously, given the underlying circumstances, equities have also opened higher this morning, perhaps on the grounds that the continuingly dire economic, political and virus growth situation will prompt the U.S. Administration/Federal Reserve and other central banks to unleash yet another round of financial support,. which seems mostly to find its way through to the equities markets rather than to those who are most in need.  This underlines the duplicity in government attitudes to such rescue packages.  The state of the equities markets is, perhaps, the most overt visible economic indicator to the media.  If the stock market is doing well so must the economy be!  That hides a huge multitude of problems which will all come back to haunt us in the years to come.

“You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.”, a quote supposedly attributed to Abraham Lincoln, is probably most apposite here.  Once the general populace begins to understand the ‘house of cards’ on which current equity valuations are built, it could all come crashing down – indeed it probably will!

The silver price has been similarly affected.  It is back below $18 an ounce and the Gold:Silver Ratio (GSR) has widened again to close to 99.  As gold recovers further, which we think it will, it will likely drag the silver price up with it, but as we have warned repeatedly here, although silver may marginally outperform gold on a rising gold price, don’t necessarily expect it to regain its old relationship with the yellow metal.  It now seems to be perceived differently by the investment sector given its high percentage of industrial usage – and industry in general is in a deep recession.  The investment downside in silver may well be limited, but so also is its upside in our opinion.

We still expect gold to shrug off its negatives and move back towards $1,800 - and maybe above, although we anticipate strong initial resistance at this psychological level.  A true breakout will likely take time, and this will also be true for any break-out above its all-time high of around $1,918 and again at $2,000.  We expect all these levels to be breached eventually, but it may yet take a couple of years to do so. 

At a $1,800 gold price we’d anticipate silver at around the $18.50 mark and at $2,000 perhaps at around $20.50, but we don’t anticipate any real silver fireworks despite the views of the silver bulls out there.  Yes, we would expect silver to outperform gold in a rising gold price environment, but not significantly so nowadays.  As always with the ‘devil’s metal’ though the downside risk is somewhat higher should gold not perform as expected.

02 Jul 2020 | Categories: Gold, Silver

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