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LAWRIE WILLIAMS: Gold and Silver Surge on Renewed U.S. Uncertainty

Commentators may have attributed the recent gold price surge to an apparent slight fall in consumer confidence, but we would attribute it to the rash of Executive orders put out by the new Trump Administration.  President Trump said he would hit the ground running, but we don’t think even his supporters would have anticipated how far and how fast he would move on some of his key campaign promises.  His opponents perhaps anticipated a mellowing of his views once he achieved office, but that is obviously not the Trump way.  He is setting out on an aggressive path which has to be ringing alarm bells within the Washington and Wall Street elite who he castigated in his Presidential inauguration address, but who may have anticipated a more softly-softly approach.  It will also be ringing similar bells among those overseas nations and perceived enemies of the state who he rounded on in his campaign oratory.

We are now heading into a very uncertain era in global geopolitics.  One suspects that the U.S. military will be tasked in redoubling its efforts to defeat Islamic State, but while this can be seen as perhaps inevitable, but relatively limited in economic terms, one wonders how the new President will deal with China, and North Korea.  China would be a potential adversary with huge military capability with at least two major potential flashpoints – notably its attempted annexation and building of military outposts on islands in the South China Sea, and the uneasy relationship with Taiwan, stirred up by President Trump in his acceptance of a telephone call from Taiwan’s President Tsai Ing-wen and subsequent statement suggesting the ‘one China’ policy of previous US administrations is ‘negotiable’. 

North Korea provides another inherited problem.  The country is run by a regime, with nuclear capabilities, which is perhaps even more volatile than the U.S. President himself. There is also a current flare up over U.S. plans to build an anti-ballistic missile shield in South Korea – a policy which is also vehemently opposed by China.  If the President Trump perceives the nation’s missile testing and nuclear capabilities as a clear and present danger to U.S. interests.  Some kind of  pre-emptive strike could even be on the cards and heaven knows what the consequences of that would be.  The U.S. military is certainly gung-ho enough to suggest this!

There are also continuing confusing signals regarding the prospects of some kind of détente with President Putin’s Russia where President Trump’s military commander in Europe seems to be rather more confrontational with the Russians than Trump himself would seem to be signalling.  There is certainly some strong opposition to President Trump’s apparent views on a better relationship with Russia in the Pentagon and in Congress.  It will be interesting to see who prevails, but this suggests yet another element of uncertainty in global geopolitics. The American industrial/military complex has a massive vested interest in maintaining a perceived threat level with potential adversaries and the Former Soviet Union, and now Russia, has been providing the key element in this.  Russia’s annexation of the Crimea and de facto involvement in supporting a breakaway part of Eastern Ukraine provides an excuse for maintaining political confrontation – the USA’s meddling in Ukraine’s internal politics, which was arguably one of the causes of all this, is quickly forgotten – although not by the Russians.

In the U.S. itself, equities markets have been dropping – the Dow has fallen back below its magic 20,000 level – the dollar is also declining – back below the US dollar index level of 100, while oil, gold and silver have all been rising.  At the time of writing, gold is at $1,221, silver at $17.65 and the Gold:Silver ratio at around 69 having been as high as close to 73 at the beginning of the year. 

Gold had been brought back following better than expected figures on manufacturing confidence, but neutral comment (seen as less hawkish) from the Tuesday/Wednesday FOMC meeting, saw it move back up again, although nothing new was expected here so early in the new Administration’s term of office.  The Fed is committed to raising interest rates, but although some commentators disagree, no decision on this is expected until perhaps the June FOMC meeting when the Fed will have a better idea of whether President Trump’s awaited economy-boosting ideas will be implemented, and if they are whether they will be effective or not.  The market is beginning to believe that the Fed may only raise rates twice this year as against the three, or even four, times suggested back in December.  The pullback in the Dow and S&P are also militating against the Fed moving quickly, or sharply, on a higher interest rate scenario.  The  Fed does not want to be seen as the possible cause of the next market crash.  Those with longer memories will recall that Fed interest rate raising moves earlier in the current century were followed by massive market turndowns.

Of course the positive factors for gold could indeed be overturned by a significant improvement In US employment statistics, or advances in GDP, thus strengthening the Fed’s hand, but if the dollar continues to fall (President Trump appears to think it is too high) and real interest rates remain negative, gold could yet have a good way to run this year, particularly given the global geopolitical uncertainties noted above.  The Gold:Silver ratio could continue to fall – we have suggested 65, but given the rapidity of the recent downwards movement that might prove conservative, provided gold continues to perform positively.

So we do remain positive on gold – indeed on the whole precious metals complex with silver and the pgms having the greatest potential in the short to medium term – but we warn against a long term positive outlook for pgms given our view that the electric vehicle market is likely to expand at a far higher rate that most analysts expect. (See: A dismal future for pgms.  Platinum would likely be the first to be hit with huge moves to phase out diesel driven vehicles as potentially the most harmful polluters, and diesel exhaust emission control is perhaps the biggest consumer of platinum today.  But petrol (gasoline) engines won’t be far behind which would put a long term dent in the palladium market too.  Electric vehicle (EV) technology is advancing very fast indeed and major cities – and some countries – are already beginning to legislate for replacement of internal combustion engine vehicles in favour of EVs.  President Trump, as non-believer in climate change, may be able to delay this trend in the USA but even the mighty America will eventually have to bow to what we see as the inevitable.

02 Feb 2017 | Categories: Gold, Silver

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