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LAWRIE WILLIAMS: Gold and silver surge.  Reality or fantasy?

In the slightly altered words of pop group Queen:  Is this the real thing?  Is this just fantasy?  Gold and silver at last seem to be making a strong positive move.  It’s probably too early to tell – we‘ve been here before as recently as last November, but this time it just feels different.  The rises could be shot down in the key North American markets and the real test may well be at what level gold and silver are allowed to close the week tomorrow.  We suspect gold may be held back below $1,850 at the week’s close, but if not it could surge further in the weeks ahead

Gold equities too – which often lead – were also up sharply yesterday – an early year bonus for their investors.  A further firming of precious metals prices, if sustained, should lead to a continuing rise in dividends from those which pay them, while a gold and silver price boost gives a strong fillip to the junior markets too.

The rises in precious metal prices – yes platinum and palladium were both up strongly too – were accompanied by more weakness globally in general equity markets which could also morph towards an investment move into perceived safe havens like gold in particular.  Equities seem to be recovering today, but that could just be a temporary delayed contrary reaction to recent falls.  Gold as a wealth protector has stood the tests of time as such. 

Investors have been bombarded over the past months with opinions from respected economists and analysts, although countered by others, that stock market prices are at unjustifiably high levels and that a serious market crash is imminent.  Those commentators who end up proving to be wrong will quietly forget publicly that they ever made such predictions, while those that are right will, no doubt, shout their perspicacity from the virtual rooftops.  Such is what passes for financial predictions nowadays.  I suppose it has always been thus, but social media now pushes such boasts, or reticence, to the forefront.

On this subject, we have not ourselves been silent in predicting gold price growth.  We certainly have been proved wrong on occasion in calling a false dawn with precious metals seeing subsequent setbacks, although the overall trend in terms of year-on-year price averages has been positive.  But again we could be wrong that it looks like this time around precious metals could be in for a period of ascendance.  We thus persist with our theorising on the basis that as we see it, positive factors currently outweigh the negatives, at least for gold and silver.

However, it is important to recognise that the gold price in particular will likely be driven, up or down, by the myriad of data releases, and U.S. Federal Reserve Bank (Fed) statements that will be forthcoming over the weeks and months ahead.  Even so, we stick to our guns in noting that whatever the Fed decides to do on interest rate rises, the ever-continuing scourge of high inflation will keep real interest rates in negative territory for the foreseeable future.  And negative real rates always make gold a positive investment asset choice, particularly when general equities are showing signs of weakness as they have been of late.

Of course there are well respected naysayers who predict a completely different outcome.  They have looked at gold’s past performance when the Fed has started to raise interest rates and are forecasting a sharp dip in prices once the Fed’s likely tightening programme begins to get under way, and will deteriorate further on each successive rate rise.  But we think this time is different due to the aforementioned negative real interest rate situation. 

On the most recent few occasions when gold has plunged on expectations of Fed interest rate rises, this was before worrying inflation levels kicked in.  While real interest rates were extremely low they were not nearly as negative as they are likely to be even at current inflation levels.  We think high negative real rates will predominate investment thinking and that gold price progress will be largely unaffected until real rates start trending back to zero, or move into positive territory.  Until this happens, which may yet be some years ahead, gold will remain a more attractive asset – particularly if equities remain weak.

Of course the current seemingly out-of control Covid infection rates in the U.S. will also have an impact on Fed thinking and likely action.  The latest strain of the virus is proving to be highly transmissible and infection worries and consequent restrictive state and national legislation may well slow down Fed moves on tightening.  This would be gold positive if it happens.  With daily infection rates in the U.S. approaching 1 million per day – a huge psychological level if this comes about – coupled with the fact that activity in the U.S. is the current principal gold price driver, we could well see another short term surge in gold and silver prices.  The effects could be less positive, though, for pgms which are much more affected by rises and falls in industrial demand.

In summary, we do think that current precious metal prices will at least be maintained.  Further, there would seem to be a good chance that they will continue upwards and perhaps, with the occasional stutter, gold will reach $1,900 by the mid-year point and perhaps touch $2,000 again before the year-end.  Silver may well even exceed our $25.50 year-end target wit that price level achievable in the next couple of months if our overall expectations on the path of gold and silver end up being accurate.

20 Jan 2022 | Categories: Gold, Silver, FOMC, Palladium

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