LAWRIE WILLIAMS: Gold and silver unable to hold on to their gains
Despite a fall in the U.S. dollar index, which is usually positive for the gold price, neither it nor silver were able to hold on to the previous week’s strong gains. Gold slipped back having reached over $1, 780 on the 16th, although it ended the week in late trade at just over $1,750, and silver back under $21, after having managed a high of around $22.20 on the 15th.
Prices won’t have been helped by a distinctly bearish analysis from top London-based precious metals consultancy, Metals Focus, suggesting that gold and silver prices would continue to fall next year. The consultancy’s analysts see gold prices dipping by as much as 10% and silver by 17% - the latter despite reasonably robust supply/demand fundamentals. The U.S. Federal Reserve’s continued likely aggressive stance in attempting to bring down inflation by increasing interest rates is seen as the biggest headwind for the precious metals sector. Expectations are for the Federal Funds rate to reach around 5% in 2023 with a consequent dampening effect on both equity and precious metals markets and also on GDP.
Even so, the Metals Focus analysts still see gold and silver playing an important role in investment portfolios and anticipate their outperforming equity and bond markets – so not all bad news! Overall though this policy would leave the economy in a weaker state and put further pressure on prices and on labour markets and push nominal yields higher.
Of course, where economists are involved there will be plenty of others with opposing views and one doesn’t have to look too far to find precious metals positive viewpoints too. However there are few who do not envisage a weaker economy ahead and a forthcoming recession in the U.S. and globally. Indeed there are many who suggest that recession is already with us, not least UK Chancellor Jeremy Hunt in his recent extremely downbeat Autumn Statement to the UK Parliament.
The UK, as did most of the rest of the world, ran up enormous amounts of debt fighting the Covid pandemic, now exacerbated by the energy costs crisis resulting from President Putin’s war on Ukraine. Consequently the country is seeking to repay this, rather than kick the can further down the road, and the process will be painful and will probably have to be followed by many other nations too, particularly in Europe, which will be following the UK response with particular interest.
There are plenty of arguments whether, or not, gold performs well in recession, but on balance it probably performs less badly than most other asset classes, which is probably why Metals Focus sees it as playing a continuing role in investment portfolios. And of course there is always the possibility of a ‘black swan’ event coming up in an ever increasingly geopolitically insecure world which could move the gold price up quite dramatically – even if only in a short term knee-jerk reaction. Gold always offers some kind of safety net. View it as wealth insurance. It may never be needed – hopefully. Silver can perform in much the same way but always remains much more of a gamble.