LAWRIE WILLIAMS: Gold and Silver: September in retrospect. Reset ahead?
September has certainly been a disappointment for the precious metals investor – indeed for investors in equities and bitcoin too. Over the month, the gold price fell a little over 3%, silver around 8%, platinum just under 4% and palladium a massive 26%. However all were making something of a recovery on the final day of the month. On the equities front, the Dow was off some 4% while in cryptocurrencies, the most traded, BTC, was down close to 6% having picked up very sharply this morning, probably on the affirmation that the U.S. central bank is not considering following the Chinese move of banning all bitcoin transactions in that country.
It will be interesting to see what the rest of the year brings to the markets. They do seem to be distinctly volatile in the face of what seems to be an increasingly unstable U.S. economy as witness big price movements in gold and silver, both up and down, on the last trading day in September.
Currently markets are dominated by speculation on what progress the U.S. Federal Reserve makes in its attempts to ‘normalise’. Current thinking is that the Fed will start to taper its bond purchasing program within the next couple of months, and complete the process by mid 2022. However, there is much less certainty as to when it may start to raise interest rates. There also seems to be rather more doubt arising as to how ‘transient’ inflation is turning out to be, and the prospective timing, and magnitude, of any rise in interest rates may be dependent on how this is perceived.
Unemployment remains an issue and one of the Fed’s key aims is to bring this down to its pre-pandemic level of around 3.5% (which it describes as ‘maximum employment’). However in his September 30th statement to the House Committee on Financial Services, Fed Chair, Jerome Powell, admitted that this target was still way off. This is yet another factor that could further delay the implementation of tapering and the timing of any interest rate increases.
Indeed cynics would say that contrary to its official statements, the Fed may actually be keen to see higher inflation levels persist as a means of helping it meet any debt repayment programme it may be considering (by making restitutions in devalued dollars), without raising interest rates at all for the foreseeable future. If this is the case, negative real interest rates will continue – or even increase and this is seen as positive for gold, if not necessarily for the rest of the precious metals complex.
Silver and the platinum group metals (pgms) are ever increasingly dependent on industrial growth – particularly for strength in the new automobile market for palladium and, perhaps to a lesser extent, platinum – a market adversely affected at present by an ongoing semiconductor shortage causing a reduction in new vehicle manufacture. There are increasing worries that U.S. and global economic recovery is proceeding far slower than the market optimists have been suggesting and in the U.S. the continuing debt ceiling impasse will also be having an undue impact on economic recovery prospects the longer it remains unresolved.
The media seems to be largely ignoring the potentially disastrous impact a potential U.S. government debt default – even if shortlived – might have on the economy. This has been despite some increasingly strident warnings of the consequences from Treasury Secretary Janet Yellen. A solution has always been found in the past and such a default has never occurred, which is no doubt leading to this lack of reaction so far. However this time around the political antagonism between Republicans and Democrats has probably never been more intense, and any necessary bipartisan solution still seems well out of reach. This may be particularly so with midterm elections imminent. If a majority in both parties feels that the blame for a default can be attributed to the other side, all bets on an agreement being reached before the Treasury runs out of cash to meet all its commitments, are off.
There has been some respite in that Congress, in a bipartisan agreement on the last day of September, did pass legislation allowing the government to continue to make some payments regardless of the debt ceiling disagreements up until December. However the prospects of a full debt ceiling raise still seem as far away as ever and the latest estimate puts October 18th as the day the government may have to default, throwing huge numbers of people on a period of zero income at best, or even putting them out of work altogether. This is not to mention the cessation of benefits payments that huge numbers of poverty stricken Americans may rely on.
As we have pointed out here before, even a temporary failure to reach a solution to the debt ceiling impasse could completely derail the Fed’s plans for tapering and interest rate rises. The negative impact of a debt default would be immense. Markets and the dollar would likely crash and bitcoin could fall dramatically as investor confidence diminishes across the board. Gold, conversely, though, should benefit in theory. Nevertheless, liquidity issues might bring all precious metals down too as good assets would need to be sold off alongside weaker ones in an attempt to keep investors and funds afloat – probably unsuccessfully in many cases.
In such an event gold would probably recover far faster than the badly wounded equities markets, particularly given that many stocks seem to be heavily overvalued at present on profit-based fundamentals. The fallout could be horrendous, particularly in the U.S., although repercussions would be global, and could even dwarf the impact of the Wall Street Crash of 1929. History does have a habit of repeating itself so one cannot rely on improvements in financial systems over the past century as offering protection from such an event happening again.
Admittedly the above speculative outcome is a worst case scenario, but the world is probably due something of a reset anyway. Capitalist society might well be set back many years, while controlled economies might be better placed to ride out the ensuing storm, so there could well be a change in the global balance of power.
How can one protect oneself and one’s wealth against such an outcome? As noted above, gold might provide an answer, although it could well see an initial turndown in value. Gold stocks might suffer less than others, given that most major gold miners can remain profitable at far lower gold prices. Gold stocks performed well in the 1930s depression and we see no reason why the same would not be true in a new market reset but one would need to make sure one chooses those counters with production costs below any likely gold price low. Most of the Tier 1 gold stocks meet this requirement – and pay dividends too – something of a bonus in cash-strapped times.