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LAWRIE WILLIAMS: Gold battleground at $1,900 behind us?

As the increasingly bitterly contested U.S. Presidential election is now only a little over 3 weeks hence, precious metals prices are becoming increasingly volatile while equities markets are holding up well despite the pretty horrendous economic situation currently unfolding. Precious mnetals prices recovered Friday to back above the $1,900 level for gold abd $25 for silver and we feel that the recent battle around the $1,900 gold price level may now be behind us at last.

Outspoken, but well-followed commentator, Bill Bonner, points to what he feels is the most important financial factor facing the U.S., and one that seems to be being totally ignored by both the Republicans and Democrats alike in what he calls the Doomsday Debt Debacle. In its attempts to ease the COVID crisis the U.S. Treasury and Fed between them have run up debts conservatively estimated at over $27 trillion that it probably can never pay. The country as a whole, including the private sector, owes $80 trillion... that it almost certainly can't pay.  And the government has promised America's 76 million baby boomers (and others) $210 trillion in unfunded additional "entitlements" - pension, medical, and Social Security benefits - that can't be paid, either.

The politicians are ostrich-like burying their heads in the sand as theym seem to think that by ignoring financial reality it will, depending on the election result, mean that it may well be someone else who will have to find the solution as to how to repay, at least in part, the massive debt that has been run up.  Besides, if Joe Biden wins the election it can all be blamed on Donald Trump, while the general populace remains unworried in any case.  Governments running up enormous debts are a modern-day fact of life.  The Magical Money Tree will provide and all will be well!

This may well be true to an extent, but running up debt that can never be repaid has consequences – not least in burgeoning interest payments which reduce the capacity for spending in other areas.  President Trump promised to bring down the U.S. debt position during his term of office, but for reasons largely outside the President’s control (the virus pandemic) this has been moving in the opposite direction very substantially. 

Ever increasing debt levels will also likely lead to U.S. dollar depreciation, global doubts about the nation’s financial strength and stability and longer term will likely threaten the dollar’s dominance as the world’s primary reserve currency. This would negate some of the global financial advantages which currently benefit the U.S.’s global trade position. 

Serious dollar devaluation could provide an at least temporary solution to the problem as many global currencies are hugely undervalued against the dollar, thus continually promoting an export imbalance in their favour.  But this is too simplistic a solution, and almost certainly unworkable.  Those countries will probably rely on exports to the U.S. in particular, helped by their ‘cheap’ currencies vis-a-vis the dollar and are thus unlikely to let the dollar devalue seriously against their own systems without taking similar action.  And for many of these currency devaluation is far easier to put in place than it is for the U.S.

This global impasse has to be positive for gold, which may have, on Friday, won its battle with the $1,900 level around which it had been oscillating on a daily basis.  There seems to be evidence that the world’s No. 1 gold consumer, China, is beginning to import gold again after something of a hiatus, and this may well accelerate now the October Golden Week holiday is over (it ran from October 1st to 7th) and financial institutions, not least the Shanghai Gold Exchange, will have reopened after being closed for around eight days.

October has often proved to be a difficult month for precious metals prices, but perhaps this time around, with the Golden Week holiday coming right at the beginning of the month, it will signify a turning point for the precious metals sector.  There seems to be little to stop gold regaining the $2,000 an ounce level in the weeks ahead and silver is beginning to pick up too, back over $25 an ounce and could gain sufficient impetus to drive it back up to $28 or higher.  Even Goldman Sachs, at one time hugely bearish on gold and silver, is setting a target of gold at $2,300 and silver at $30 for next year.

While the Presidential election result in the U.S. may be breeding additional uncertainty (probably good for gold) in the markets, the current stimulus impasse almost certainly means that once the result is behind us the U.S. Government of whichever hue and the Fed will unleash a massive new stimulus package designed to drag the U.S. out of the current COVID-related economic mire.  Whether this is successful in so doing, or not, is probably immaterial for precious metals and equities at least.  The very fact that stimulus is coming has to be positive for all sectors of the market, at least in the short term.  Indeed it is possible that the Goldman Sachs targets for 2021 prove to be conservative – at least for precious metals. 

We retain our doubts on the continuing  strength of the equity markets, however.  Once the true economic realities of the virus-related downturn on a huge slice of corporate America really begin to sink in we think markets will tank, and the high flyers like the tech stocks which have seen benefits from virus-related lockdowns and rise in home-working, will likely be dragged down alongside those companies which have been suffering enormously, and will continue to do so - if they even survive.

So hang on to your gold and silver – or even take the current prices as a further buying opportunity.  In our view the recent declines in prices will be seen as a correction in the precious metals’ continuing upwards paths.  Some even relatively conservative analysts foresee a $3,000 gold price before the end of 2021.  They may not be far wrong in our opinion!

10 Oct 2020 | Categories: Gold, Dollar

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