LAWRIE WILLIAMS: Gold battling to maintain $1,200 level
There’s a bit of a tug-of-war going on with the gold price. The international market seems to be trying to drive it higher, yet the U.S. one seems determined to hold it down, preferably to below $1,200 an ounce. At the moment neither side seems to be gaining much traction. The pattern is that the gold price seems to be tending to rise before the U.S. open, but once the U.S. comes fully into play the price is marked down, but then picks up again after hours. Last week, immediately ahead of the U.S. Labor Day holiday, the NYMEX market for gold brought it back under $1,200 but after hours it picked up a little to close the global week a little above the $1,200 level before falling back a couple of dollars this morning and then hovering around the $1,200 level as London opened..
All could change. This week, the U.S. markets are closed today for the Labor Day holiday which may allow global markets to mark the price up again, but when the U.S. market re-opens tomorrow the price may run either way. The Labor Day holiday often marks an inflection point in U.S. markets and any reaction this year is hard to predict. Things may depend on whether the return from holidays sees the mainstream equity markets surge or tank – the former probably being gold negative, the latter gold-positive. American markets are poised to move sharply in either direction and geopolitical issues could be the catalyst here. U.S. domestic markets may move if the process to impeach President Trump gains traction (although actually removing him from office seems unlikely whatever the outcome of any impeachment process). Meanwhile global geopolitical events, perhaps impacting China (trade and the South China Sea), North Korea, Syria and the Ukraine could all generate market uncertainty which could be positive for gold.
What should be worrying at this time for the gold bulls is that the big SPDR Gold Shares gold ETF (GLD) is still seeing gold liquidations out of the fund. Since April, GLD has shed 116 tonnes of gold, or 13.3%, with the latest liquidation recorded on Friday of 2.65 tonnes. Year to date GLD has shed a net 81 tonnes of gold which is equivalent to around 2.5% of global new mined production. That’s a lot of gold for the market to assimilate and would likely more than counter any fall-off in global gold production, although we don’t think this is actually happening – at least not yet.
GLD additions or liquidations tend to lag gold price performance but even so it may be worth monitoring GLD’s performance as a guide to where the gold price may be headed. If we see additions starting up again next week that will be a truly positive sign for gold but further liquidations out of the ETF will be a negative one for the gold bulls.
The strong dollar isn’t helping either. Fed interest rate rises are causing dismay and potential defaults in emerging markets which have been heavy into dollar denominated loans. Local currencies are falling against the dollar and the more the currencies fall the worse the debt with a drag on the local economy, so currencies fall further, the dollar index rises and the position gets even worse – potentially ad infinitum. President Trump has signalled he is not in favour of interest rate rises and a stronger dollar, but will the supposedly independent Fed pay any heed?
Trade tariffs, interest rate rises, domestic political uncertainty and potential geopolitical flare-ups are all on the horizon and tugging gold one way or the other. Overriding all is a possible (many think probable) general equity markets crash and if that happens all options are open. Gold could get dragged down further in the need for liquidity, but would likely quickly recover and then strengthen substantially.
But would higher gold prices as a result stimulate new mined output? We don’t think so. Indeed they might make matters worse for a time with higher prices persuading miners with lower grade reserves becoming economic to mine. Lower grades through the mill, assuming milling capacity is already maximised, mean lower overall output. It takes time to build any significant processing advances. Meanwhile the fall-off in exploration expenditure and the continuing difficulty in finding finance for big multi-billion dollar new projects are taking their toll. Global output is likely to be on the downward path for many years to come given the long lead times in getting a new mine into production – regardless of the gold price. In the long term gold has to be a very positive investment – demand will surely continue to increase and supply is likely to start falling if not in the current year, definitely in the early part of the next decade – which is only 16 months away. Fundamentals look like favouring gold – and the other precious metals alongside – particularly silver which, as various observers have put it, behaves ‘like gold on steroids’ in a rising gold price environment. Silver has been disappointing of late – the gold:silver ratio is back at around 83, whereas we feel a ratio of 70 or below is more realistic. Silver will have its day and when that day comes its rise could be spectacular.