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LAWRIE WILLIAMS: Gold breaks back up through $1,800 – but for how long?

I waited to see if there was any immediate setback in North American markets after gold broke back up through $1,800 this morning in European trade.  So far so good with the gold price at $1,810 as I write, but it’s still a long way short of last August’s peak.  Silver was also trading higher while platinum, which has performed particularly strongly so far this year, was flat and so was palladium – these two being the most industrial of the precious metals.

Every time so far this year that gold appears as if it might be breaking upwards above its most recent trading range, it has been brought down sharply – largely through adverse reaction in the COMEX gold futures market.  Will this happen yet again this time?  We will have to wait and see as some elements of the supply/demand equation have been negative, while others have been positive. 

Equities markets and bitcoin have been strong – which has presumably siphoned off some of the investment which might have favoured precious metals – but both had been reacting downwards at least in initial markets today, which might also account for the slightly less positive performance by the industrially focused pgms.

We have been predicting an equities crash for almost a year now, but stocks seem to have followed an ever-upwards path – in our view unjustifiably so.  That is apart from for a few companies, mostly in the tech sector, which have benefited from coronavirus spread prevention restrictions.  But we still think equities will crash, although the fall may not be quite as dramatic as we had initially been anticipating, as the pandemic impact on economies has not been as harmful as we had surmised – in part due to the actions of governments and central banks, although at the expense of running up enormous debt positions which will take years to work out of the system – if ever.

There could be some room for optimism on the economy from the apparent efficacy of the new vaccines in preventing hospitalisations and deaths among the most vulnerable elderly section of the population.  Research in Scotland over the past couple of months since vaccines have started to be administered appears to show that the Oxford Astra Zeneca vaccine has a success rate in prevention of hospitalisations among such elderly recipients of 94% and the Pfizer/BioNTech vaccine 85% after the first dose has been administered in each case.  These kinds of results could well engender an increased degree of hope that there is at least some prospect of a return to life approaching somewhere near normal in the foreseeable future.  This is despite the accompanying predictions that the actual virus may now be with us for ever, somewhat like ‘flu, and require annual immunisations against new strains to keep it under control.

Equities markets have been supported by government and central bank actions designed to prevent global economies collapsing under the impact of virus control restrictions.  In theory these should also be supportive of precious metals prices too, particularly as interest rates have been kept artificially low – indeed real interest rates are effectively negative in many countries.  However the particularly strong capital growth patterns seen in the equities markets and bitcoin have almost certainly, as noted above, diverted investment away from the traditional precious metals safe havens. 

Once the realisation sets in that the pandemic has decimated large sections of the economy, which will take many years to recover, we feel equities will begin to react negatively and precious metals investment come back into favour – for gold in particular.  We thus stand by our assertion that gold will hit $2,000 again this year, although if a severe equities crash happens then gold too could be affected adversely as funds and institutions struggle for liquidity and are thus forced to sell strong assets along with the weaker ones.

22 Feb 2021 | Categories: Gold

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