LAWRIE WILLIAMS: Gold briefly hits $1,750 and Gold:Silver Ratio below 100
Despite what we see as yet another crazy equities recovery, gold and silver prices both showed strength on Wednesday, although gold was pushed back every time it looked as if it might breach the $1,750 level. Overnight it was brought back down to the $1,730s and even below that level during today’s trading. The dip was put down to dollar strength, but the gold price has largely been moving independent of the dollar index recently and we believe the gold price fall may well have been due to short holders trying to protect their positions.
The silver price showed relative strength too with the Gold:Silver ratio (GSR) coming back down below 100 for the first time since mid-March when it shot up to over 120. But, like gold’s reversal, it reverted back to back above the 100 level in morning trading, Thursday but both gold and the GSR were showing minor signs of improvement by early afternoon in Europe. However that was not allowed to continue when U.S. markets opened – buoyed perhaps by an improvement in sentiment in manufacturing and services PMI figures from horrendous to just bad! U.S. equities also started the day up a little after mostly poor performances in Asian and European stock markets, before turning down, although not strongly.
The big problem facing the key precious metals as we see it is the big overhang in short positions in both gold and silver on the COMEX and London futures markets. If the traders, who have a lot of money behind them for now, are forced to settle these amidst rising precious metals prices there could be financial carnage, akin to the market moves which brought down Bear Stearns in 2008. Thus it is in their best interests to try and mitigate this position through action in the futures markets which depresses gold and silver prices for a, hopefully brief, period of time.
As we have stated often beforehand, equities markets still seem to be living in cloud cuckoo land. Even poor performance data, like the latest PMI figures, can send the markets higher given they were not quite as bad as prior figures. There is likely to be a raft of pretty awful data ahead, culminating in some predictably disastrous Q2 figures, and we think investors would be wise to follow the paths of some of the most successful big players out there who are eschewing equities for now – some of them in favour of gold and silver.
There has been much positive comment suggesting gold, in particular, is poised to attack new highs and once the current shake-out is behind us maybe that is just what gold is waiting for. Certainly the flood of buying into the major gold ETFs, which are now at record levels globally, seems to suggest just that.
Silver is not quite so unanimously favoured by the commentators – for example a decidedly downbeat assessment has just been released by Capital Economics - but some enormous deposits into some of the bigger silver ETFs over the past few days suggest that at least some of the big money thinks differently – and investors seldom lose out by following the money!
With the GSR back over 100 silver looks cheap in comparison with gold, but don’t forget that it is in essence an industrial metal nowadays and thus dependent for most of its demand on the industrial sector. So with even conservative forecasters talking of a global depression, perhaps lasting until long into 2021 or even longer one has to be a little wary. However, historically silver has tended to advance when the gold price advances and the March spike in the GSR to over 120 does look to have been overdone. We still reckon the overall direction of the gold price is upwards and silver should follow suit though, but perhaps without the kind of volatility seen in past silver bull markets.
Platinum and palladium though are truly industrial sector metals and their main demand area is in the autocatalyst sector – and this relies on an industrial sector that has been particularly hard hit by the COVID-19 virus. The big question here is will the sector rebound with pent-up demand coming to the fore as lockdown restrictions are eased. There is a theory out there that people and corporations will cut back on capital spending out of caution – perhaps for a few years – in the aftermath of the virus. If so demand for autocatalysts will decline, and maybe the apparent improvement in air quality as motor vehicle traffic has subsided during enforced lockdowns may direct more people to a non-polluting drivetrain option. We shall see.
Overall, therefore there are some mixed messages for the precious metals complex. We still stick by our most recent guesstimate of a $1,800 gold price by the end of the northern summer and the yellow metal touching $2,000 – but maybe not staying up there – before the year end. As to silver we could well see the GSR coming back to 90 or so. Which at a $2,000 gold price would put silver at $22 – a goodly gain for the silver investor, but don’t bank on it!
As for the PGMs, we remain a little nervous with so much depending on the return to car and truck purchasing patterns. We suspect these will remain weak into the year-end which could well lead to the gold price exceeding that of high-flying palladium later in the year. Palladium is, though, a tiny market in comparison with gold so prone to much greater volatility. We no longer see platinum prices surpassing those of palladium this year, but over time – maybe in 2021 or 2022 – the old price hierarchy may be resumed.