LAWRIE WILLIAMS: Gold catches another wave ahead of U.S. holiday

The rather predictable market euphoria on the announcement at the G20 that the U.S. and China would resume trade talks affected the gold price to the downside over the past weekend, but gold only took a day or so to recover much of its lost ground on the realisation that little had actually changed.  The agreement to resume talks was just that – the differences between the U.S. position and that of China remain unchanged.  And even a perhaps slightly more conciliatory tone from the U.S. President has done little to alleviate the substantial positional trade policy differences between the two superpowers.

We had previously suggested that little would change in gold pricing between the weekend and the U.S. Independence Day holiday today.  We were wrong in that respect with the gold price gaining the best part of US$30 on Tuesday, and remaining strongish yesterday, (on remarkably high volumes for the day preceding a major U.S. public holiday) and overnight before pulling back a tad in this morning’s European trading. 

Overall the latest gold price movements do suggest a much more positive mood is developing towards gold amid worries that other asset classes are due for falls – equities in particular, even though the Dow and S&P indexes have been continuing on an upwards path.  What has to be particularly encouraging for gold bulls is that it was primarily the U.S. markets  that drove the price higher on Tuesday.  Previously it had been European and Asian markets that had been the key price drivers and the U.S. market often being a dampening factor as the day progressed!

Independence Day marks the start of the principal U.S. holiday season with many traders and hedge fund managers managing to take time off between now and the Labor Day holiday at the beginning of September.  This usually tends to be a relatively quiet period in the U.S. markets due to reduced volumes but, so saying, it was this period in 2011 that saw the gold price surge from a little over $1,500 to its highest ever level of over $1,900 spot. 

Could that happen again?  We think that unlikely as there is not really sufficient momentum behind gold yet to suggest this could re-occur, but we could well see an important rise over this period if the gold price momentum is sustained.  There are additionally several potential geopolitical flashpoints on the horizon which could trigger s strong upwards move should any of these blow up over the northern summer.

So saying, depending on what happens next week following the Independence Day celebrations, we could see gold either fall back to the mid $1,300s or perhaps surge to around $1,500 or higher.  It’s already moving towards this latter level, although European trade this morning remains muted, although as I write we are seeing a small gold price recovery.

As readers of my columns for Sharps Pixley will know, I am cautiously bullish towards gold without being an out and out mega bull.  I see a number of factors which are gold positive and not many that are gold negative.  The negative possibilities include the U.S. Fed not lowering interest rates as they are expected to do at the next FOMC Meeting, which takes place at the end of the current month.  While a 25 basis point rate reduction is seen as almost inevitable by the markets – and even a 50 point cut seen as a possibility – there is a chance the Fed will hold out to keep rates as they are until the mid-September meeting - if only to demonstrate its independence of the Administration with President Trump persistently calling for lower rates, or some other means of reducing dollar parities against what are seen as competitive currencies.  A lower dollar does tend to result in a higher gold price given gold is seen as a measure of dollar strength, or otherwise.

An agreed trade deal with China might also be negative for gold, but any negotiations will remain complex and take time so any new deal is unlikely to be settled soon – if indeed some of the more contentious differences can ever be agreed upon.  As we have commented before a centrally planned economy like China’s, with an ever-growing domestic marketplace, might be better placed to withstand long term trade restrictions than a truly capitalist economy like that of the U.S.  While the U.S. may seem to have the monetary advantage in terms of relative trade it may never ‘win’ an ongoing trade war.

But what of silver.? Numerous followers of the silver market, including myself (SILVER SHOULD BE GOOD TO GO), see silver’s recent underperformance vis-à-vis gold as ripe for speculative investment with the Gold:Silver ratio currently close to an almost unprecedented high.  Platinum and palladium are both almost completely driven by industrial suuply/demand factors, but silver not so much so despite its heavy industrial usage element, with recent research showing a far stronger correlation with gold price movement.  Historically silver has risen faster than gold in percentage terms when the latter is seen as rising and recent heavy inflows into the big SLV silver ETF suggest that some mega investors too are expecting a silver breakout.

We shall have to wait and see what the markets make of all this when many of the U.S. traders and fund managers are back at their desks next week.  We could see fireworks developing in the precious metals markets then.  Gold and silver bulls will be hoping they don’t prove to be damp squibs!

04 Jul 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com