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LAWRIE WILLIAMS: Gold confounds on Fed negative interest rate position

As usual, it seems, the gold price totally over-reacted, both upwards and then downwards, as Jerome Powell, the U.S. Fed chair, addressed a webinar hosted by the Peterson Institute for International Economics earlier today.  As Powell began to speak the gold price shot up, but then fell back sharply as he completely ruled out that the Fed would contemplate the imposition of negative interest rates as some had been suggesting.  Equities indexes reacted somewhat similarly with the Dow, S&P 500 and NASDAQ all falling well into negative territory once again.

Perhaps investors would be better off listening to the likes of mega-investors Stanley Druckenmiller and Paul Tudor Jones – or Warren Buffett – all of whom are looking for a long and continuing recession/depression which may last for many months and drive equities down to an almost unprecedented level.   The first two of these also see continuing strength in gold as investors flee for safe haven investments, while Buffett, who has never been a fan of gold (although once did make a big silver investment) has not joined that particular forecast, but rather plans to sit on the investment sidelines while the  equities downturn continues.

Our article of yesterday (Gold, Equities And Covid-19 – A Potentially Apocalyptic Scenario?) set out our thinking on the likely progress of the general equities and gold sectors, drawing parallels with the investor-crippling big dead cat bounce in the early stages of the Great Depression, from which markets subsequently fell over 80%.  We have been seeing similar equities recoveries this time around despite some absolutely horrendous economic and employment figures.  Investors seem to keep falling willingly into the traps set by the snake-oil salesmen whose job seems to be to try and talk Wall Street up regardless of the continuing calamity suggested by ever more disturbing economic data.  And if one considers current data market depressing then perhaps you ‘ain’t seen nothing yet’ as Q2 figures, when they come in, are likely to be far worse than any we have seen to date.

And perhaps we should consider the Powell-led Fed as a contributor to some rather unwarranted, in our eyes, more optimistic viewpoints on a recovery.  Yes, a recovery will come – eventually – but probably not in the second half of the current calendar year, and perhaps not even throughout most of 2021.  The COVID-19 virus will probably prove to be far more destructive of the U.S. and global economies than it will be to the physical health of the nations affected.  Whole swathes of the economy have been shut down, some of which will take years to recover – if ever.  These employ tens of millions of people who will find themselves cut off from earnings capabilities for years to come.

One may wonder why Donald Trump, Boris Johnson, Angela Merkel, Emanuel Macron, Guiseppe Conte, Pedro Sanchez, et al all may be rushing to try and get their citizens back to work in the light of opposition from medical advisers and epidemiologists and sectors of the media, all warning of the possibility of a consequent second wave of COVID-19 infections.  These political leaders all understand the enormous long term damage that will result from continual economic stagnation of their countries’ respective economies.  Our political leaders have to take tough decisions for what they see as the overall good of their citizens and an early resumption of some sectors of the economy will be something of a trade-off between a possibly resurgent death rate and the reduction of the adverse sociological effects of keeping their citizens confined to virtual indefinite house arrest.  That is a decision which will give them all nightmares.  Let us pray that their worst fears are unrealised.

So where should one choose to place one’s money under such circumstances.  Warren Buffett seems to be set on his company, Berkshire Hathaway, for now sitting on its huge $130 billion cash pile.  Current interest rates are derisory and the potential for currency debasement, given the U.S.’s enormous debt position and the continuing stream of billions of dollars being unleashed to try and keep at least some of the economy afloat, makes this kind of policy unwise in our opinion.  However it has to be a better bet than investing in general equities for now until the market bottoms – which could still be months, if not years, away.

Gold looks to us to be a better bet.  Big money has been pouring into gold-backed ETFs at record levels over the past few months which should give us an indicator here.  Follow the money has always been a wise move. 

Gold bullion may be an even better bet, but this has security implications for the smaller investor in particular, although for the really big players, who can benefit from volume related reduced vaulting costs, this is definitely a good option and takes most third-party risks out of the equation.

But another potentially lucrative investment may well be in the better gold stocks.  There’s a risk element here but if one does one’s homework and invests in one or more of the bigger, well-diversified gold miners the risk is reduced.  They mostly pay dividends at a higher yield than the kind of paltry interest rates one can get from a bank or other financial institution.  Should the gold price continue rising, as we think is likely, their earnings potential is positive, as is their consequent likely stock price gain.  This compares with the general equities sector which we see as prone to substantial falls over the next months, and possibly years.

We stick to recommending gold over the other precious metals which all should be considered industrial metals and thus prone to fall alongside the general manufacturing sector.  Silver could be worth a gamble, though, as it is particularly cheap at the moment compared with gold, but its performance of late has been distinctly lacklustre compared with that of its yellow cousin, which does raise some warning bells.  Its potential downside is perhaps more limited than the PGMs and it may well be dragged up by gold, but don’t necessarily expect it to outperform as it has been prone to do in the past.

13 May 2020 | Categories: Gold

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