LAWRIE WILLIAMS: Gold disaster? Perhaps not.
On the face of things last week looked pretty disastrous for precious metals. Gold fell by just over 6%, Silver by around 7.6%, Platinum by 9.6% and Palladium a whopping 11%. Gold and silver stocks fared even worse than their respective metals. It was definitely not a great week for the precious metals investor! But we suspect that the market over-reacted hugely to the post-FOMC meeting statement by Fed chair, Jay Powell, and we could see a strong recovery in the next couple of weeks. As we’ve said before, markets tend to over-react to both positive and negative news and this was indeed one of those occasions.
Year to date, gold is down 7%, silver 2%, platinum 3% while palladium has just about held its own. For an investor things could have been worse which, I suppose, demonstrates that precious metals volatility is really not too bad even in seemingly adverse times. Compare this for example with bitcoin which fell back around 50% in a couple of days recently – that represents true volatility.
There are those, mainly on the ultra-bullish side of the gold investment fraternity, who will put these big declines in the second half of the past week down to rearguard action by the big precious metals traders and bullion banks holding massive short positions in the precious metals, seeking to mitigate potential losses by driving prices down. There may be some truth in that, but we suspect that these big price declines were primarily due to a knee-jerk misinterpretation by the markets of the U.S. Fed’s likely forwards path regarding interest rates in the light of strong inflationary pressures resulting from a perceived end to the virus pandemic restrictions.
If one looks at CPI figures, U.S. inflation is indeed at its highest level for some years, but given a huge sector of the economy is now seizing the opportunity to try and claw back some of the losses experienced over the lockdown months, this cannot be a surprise. The Fed is making a judgement that these inflationary pressures will work their way out of the system over the next few months, and inflation will return to low levels again. Given that the Fed has seen its inflation target undershot month-in, month-out, a period of above target inflation to bring the average up to the Fed’s desired level has not so far proved to be a strong enough worry to make any changes to its current ultra-low interest rate, plus significant QE, policy for the foreseeable future. Indeed allowing a higher inflation level might even be seen as a deliberate policy as a ploy in helping mitigate the huge debt/GDP situation.
So saying, the Fed appears to be standing firm on policy and there is no indication that it is much nearer to allowing interest rates to rise until 2023. In short the accommodative policy it has been conducting all-along is effectively unchanged, which is why the reaction to the post-meeting statement seems somewhat overdone. That a mild suggestion that the possibility that the Fed might start tapering earlier than initially thought is considered ‘hawkish’, despite this projected date being two years into the future, is a little bizarre. Hence the opinion that the short-holding traders and bullion banks used the ‘hawkish’views on the latest FOMC meeting to manipulate prices lower, continues to generates a strong following!
For now we see this as a buying opportunity for gold and silver – we don’t sse them falling back much further this year and if indeed it is a buying opportunity for the metals, then perhaps it is even more so for gold and silver mining stocks given the miners are still making strong profits at metal prices. We remain a little more wary about the pgms as they are very much demand dependent on growth in the automotive sector which is, in turn, so dependent on how fast the economy recovers from the pandemic effects, which may well be slower than many are predicting.