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LAWRIE WILLIAMS: Gold dives back well below $1,800

The past week may have been a defining one for the gold price.  It proved to be unsuccessful in breaking out upwards significantly above $1,800, and had been hovering around this mark – occasionally falling below that level, but usually managing to recover back above it.  But by the end of the week it failed to maintain these recoveries and plunged down to the $1,750s at one time before ending the week slightly above $1,760.  A usual, we suspect the big downturn was too far, too fast and are hoping for at least a small recovery next week.

July and August have historically been weak months for the gold price, although 2019 and 2020 were exceptions  It thus looks like the yellow metal’s price performance may be reverting to the historic performance norm.

In our view, there are still plenty of factors suggesting that the gold price should rise over the remainder of the year, but much may depend on the ongoing performance of the U.S. economy. The Fed looks like keeping its bond buying and low interest rate policies in place, while Central Bank buying looks to be continuing strong.

There had been an assumption that the U.S. might be recovering from the worst effects of the pandemic, but recent infection figures, and accompanying deaths, have been rising sharply as new virus variants are taking hold. The reluctance of a significant proportion of the U.S. population to receive the approved and available vaccines, particularly in Republican areas, seems to have been a significant contributing factor.  Recently reported new cases of the COVID-19 virus have surged above, 130,000 daily – supposedly the world’s worst - and deaths over 700 daily, only exceeded by Brazil, Indonesia and Russia in terms of reported daily fatality numbers,  Another factor pointing to a stronger gold price going forwards is the report that demand in India, the world's second largest gold consumer, is picking up strongly again which has to be positive for the yellow metal's fundamentals,

We can’t be certain that a slower than anticipated U.S. economy will be positive or negative for the gold price.  It almost certainly means the U.S. Federal Reserve will be in no hurry to taper its bond-buying programme nor raise the Federal Funds interest rate.  With inflation running high and showing little sign of slowing down, real interest rates my become increasingly negative which is usually seen as a very positive pointer for the gold price.

A weaker-for-longer U.S economy may also hit dollar strength vis-a-vis competitive currencies, which is another potentially positive gold price factor.  Somewhat surprisingly U.S. equities have hardly faltered, while bitcoin – presumably buoyed by its many vested interests, seems as if it might be making a bit of a recovery after plunging to the $28,000 level  We think, however, contrary to some, that its days are numbere.  Interestingly the hugely respected UK Economist magazine very recently conducted a theoretical exercise to investigate what might happen economically were bitcoin to drop to zero.  We may well be somewhat ambivalent about bitcoin, and many of the key players in the sector, but even we think a zero level is unlikely.  However, we wouldn’t rule out another massive percentage fall if governments continue to see it as a threat and legislate against it accordingly.  Furthermore the exposure of some of the more dubious elements controlling some of the biggest players in the sector should (but may not) reduce confidence in cryptocurrencies in general.

The sharp gold price fall which occurred Friday appears to have been data driven with the latest employment figures exceeding expectations.  Credit card debt also soared, suggesting retail markets may be picking up too, but it may not take much to curb coronavirus-end optimism if U.S. infection figures continue to rise prompting the re-introduction of precautionary measures in the worst affected states and thus deliver another setback to the nation's economy.  It ain’t over yet!

08 Aug 2021 | Categories: Gold, US, Bitcoin, FOMC

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