LAWRIE WILLIAMS: Gold – doing its job as the ultimate global wealth protector

Perhaps gold followers and investors should be encouraged that after a turbulent week, with prices ranging from the low $1,460s to above $1,510 on conflicting U.S. data, the yellow metal closed the week at above $1,500.  Previous weeks had often seen the gold price brought down to just below the $1,500 level at the week end despite wide fluctuations in price midweek.  This plus $1,500 level was achieved despite the important Chinese market being closed for the latest ‘Golden Week’ holiday following the country’s 70th Anniversary National Day which was on October 1st.  Chinese markets will reopen this week.

In fact latest reports out of China suggest that Golden Week holiday shopping demand for gold jewellery has been particularly strong suggesting that portents may be good for a gold demand pick-up in the final quarter of the year.  With the Chinese New Year, followed by another Golden Week holiday period, occurring on January 29th next year we should see rising Chinese demand anyway as jewellers and fabricators stock up ahead of likely New Year buying for the year of the rat, despite the apparent U.S.-imposed sanctions and tariffs which do appear to be having and adverse effect on the country’s economic growth.   Nevertheless the Chinese economy still appears to be growing, albeit at a slower rate than before.

The Trump-initiated additional tariffs on Chinese imports into the U.S. has been designed to make Chinese products more pricey and, hopefully stimulate the U.S. manufacturing sector to gear up and replace them with U.S. domestic production.  But meanwhile a minor devaluation of the Chinese currency so far has helped mitigate the impact, and one suspects the Chinese manufacturers may be absorbing some of the costs anyway.  And any pick-up in U.S. manufacturing of replacements cannot happen overnight – if ever.  Certainly the latest PMI data suggests that U.S. manufacturing is seeing something of a downturn as the strong U.S. dollar is making exports even less competitive.  That is why President Trump is berating the U.S. Federal Reserve for not cutting interest rates fast enough, or sufficiently enough, to see a downturn in the U.S. dollar index.  These are unintended consequences of the Trump tariff policy moves!

Geopolitical tensions remain in the air and these could affect the gold price positively in the next few weeks.  The most likely negative development for gold would be some kind of breakthrough in the U.S.-China trade talks, but we don’t see any significant conciliatory move by either side ahead.  Meanwhile the possible Trump impeachment process seems to be gathering steam, while foreign policy issues could well raise ever more uncertainty.  North Korea’s President Kim is making unhelpful statements re. possible nuclear disarmament, while that country’s recent apparent submarine missile test launch seems to have raised the stakes.  Iran is proving to be something of an intransigent bête noir, while Russo-Chinese-European moves to circumvent the dollar in global trade by bypassing the U.S. dominated SWIFT global financial system could put a dent in the benefits the U.S. incurs from being the world’s dominant reserve currency.  While any such effects could take several years yet to materialise they do promise an end to the power of the petrodollar in global oil trade, and could mean a reduction in the impact of U.S. sanctions on Iran.

For the moment the U.S. equities markets remain relatively stable, but with a degree of nervousness apparent.  The Fed’s likely further cuts in interest rates at end-October’s meeting, and possibly at the December meeting too, may find favour by President Trump in devaluing the dollar and benefit equities, but the continuing overpricing of tech stocks in particular could blow up at any time, and if they start to fall could bring down the rest of the market with them.

However, although in our view the logical likely progress of the gold price from now is upwards, some technical analysts reckon the charts portend a short term downturn – perhaps even to $1,400 or below.  We don’t see that as happening, but if it does it should present an excellent buying opportunity as the long term trend is for the price to advance.  But with the gold price things seldom run smoothly and we could well experience ups and downs in its progress to higher levels.  We do foresee gold hitting, and perhaps exceeding, its all time high in U.S. dollars within the next couple of years.  It has already done so in many other currencies so is doing its job well as a global wealth protector – just ask any Venezuelan gold holder!

06 Oct 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