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LAWRIE WILLIAMS: Gold down as equities correct upwards - but for how long?

U.S. equities lost around 20% of their value in Q4 last year with the Dow and S&P taking some major hits, but since the year end have recovered much of their losses.  Conversely the gold price rose in Q4 2018, but was unable to break upwards through $1,300 - some would say was ‘not allowed’ to breach that level!  Since the year end, gold has drifted back downwards to around the $1,279 resistance level.  Will this situation persist or will we see the gold price continue in no-mans land just below the $1,300 psychological resistance point?

Yesterday U.S. markets were closed for Martin Luther King Day, so any trade was thin given much of the gold action occurs in the U.S. Futures markets, but will the weak gold market and U.S. equities strength continue?  Asian and European equities markets did turn lower overnight and the gold price moved back to the low $1,280s in this morning’s European trading which may suggest a turning point - or perhaps just that the strong equities performance in the past week or so was somewhat overdone.  Whichever, market volatility at the end of last year may be a better indicator of the state of things to come.

Followers of Jim Rickards, who does not have a great track record in his more recent contentious forward predictions, will note that he is predicting a major financial reset involving gold, perhaps as near as the end of the current month.  He avers that the world’s central banks will get together to revalue gold to $10,000 an ounce to put the world back on to some kind of gold standard to try and bring financial excesses by global governments under control.  While he may be right in that this could well be what the world needs, we somehow doubt that it will happen - at least in the near term as he is suggesting.  Long term gold may well hit $10,000 but how long term is very much a matter for conjecture and debate.  We, and countless gold investors, would like him to be right but we faer it will not happen!

Rickards, like many of his ilk, is something of a self-promoter building on his self-professed history of involvement in CIA planning and in his role in the Long-Term Capital Management fiasco rescue - he was LTCM’s general counsel which could be seen as something of a mixed recommendation!.  Nowadays he primarily writes financial commentary for the Agora Financial group, and its plethora of newsletters and financial advisory services, aimed at bringing in new subscribers - which does mean he has something of a vested interest in producing attention-grabbing material like his $10,000 gold prediction.  He is also the author of several books on money and precious metals and does  maintain a high profile in the gold sector in particular through conference presentations and his writing.

But I digress.  The equities markets meltdown of late last year will have added uncertainty into what had seemed to be consistent long term upwards momentum in the markets.  This may have resurfaced in the first few weeks of the current year but we wouldn’t bank on it!  Equities markets are perhaps due an even bigger correction than that we saw at the tail end of last year, but the timing of this is uncertain.  What is for sure is that the state of the U.S. and global economies is not quite as rosy as many politicians and analysts would like to have us believe.

The strong performance of equities over the past several years has been seen as one of the reasons for a lacklustre gold price - safe haven investing, gold’s long professed principal role, has become seen as relatively irrelevant in a seemingly ever-rising equities scenario.  But last year’s volatility in equities globally, which saw gold as a less vulnerable investment asset class over the full year already seems to be bringing some big investors back into gold.  Recent analysis by Bloomberg puts global gold ETF holdings at the highest level in nearly six years which is a great indicator that some of the big funds and individual investors are finding their way back into investment in gold.

Perhaps the U.S. Fed is key.  It had been set on a steady increase in interest rates - towards normalisation whatever that might be - and reducing the Fed’s balance sheet, but the latest indicators are that it may well be about to hold back on further interest rate increases and balance sheet reduction, at least until it has a better idea of where the U.S. and global economy is headed.

If the Fed does hold off this could well presage something of a decline in the comparative value of the U.S. dollar and a corresponding rise in the gold price.  Numerous analysts and commentators are predicting $1,400 gold or higher this year - but then they were last year too so be warned.  Consensus analysis is often found wanting!  However, of course, if Jim Rickards is right in his latest gold pricing claim, all these predicted rises will pale intro insignificance!  We shall see.

22 Jan 2019 | Categories: Gold

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