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LAWRIE WILLIAMS: Gold drops below $1,700, equities rise but don't expect this to persist

We think this is all may be a bit premature, but global equities picked up quite strongly on Friday and, as they did so, safe haven assets like gold and silver fell back – equally sharply.  This was prompted, no doubt, by President Trump’s statement on getting America back to work in some less-affected states and reports that the drug, remdesivir, was showing good results in controlling the virus in already-affected patients. 

Re. any lockdown relaxation, however it is up to the state governors to order reductions of the lockdown restrictions and the President suggested some quite strict criteria to be attained before such relaxations should be put in place which suggests that any return to work in the country’s industrial heartland may be further away than the President, and some of the populace, would like.  Some less affected states, however, with mostly agricultural communities, may see some return to work fairly quickly, but overall the economy will remain in the grip of the virus for some months to come.

By the start of this weekend the U.S. has recorded over 700,000 virus cases, rising at around 30,000 daily, and more than 37,000 deaths.  This works out at 3.7 times the number of cases which have occurred in Spain, the second most affected country according to official statistics (although true Chinese figures remain suspect) and nearly twice the number of deaths.  However the U.S. population is far higher than that of any European nation and in terms of cases and deaths per million people, the U.S. is still well below similar figures for the most affected European countries, but the overall figure is still rising rapidly, while those in most of Europe appear to be diminishing.  By the end of Monday. U.S. figures could easily reach three quarters of a million virus cases and 40,000 deaths – and still rising fast.  At the current rate of infections and deaths, the U.S. could reach 1 million known virus cases and 50,000 deaths by the end of the current month.  Sobering statistics. Although there is a glimmer of hope in the worst affected state, New York, where virus-related deaths at least appear to be diminishing at last.

Despite the alarming figures, Friday saw a big uptick in global equities and the gold price dropped back below $1,700 for the first time in the week.  We don’t anticipate either of these statistical upticks and downturns to be maintained.  Wall Street, for example, is likely to see more stock price falls – possibly very sharp ones – as ever-ongoing government data figures continue to demonstrate the full effects of the virus incidence on the U.S. economy.  There are already around 22 million Americans registered as unemployed, and rising.  This is why President Trump is so keen to get people back to work, despite medical advice to the contrary.  In truth medical advice tends to be by nature on the pessimistic side, but there are many who believe that the U.S. President wants to move too far, too fast which will lead to an unnecessary rise in the virus incidence and death rates.  However the political and economic arguments of a more rapid return to work than most medical advice would suggest, may work in favour of a trade-off of more virus-related deaths in order to bring the economy back to any slight degree of normality.  Whether that is a politically acceptable judgement remains to be seen.  Given the huge political divide in the nation this trade-off may be acceptable in Republican-dominated areas of the country, but strongly contested in Democrat-dominated regions,

We have been warning about the potential for a major hit to the U.S. and global economies since February 1st when U.S. virus cases were in single figures and President Trump pontificated that it would rapidly fade away completely in America.  How his words of that time will come back to haunt him!  European cases were also virtually non-existent at the time. Even so, we wrote back then “This could be the trigger that sets off the start of a huge equities bear market – some suggest this could replicate, or exceed the market falls seen in the Great Depression/Wall Street crash of 1929 with markets not then really recovering for 10 years.  The powers that be, particularly in the U.S., will do all they can to prevent this happening.  After all a market crash could be disastrous for the Trump Administration in an election year.”  (See: Prediction: Wuhan virus could boost gold and silver, trigger equities meltdown.)

Much of what we warned about only two and a half months ago has come about and we anticipate further adverse effects on U.S. markets in particular – and what happens to U.S. equities often is replicated elsewhere in the world.  As for gold, the continuing flow into gold ETFs and the seemingly now longstanding shortage of investor-friendly physical gold in the form of gold coins and small bars, suggests that safe haven gold demand remains strong within a sector of the community and within some funds.  Gold’s detractors say that there is plenty of gold available, it’s just in the wrong place, but given that this is said to have been the case for a few weeks now, yet nothing seems to have changed, we remain sceptical on this position.  Thus our expectation of $1,800 gold by June or July and $2,000 gold before the year-end remains in place – and could prove to be a conservative estimate should the true realisation of the long term damage to the global economy sink in to the broader investment sector.

The Gold:Silver ratio (GSR) has remained remarkably constant throughout the recent falls in precious metals prices suggesting an ever-continuing strong link between gold and silver prices.  Assuming a constant GSR. $1,800 gold would see silver above $16 and $2,000 gold would put silver at around $18. But we do suspect that the ratio would come back a little at least in a rising gold price scenario suggesting that silver could actually do a little better under these circumstances. 

We remain wary about pgm prices however, although fundamentals may be improving with the virus-related shutdowns of South African mines,altyhough this may now have been eased.  But the market for these very much industrial metals remains hugely subdued with the enormous crash in motor manufacturing output and new vehicle sales.  The cleaner air as a result of the lockdowns and huge reductions in vehicle emissions may also lead the auto-purchasing public towards a proportional acceleration of non-polluting electric vehicle purchases when markets do begin to recover!

Our advice: Stay with gold as your primary wealth protection investment.  The upside potential still looks strong and the downside is probably limited, while general equities still look vulnerable to our eyes – although selected stocks in companies which are benefiting from the huge change in circumstances, may still be a decent bet.  But, as always, make sure you do your due diligence in any investment decision.  What may be disastrous for one company may be hugely positive for another!

19 Apr 2020 | Categories: Gold, Silver

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