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LAWRIE WILLIAMS: Gold ends week on an upnote. Breakout ahead?

Gold was closed on Friday back above $1,740, although was once again brought down when it threatened the $1,750 level which seems to be the maximum some of the bankers holding big short positions will allow – at least for the time being.  However, in our view, and apparently that of some of the investment sector’s biggest players, we may well be getting to the point where the ongoing price momentum will see the gold price breaking out conclusively above this level.  Indeed if that doesn’t happen this week we don’t think it will be too long before this occurs leaving the gold price free to rise to $1,800 - or perhaps beyond.  Gold did soar above $1,750 today when Asian and European markets opened, but was brought back down to the low $1,740s fairly quickly, although was recovering again at the time of writing.

In an article published only a week ago (Gold's Strong Positive Correlation With TIPS - Murenbeeld) I pointed out the extremely strong relationship between the inverse of the 10 year TIPS yield and the gold price noted by Canadian economist and gold follower, Martin Murenbeeld, whose opinion I rate highly.  Now in his analytical company’s latest weekly Newsletter, which came out on Friday, he points to another metric (which also incorporates the TIPS yield) which suggests that the gold price should currently be sitting at around $1,769 – in other words comfortably breaching the $1,750 ‘barrier’ once and for all. 

As I’ve noted before, Murenbeeld is currently positive on gold, but not one of those mega-bulls continually pushing the $5,000 or $10,000 gold price theory as being where the gold price should be currently.  He is much more of a realist and over the years his organisation’s gold price estimates, although generally seen as quite conservative, have been far closer to actuality than those of most other credible forecasters.  The group’s most recent forecasts placed gold as averaging $1,731 through Q2 2020 – pretty close to what it actually achieved on average over the quarter despite all the anomalies resulting from the COVID-19 pandemic.  An update is due next month which will be eagerly awaited, and overall Murenbeeld sees prospects as distinctly positive with the aforementioned possible breakout from its current range possible in the coming week.

Certainly economic and geopolitical factors look to be positive for the gold price going forward. This is despite the recently seemingly unstoppable rise in equities markets – which we feel may still be due for a mega-crash.  After a short blip when the gold price was brought down sharply, the gold ETFs seem to be seeing big inflows again which is a strong indicator of high wealth investors renewing a commitment to the safe have aspects of the yellow metal.  We still think ‘following the money’ continues to be a wise investment move.

And what of silver?  In the past silver has been referred to as ‘gold on steroids’ given its propensity to outperform gold in an upswing.  However the metal seems to have lost a lot of its lustre in recent months as the realization has set in that its main demand attribute is industrial, and industrial growth prospects look to be ‘iffy’ at best until the pandemic is behind us – which may not be for some months yet.  Nevertheless it has certainly performed better than gold in percentage terms in recent weeks with the Gold:Silver Ratio (GSR)  coming back down from over 120 to under 100 – but it still remains at historically high levels.  We don’t see silver performing as well as it has done in the past in a gold bull market, but it will continue to be dragged up by a rising gold price and may yet do marginally better in percentage terms than its yellow sibling which will be expressed in a falling GSR, which we are seeing at the moment.  Out and out silver bulls are probably looking for a very substantial fall in the ratio – perhaps to 50 or lower – but we think the game has totally changed for the silver price and if the GSR falls below 80 we will now be surprised.  But as we have seen with the premiums being achieved in seemingly ‘worthless’ equities while the issuing companies are filing for bankruptcy protection, anything is possible in the current crazy markets.

Bubbles seem to be abounding.  Grant Williams in his latest Things that make you go hmm.. newsletter, attributes this – at least in part -  to a new wave of day trading gamblers who are boosting the markets during a COVID-19 inspired demise of sports betting opportunities.  In our view these bubbles will all burst sooner or later and it will all end in tears as the gamblers lose all their money when markets come crashing down, as they will.  Stick to safe havens like gold, and if you want to gamble try silver.  Whatever happens to the equities markets, even if their fall brings precious metals down with them for liquidity reasons, their potential downside will be limited and the upside very positive.  Follow the big money!  Stay safe.

22 Jun 2020 | Categories: Gold, Silver

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