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LAWRIE WILLIAMS: Gold headwinds bring price back down below $1,700

Several times over the past few days the gold price has been brought down below the $1,700 level – and most times it has not stayed there recovering each time to above what appears to be a ‘line in the sand’.  But yesterday may have seen a fall too far for easy recovery - a fall that continued overnight.  If somehow gold can recover and maintain the $1,700 level as a true bottom within the latest bull run, this could be seen as a consolidation point from which it may well be poised to move onwards and upwards over the next few months.  If not it could yet fall back to the $1,650s or lower for the time being.

There are indeed some serious potential headwinds for gold out there.  According to the latest reports – including the latest Gold Demand Trends publication from the World Gold Council, some segments of gold consumption have fallen off a cliff, while supply has also fallen a little due to coronavirus-related mine shutdowns. Given that the world’s top two consumers are China and India and the former virtually came to a standstill in the initial outbreak of the COVID-19 coronavirus, while the latter is in the throes of its own draconian lockdown, the fall-off in demand (principally jewellery and the tech sector) is hardly surprising.  With the virus only getting a real grip on the global economy now in Q2, in theory this should make for a heavy blow to gold’s fundamentals.  Particularly so given that the leading central bank gold purchaser of the past few years, Russia, has also ceased domestic gold purchases for the time being, although this won’t have appeared in Q1 statistics as the cutoff was from April 1st.

To an extent this demand fall-off for physical gold has been at least partly replaced by record gold inflows into exchange-traded products  (see table below from the World Gold Council which shows global gold ETP inflows during Q1 of a net 298 tonnes – equivalent to around 37% of new mined gold over the period).  ETP inflows have continued at a high level overall throughout April too.  This may well be insufficient, though, to make up for potential global consumption losses worldwide but does indicate investor-driven momentum which may, for the time being at least, mitigate basic supply/demand fundamentals.  With equities markets continuing to be vulnerable to further big falls, and many commentators predicting a substantial gold price increase ahead, so-called safe haven (wealth protection) demand should continue to be positive for the gold price going forward once it gets over its current weaker trend.

Table:  Global gold ETP inflows Q1 2020

Those looking for a massive increase in the gold price in the short term, though, may be a little disappointed if this does not materialise.  While pro-gold sentiment and momentum may well counterbalance any weakness in supply/demand fundamentals, these latter will have an adverse impact on the overall price performance and should not be disregarded altogether.  We remain believers that the gold price could hit $1,800 at some time in the second half of the year, and would not be surprised to see gold breach its 2011 high point of around $1,940 at some point before the year-end, but we are not predicting some of the high peaks that are being forecast by some of the more optimistic gold proponents – at least not this year.

We are still predicting further sharp falls in general equities as the COVID-19-related recession/depression plays out.  This could have a mixed effect on gold.  Liquidity issues may force holders to sell strong assets like gold and silver – indeed may be having an effect as I write.  Investors seem to be adept at clutching at straws and driving equities upwards on the slightest hint of positive news, but we see these occasional rallies as false dawns with little understanding of how bad and how deep the virus-related downturn may really be.  Thus gold and silver, and gold and silver mining stocks, may be dragged down along with falls in general equities, but any such losses are likely to be hugely less than those in mainstream stocks in percentage terms and recoveries will be far quicker and more positive when they do come.  One only has to look back on the 2008/9 Great (Global) Financial Crisis – or indeed to the Great Depression of the late 1920s and the 1930s to see how this is likely to play out.  History does tend to repeat itself. 

Some commentators even reckon that this virus-induced massive downturn could well be deeper and longer lasting than the Great Depression itself – a hugely sobering thought for today’s global populations who are mostly attuned to a more positive perpetual growth-oriented economic outlook.  One thing is for sure, though, the reliance on credit that has fuelled retail growth generated by the baby-boomers, millennials , generation X etc. is likely to be turned on its head. 

Saving may even become a norm again.  The downturn ahead will certainly re-focus us all on more cautious economic management of our own finances.

Unsurprisingly the dollar index has fallen back a little – no doubt due to the enormous U.S. debt build-up, and some of the more astute economic commentators and forecasters see this as a prelude to inflationary pressures building.  That potentially heaps more bad news on those already in dire financial straits through loss of earnings due to coronavirus lockdowns.   Unemployment levels in the U.S. have risen to around a horrendous 30 million and at long last the equities markets may be beginning to see some understanding of the seriousness of the U.S. domestic situation – a financial scenario that is being mirrored elsewhere around the world.  We are truly heading fast into a global recession/depression that may take years to recover from.  While governments may try to restart reluctant economies as the virus spread perhaps reduces, things may NOT return to pre-virus levels for many years.

As we have suggested many times over the past few months and years, investment in gold (and maybe silver too) should offer some degree of wealth protection – or even wealth accumulation - although this may do little more than protect you from the continuing downturn that lies ahead!  We obviously hope that our predictions of global doom and gloom may prove to be exaggerated and the politicians and economists cobble together a way out of the continuing downwards spiral, but our warnings so far seem to have been coming ever truer by the day.  We look to the future with a strong degree of trepidation.

01 May 2020 | Categories: Gold

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