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LAWRIE WILLIAMS: Gold hits $1,800 again.  Can it stay there and move higher?

The gold price pattern last week was for it to rise in European trade, but be brought back down again once the American market opened.  The yellow metal opened the current week by showing some strength again in the European market, but instead of falling back quite sharply when New York opened, gold stuttered higher, breaching the $1,800 level which it had had such difficulty reaching during the previous week,

Silver also picked up a bid or two for the first time in several days and moved up around 4% with the Gold:Silver Ratio (GSR) coming back a little as well. Although it still remains at a relatively high 76.4 (a high GSR is bad for silver).  While this is well down on the 120+ level it reached towards the end of last year, it is still comfortably above the 65 or so it came down to a couple of months ago.  We suspect it could come back below the current ratio, settling at around 70 which we consider to be a more realistic level.  At a $1,800 gold price this would put the silver price at between $25 and $26 - not sufficiently high to get the silver bulls over excited, but a base from which the metal could climb a few notches higher.

We had been getting a little despondent about silver, given its relatively poor performance in the past few weeks.  Our opinion had been perhaps influenced by the fact that so many analysts had been highly positive about the metal’s prospects earlier in the year, so today’s price boost has been at least encouraging.  The out and out silver bulls are always hoping for the return of the GSR to around the 16 mark, as it was around the end of the 19th Century.  But we would point out that silver is nowadays far more of an industrial metal, and no longer a monetary one, so its historic price relationship with gold when both had significant roles in coinage and in Central Bank holdings no longer applies. 

So we see a return to a GSR of 16 as hugely unlikely unless industrial demand for the metal rises to the extent there is a considerable shortfall in availability.  This is likely to be an extremely long way off and would only come about if new technology unearths a huge new demand usage for the metal leading to a major supply shortfall.  In the meantime even $50 silver looks well in excess of any price level silver is likely to achieve in the foreseeable future.

Monday’s trade looked like it was starting out positive across the board for metal commodities (apart from uranium) and for crude oil too as the dollar slipped back.  Maybe the Afghanistan debacle was beginning to take its toll on the greenback, perhaps not before time.  If anything was going to damage confidence in the U.S., and in the dollar, the chaotic news coming out of Kabul would certainly play a part. 

However the ‘Afghan effect’ was but one factor contributing to the price rises and dollar fall.  A disappointing read on the latest PMI data release, and speculation that the Fed might not be able to start its tapering program as quickly as had been previously anticipated, also took its toll on the dollar.  New U.S. COVID infection cases could well pass the 200,000 a day mark this week as the Delta virus variant takes an increasing hold, and U.S. mortalities are already running at 1,000 a day plus.  In combination these latest figures could well bring any economic recovery in the U.S. to a halt, or even put it into reverse.

Eyes are now beginning to focus on next week’s Jackson Hole confluence of Central Bankers (even though this will be in part a virtual gathering of the world’s monetary elite).  Many nations are facing similar difficult economic conditions to the U.S. and are having difficulties in coping with inflationary pressures resulting in part from debts built up from enormously costly attempts to prevent their economies from collapsing due to virus-related strictures.  In theory they should be raising interest rates to combat these inflationary trends, but are reluctant to do so for fear of derailing any economic recovery they may already be seeing.

Reluctance to raise interest rates – and even if they do so only tiny rises are likely to be forthcoming – coupled with high inflation are making real interest rates increasingly negative,  As we have been pointing out in our articles here, negative real rates should be very positive for the gold price.  The destabilising global consequences of the rapid U.S. military withdrawal from Afghanistan, will cast ever increasing doubt on the longevity of U.S. military support and involvement in other global existing, or potential, flashpoints.  Partially because of this the world order looks to be ever increasingly fragile.  This isall grist to the global gold mill, and while the price has not yet risen sufficiently above the $1,800 level to be certain it will stay there, we would assess the chances of it so doing, and seeing further advances, as better than evens.  Also, don’t rule out the possibility of $2,000 gold before the year end yet!

23 Aug 2021 | Categories: Gold, Silver, Dollar, US, FOMC

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