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LAWRIE WILLIAMS: Gold Hits $1,900 again but then struggles

At one stage in yesterday’s early trading it looked like gold was making a sharp move upwards, with Kitco recording a high point of $1,906 in late Asian trading.  But then the price was brought back down sharply to a low point of around $1,852 as Europe came on line, although that low point was shortlived. Gold then made something of a recovery to the low $1,880s around the level it had closed for the weekend but then fell again to the mid-$1,870s, although gold stocks still managed to make some gains.  This morning gold was again marked down a few dollars

Silver performed in a somewhat similar pattern to gold, but its recovery was more marked than that of gold and it ended the day comfortably in positive territory, although it fell back a little this morn ing.  PGMs did not fare as well with both platinum and palladium dipping quite sharply in price which, given that these are nowadays very much industrial, rather than precious, metals could be seen as an ominous sign that the big money has little faith in any real recovery in the economy in the short to medium term.  While equities markets worldwide have mostly fallen too, the Dow did make something of a recovery yesterday after falls in early trading, but the S&P 500 and NASDAQ turned lower and were followed down by Asian markets overnight.

With European equities markets seeing a bit of a recovery this morning, it is too early to say whether yesterday’s falls were the precursor of a more profound dip, but one does need to watch equity indices closely in the run up to Christmas and the year end.  We could well see something of a market reset in the New Year absent any specifically positive news for the markets.  However the start of the New Year often seems to bring forth a degree of optimism, although the current situation with the continuing coronavirus spread has to be, to say the least, abnormal.  It is still too early for the rollout of vaccines to have any real effect and with the economic effects of the virus pandemic likely to get worse before they begin to get better, if they do, equities markets may start, somewhat belatedly, to suffer accordingly.

What has to be particularly worrying is that this virus pandemic seems to be particularly resilient.  Go back nine months in time and many, if not most, people assumed that the worst of the infection spread could well be behind us by the second half of 2020.  This has very obviously not been the case.  A new, probably more infectious, virus variant has been observed in the UK and it can only be a matter of time before this spreads worldwide if the virus advance patterns seen to date are replicated.  While this latest virus mutation does not seem to be more deadly than the original strain, and scientists believe it won’t affect vaccine efficiency, it will undoubtedly lead to more people being infected.  And more infections means more deaths, regardless of the mutation itself being no more likely to cause death than the current strain - if that is indeed the case.

With even a rapid rollout of vaccines, their effect on the virus spread is unlikely to make much difference before the second half of 2021, if then, and even this is dependent on vaccine acceptance by the general population, which is not assured.  Thus national economies will continue to suffer – something that appears to have been recognised by the U.S. Federal Reserve in its note that it is likely to keep interest rates at their current low level until at least 2023.  As we pointed out in an earlier article, if that is not a positive sign for a continuing appreciation in the gold price, then nothing is.  Real interest rates will thus remain negative and negative interest rates tend to be gold positive.  QED.

As for silver, it is beating a somewhat independent path vis-a-vis gold.  The gold:silver ratio (GSR) has come down to around 72 after hitting dizzying heights only 3 months ago.  Long term investment advice has always been that at a GSR of 80 or above one should buy silver and at 35 or below one should buy gold.  We’d probably move this lower level to 50, but we’re still an awful long way from that, but those who bought silver when the GSR was above 80 will already have been well rewarded in terms of price appreciation.  Historically, silver appreciates faster than gold when the latter is in a rising market.  However we should note that the silver market has changed over the years.  In reality silver is no longer a monetary metal, although the markets still tend to see it as such, but its industrial demand now dominates to the extent that it has become more dependent on the state of the economy.  Even so, there is probably life in silver investment yet assuming positivity in the gold market as it still tends to follow gold’s lead, but in a more extreme manner.  It is thus the gambler’s investment, but silver traders sometimes refer to it as the ‘devil’s metal’ because of its volatility.

The platinum group metals (pgms) are harder to call.  Supply/demand fundamentals probably still favour palladium, although its long term future is suspect given a likely acceleration of moves towards electrical vehicles in the light car market – particularly as battery technology continues to improve.  Platinum supply/demand is coming back into balance but the very considerable negative price differential between platinum and palladium could see the former making inroads into the latter’s prime market, given the two metals’ somewhat similar properties.  Consequently we are long term bullish on platinum and bearish on palladium, but major changes in parity between the two may still be a few years ahead.

22 Dec 2020 | Categories: Gold, Silver

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