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LAWRIE WILLIAMS: Gold over $1,800, silver over $27. Can price growth go on?

As we suggested a week ago, gold breached the $1,800 psychological price barrier comfortably, and without pausing for breath this week.  At the time of writing, the price was hovering around the $1,830 level where it may pause to consolidate before its renewed momentum may well carry it higher – perhaps to the next psychological barrier at around $1,850 which, if it breaks through as easily as it rose past $1,800 then that would put $1,900 in play.  Silver rose too, on the back of the gold price rise, and ended the week at over $27.40 with a Gold:Silver Ratio of 66.7.
The latest gold price boost seems to have been triggered by the most recent rise in U.S. employment figures, which came in below expectations.  There are also increasing underlying fears that a significant increase in inflation may necessitate the U.S. Federal Reserve implementing a rise in interest rates sooner than previously anticipated in an attempt to prevent the U.S. economy from overheating.
Other gold positive factors have also come into play.  The U.S. dollar index has been falling giving a price boost to all commodities, while some off-the-cuff remarks from new U.S. Treasury Secretary, and former Fed chair, Janet Yellen, seemingly supported the likelihood of interest rate rises coming in sooner rather than later.  Yellen has since denied that that was what she meant, but the initial interpretation of her comments has still stood among many commentators.  Meanwhile, current Fed chair, Jay Powell, has again gone on record as saying the Fed’s consensus feeling is that any apparent rise in interest rates is only transitory and they will rapidly return to the Fed’s target average of around 2% thus not necessitating any Fed interest rate raising action for the foreseeable future.
The next Federal Open Market Commission (FOMC) takes place in mid-June and perhaps any inflation trends and general U.S. economic and employment trends will become clearer by then.  That will make for clarity on any likely potential Fed moves on interest rate policy and on the continuation of its Quantitative Easing programme more easily predictable, with a consequent impact on precious metals prices going forwards.
That of course begs the question of what will happen to gold, and the other precious metals in the meantime.  Much as we saw the gold price consolidating in the $1,770s before making a successful run at the assumed $1,800 psychological price barrier, gold may well find itself consolidating in the $1,830s over the next couple of weeks before taking a run at the next psychological barrier at $1,850.  If that is breached, then that opens up $1,900 gold as the next target for the gold bulls.  If that proves to be the case then it will likely drag silver up with it putting $28 silver, or higher, in prospect.  
We are not so sure about the platinum group metals (pgms), which are much more dependent on economic growth, and in particular a recovery in auto sales for any price advances, although the seeming steady growth in electric vehicle sales – in China and Europe in particular – could prove to be something of a dampening factor here – in particular for palladium.  However we suspect the continuance of internal combustion engine dominance for another few years, particularly in the huge U.S. market, will keep the big palladium supply deficit in being and give this market another few years of high prices.  
Nonetheless, we would also re-iterate that a strong palladium price’s days are numbered as electric-powered vehicles gradually begin to dominate the markets.  As governments move towards zero emissions policies the pressure will grow on motor manufacturers to cease making and selling internal combustion engine-driven vehicles.  Indeed this is already happening and the trend will accelerate.  It may take a decade or two, but electric-powered vehicles will come to dominate the auto markets worldwide and lead to a total collapse in palladium demand unless some alternative major demand element replaces this key sector at some stage in the future.
So overall we do see continued growth in gold and silver prices, but remain wary on pgm markets long term.  Our earlier predictions of plus $2,000 gold and $32 silver by the year end look to be back on track, although a collapse in equities prices, which look to be unsustainable at current, or higher, levels, could create a temporary hiatus in precious metals price advances as investors struggle for liquidity.  But although we think this is inevitable, timing is far less certain.  Unwarranted, in our view, market euphoria could keep equity prices strong for some months, if not years, yet.  As usual where investment performance is concerned, timing is everything!

08 May 2021

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