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LAWRIE WILLIAMS: Gold poised to attack $1,900 on bitcoin crash and inflation fears

Last week turned out to be a positive one for gold, although perhaps not so for the other ‘precious metals’ which all have industrial demand attributes which may be dominating their price movement.  In the event, gold rose around 2% close to close over the week, silver effectively marked time, while both platinum and palladium lost just over 4% of their value.

But, of course, the story of the week was bitcoin’s performance.  The most prominent of the cryptocurrencies, bitcoin (BTC) itself, halved in value over the week, while some of the smaller cryptos fell by an even greater amount.  That is a salutary lesson on what can happen in an over-hyped market if sentiment turns negative.  We may well see a kne-jerk recovery in the bitcoin price but we don’t expect that to continue and anticipate the possibility of further falls ahead.

Bitcoin may be an atypical case, though, as it probably has zero inherent value in just being a digital creation, successfully hyped as an investment and currency alternative – its only value being what people are sucked into paying for it.  The more that people bought it, the higher its price rose – something of a legal Ponzi scheme.  With the price soaring ever higher it looked to be only a matter of time before it came crashing down – and, as noted above, in our view it still remains vulnerable to further major falls.

The recent collapse in the bitcoin value should be a warning sign for general equities – another market sector hyped to well beyond its inherent value – at least in historic terms.  Profit potential going forward just can’t justify some of the sky-high prices at which many stocks – particularly in the tech sector – are currently trading.  At least some of these, unlike bitcoin, do have some inherent value, but not at the excessive market capitalisations the markets seem to be placing on them.  They too seem to be riding for an epic crash, but worryingly for the investor, when this does occur, as it surely will, good stocks could well be brought down alongside those which are seeing current valuations hugely beyond their earnings potential even in an otherwise favourable environment as countries recover from the Covid-19 pandemic.

Gold remains something of a bulwark against collapsing values.  It has stood the test of time, but even it could be vulnerable to selling pressure as some funds and individuals need to sell any holdings they may have to ward off liquidity issues.  However, history also tells us if this were indeed to happen, the gold price will recover far faster than other markets and would then likely go on to significantly improved valuations – a true wealth protector.  But a temporary fall in value for gold would only occur if, and when, equities crash drastically, which they are showing no signs of doing yet – although the bitcoin value decimation should come as a timely warning of what could occur.

As to gold, there are some significant factors working in its favour at the moment, which are well capable of driving it to the next level of over $1,900 an ounce, in the short term.  The first of these is the onset of possibly out-of-control price inflation as the world gradually recovers from the virus pandemic.  Retail Price Index (RPI) figures are already beginning to rise sharply as the person in the street will attest.  Companies need to claw back some of their losses incurred over periods of lockdown, and consumers seem happy to pay higher prices for goods and services in their euphoria at seeing many controls lifted.

In the U.S., where the markets tend to set the global gold price pattern, the Federal Reserve seems determined to keep interest rates at their current extremely low levels in its primary purpose of trying to bring unemployment down to its pre-pandemic level.  It may well waver in its attempts to keep rates at current levels if inflation is seen as rising out of control, but this probably won’t happen until much later in the year – if then.  The combination of rising inflation, but coupled with near zero interest rates has to be hugely positive for gold.

The other big potential plus for gold has to be the collapse in the bitcoin price.  A number of commentators and financial analysts had put some of the gold price’s weakness at the beginning of the year down to investment being moved from the traditional safe haven of gold into bitcoin, which seemed to be following an unstoppable upwards path.  The recent bitcoin collapse will have destroyed confidence in the cryptocurrency and should mean some of the investment in it may flow back into gold.

Currently the gold price seems to be stalled with the $1,890 - $1,900 level appearing to be the upwards resistance point.  But as we have seen recently at the $1,700 and $1,800 levels, if the momentum is there, the gold price can move rapidly through these barriers, and not look back.  If gold does break up through $1,900 sooner rather than later then $1,950 and $2,000 might come into its immediate sights.  We could thus well be in for a period of strong gold price advance.  Whether this is allowed to happen, though, remains uncertain given that gold strength is seen as a sign of U.S. dollar weakness – but then a weaker dollar making U.S. exports more competitive on global markets might not be too unwelcome to the current U.S. Administration.  We shall see.

24 May 2021

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