LAWRIE WILLIAMS: Gold powers through $1,300, but will it stay the course?

Gold has made several attempts to consolidate above $US1,300 so far this year, but has so far always been brought back down through concerted activity in the U.S. futures markets.  This past Friday, and today, gold has driven up through the $1,300 level again and has seen good strength in Asian and European markets, but will it survive the U.S. markets when they open today?  In other words will this time be different?

The trigger on this occasion for the uplift in the gold price has been President Trump’s announced intention to weaponise further trade tariff impositions – this time on Mexico to try and force the latter to put a stop to illegal immigration into the U.S.   The problem with this is that the U.S. President seems to think the carrot and stick approach to international diplomacy (rather more stick than carrot) will work as well as it may do in business.  But the difference here is that other sovereign nations may just dig in their heels and resist such policies to their fullest extent.  National pride is at stake here.  Governments are not subject to shareholder needs – indeed they may be subject to electoral dismissals, but these are much longer term scenarios and an aggressive approach like that of the U.S. President can have a counter-productive effect in uniting the affected populace against what they see as unwarranted foreign intimidation.

Sanctions and tariffs seldom work.  The imposition of sanctions on Russia for example, which have now been in place in some form or other for around five years now, if anything have seen the latter nation go from strength to strength and have done nothing to dampen President Putin’s popularity.  He is seen by the Russian people as instrumental in ‘Making Russia Great Again’ – or MRGA – even outdoing, in effect, President Trump’s MAGA clarion call.  Arguably Russia is now a much stronger player on the global stage than it was before U.S. sanctions were implemented.  Counter measures by Russia and an ever increasing political and financial relationship with China may well be more damaging to U.S. global interests than a rather more laissez faire attitude may have been.

Likewise the imposition of swingeing trade tariffs on Chinese goods and the strictures on Chinese tech giant Huawei may end up being counter-productive.  It much depends who out of Presidents Trump and Xi blinks first – but the U.S. President, who claims a deep understanding of China – must be aware that ‘saving face’ is probably a far more important part of Chinese culture than it is of Western political expediency.  While on the face of things the far higher level of Chinese exports to the U.S. dwarfs the latter’s exports to China suggests that the U.S. would be the winner in a trade war, the differing political and economic cultures of the two protagonists suggest that China may be in a far stronger position than the U.S. is counting on!

Be all this as it may, the intransigence of the U.S. President, his propensity to announce significant policy changes on twitter and his perhaps less than honest recollections/interpretations of some of his past utterances could well have the unintended consequence of precipitating a stock market collapse and the triggering of a global recession.  We could even be heading for some kind of superpower shooting war – there are enough global flashpoints for this to happen very quickly.  American military technology may yet not be sufficiently dominant to ensure U.S. victory if such a war springs up.

All the above may be in investors’ minds at the moment.  Equities markets are, to say the least, nervous.  They look to have risen too far too fast, way beyond normally justifiable levels.  Many big players may well have had their profits prospects seriously damaged by the seemingly ever-escalating trade wars.  In the U.S. the all important FAANG stocks which have been instrumental in driving the market upwards look increasingly vulnerable to the U.S./China trade war and the hugely important U.S. auto manufacturing sector to the potential trade dispute with Mexico.

So what does all this mean for gold and the other precious metals?  Gold, in theory at least, thrives on uncertainty.  We are already beginning to see inflows into the gold ETFs which had been seeing liquidations for much of April and the first half of May which suggests the big money is taking notice – not before time.  The pgms would probably suffer in a recession – particularly palladium and rhodium which are hugely dependent on the petrol (gasoline) driven auto market.  Silver may well benefit, despite its strong industrial usage.  The gold:silver ratio has been at close to 90 and will probably come down in a rising gold price scenario suggesting that percentage gains in silver may exceed those of gold.  But silver is not known for nothing as ‘the devil’s metal’ because of its unpredictability so it may be better to play safe and stick with gold as your market crash/recession insurance.  The omens look positive for gold but we shall see whether the U.S. market agrees!

03 Jun 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com