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LAWRIE WILLIAMS: Gold price reluctance to fall could bode well in this year of mega black swans

Maybe gold’s recent double breach of the $1,300 level was too far too fast, but each time the take-down by the big money (seen as profit taking by the media) was capped on the downside in the $1,270s – a far cry from some of the similar attempts to inhibit any serious price rises in the past when dramatic falls succeeded strong price rises.  We suspect the next $1,300 breach, if and when it comes, may well be sustainable.

It has been noticeable that the downward flows have been occurring in the New York markets, with Asian and European markets largely supporting the recoveries back to the $1,280 and above level again.  Perhaps paper gold is indeed losing its power to control precious metals prices to the extent it has in the recent past.  Does this suggest that we are poised for lift-off given the anecdotal reports of short supply in the physical gold market coupled with the onset of the Shanghai Gold fixings, which deal in physical gold not paper?  While Shanghai may be reluctant to rock the boat price wise it does seem to be having a positive overall effect in helping to mitigate paper gold-led downturns in price.  Or is this just wishful thinking?

In his recent article here -  A Paper Gold Rally - Physical Yet To Engage – Ross Norman points to a total turn around in gold price activity and that, in his view, 2016 is far different from 2014 and 2015 which saw Q1 rallies in the gold price only for it to fall back sharply through the rest of the year.  This time around there has been a relative absence of Asian demand, whereas in 2014 and 2015 this was running really strong.  This time around, Norman points out, it is Western demand which is driving the price.  Perhaps someone should chart Asian demand against the gold price – there would almost appear to be an inverse correlation (which seems to make little economic sense), at least as far as the past three years are concerned.  But if the right timescales are taken such statistics can often be shown to support almost any scenario put forward to support the analyst’s own viewpoint!

It is also interesting to note the rapid turnaround in many bank analysts’ views on where the gold price is headed.  I have often commented that the analysts tend to be reactive, rather than proactive, in their price predictions.  There are still some sticking to their falling gold price guns – like Goldman Sachs, although the investment bank, and its followers will have had something of a salutary lesson here given its sell gold short call in mid-February, since when the price has risen by close on 7% - not a bad performance over just under 3 months.  The latest investment bank to come out with a turnaround prediction on gold is Bank of America Merrill Lynch – See: The Sell Off Is Overdone: It’s Time To Buy GOLD, although this relates to miner Randgold, but on the basis that gold prices will rise.

Now we could be wrong – and Goldman Sachs could be right in the medium to long term.  Gold is difficult to predict.  But with momentum gathered in the West, and a probable return to stronger demand in Asia, at the moment things are looking positive.

And as for silver – the Gold:Silver ratio has been coming down and further rises in gold will likely see it come down even further giving the silver price a nice additional boost.  GFMS has just come out with its annual silver survey which puts supply/demand fundamentals as more positive than ever after a third consecutive year of a supply deficit according to its analysts.  Rising gold and a shortfall in readily available industrial supply could provide a double whammy for gold’s less costly sibling.  Some are suggesting the gold:silver ratio could come down to 60 or lower – and even at the current gold price of just over $1,280, a ratio of 60 would see silver at over $21.  Yes still hugely below its 2011 peak, but over 50% higher than it was at the end of 2015.  If the gold price rises as well a gold:silver ratio of 60 could see the metal hit the $30 mark or higher.  Silver investors will certainly be hoping for something like this in the months ahead.

And we also have the possibility of two enormous black swans ahead.  The UK may vote to leave the European Union in a referendum in late June which, if it were to happen, would place the EU in turmoil and could lead to its break-up with all the global ramifications that would have on the markets.  Good for gold which tends to thrive on geopolitical uncertainties.

The second mega-black swan would be the election of Donald Trump as U.S. President in November.  This is no longer a hugely unlikely scenario given his likely opponent, Hillary Clinton, also carries a huge amount of political baggage and a serious degree of dislike amongst a big sector of the population.  While Trump appears to be disliked even more, he has come up hugely in the opinion polls since the beginning of the year.  Who knows what will happen in a likely hugely divisive and vitriolic campaign for the Presidency in the second half of the year.  Trump’s likely policies, if elected, are very much an unknown but it would seem protectionism would come high on his agenda which would again suggest big uncertainties in global trade.  Again potentially good for gold.

2016 is very much turning out to be ‘interesting times’ in terms of the probably apocryphal Chinese proverb and ‘interesting times’ will be hugely positive for safe haven investment.  And with the US dollar looking vulnerable as well, gold and silver could provide the best safe havens of all out there.  China, with its pretensions for global economic and political leadership must be licking its lips in anticipation!

06 May 2016 | Categories: Gold, Silver

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