LAWRIE WILLIAMS: Gold Pricing Battle Playing Out. Silver Benefiting
The recent pattern in the gold price is making the yellow metals’ short term future somewhat unpredictable. Was it ever thus? There is perhaps, though, more of an equal battle between those pushing gold prices higher, and those looking to take it down, than there has been since the heady first three quarters of 2011 when the gold bulls were very much in the ascendancy, and the subsequent four years with the bears dominant.
This year has seen a significant change in sentiment towards gold, with the price up around 17% year to date. Silver is up around 14% as well, but has only recently started to express its upwards volatility vis-a-vis gold and is still having to play catch-up, with the Gold:Silver ratio at last beginning to come down from its highest level in nearly eight years when it last settled above 80 at the heart of the 2008 financial crisis. If this is an indicator with history repeating itself then it could suggest equities are in for a torrid time, while precious metals stutter but then soar to dizzy new heights.
One big area of change, supporting precious metals, has been the huge sea change in ETF gold take-up. Because ETFs are a much easier way to invest in gold than in holding physical (the ETFs do that for you) they are proving to be a significant route for rapid institutional gold buying as sentiment towards gold has improved to being positive from almost non-existent given its stellar performance year to date, while equities have been lacklustre for the best part of the past year. Gold was truly the forgotten asset, but this has all changed. But will that continue? Institutions tend to be fickle, often looking at short term fixes – hence the recent moves into gold.
We tend to look at the stats for the biggest gold ETF – GLD – in our analysis and its gold holdings are currently at their highest level for almost exactly two years and have been continuing on an almost unbroken rising pattern since the start of 2016 in which time GLD has added just short of 180 tonnes of gold. At current prices that is worth over $7 billion moved into just one ETF, albeit comfortably the biggest one. Our advice has been to monitor GLD in particular to try and assess where the gold price is going (See: Watch GLD for gold sentiment and pricing) and on this measure the bulls look to be remaining in the ascendancy, although this can change rapidly with the potential for heavy profit-taking should the perception be that gold is beginning to turn down.
Analysis by the late Ian McAvity (who tragically passed away a few days ago) suggested that now would be the time to switch from gold into silver as based on past performance a Gold:Silver ratio above 80 – it reached 83 a month ago – is a time to switch from gold into silver while a Gold:Silver ratio of 40 suggested you switch from silver into gold. This was all set out in an article I published on Seeking Alpha at the beginning of this month (See: Gold/Silver Ratio: Silver Performing Badly - Time To Buy?) and it has certainly already proved to be a profitable policy – indeed a number of other commentators have been suggesting something similar since.
So where to now? As we said here before, follow GLD gold purchasing figures for a guide. Until the Shanghai Gold Exchange begins to have an impact on price benchmarking (it is due to commence this some time next month but may then take time to have a significant impact) it is sentiment towards the precious metals in the U.S. in particular which tends to set the price trends. And possibly the best way of assessing this is via the GLD statistics, which are released daily between 6.00 and 6.30 am New York Time. If purchases start to come back significantly, then the gold price strength we have seen so far this year may start to diminish. If they hold up, the $1,300 and higher level is on the cards.
And as for silver, it looks to be starting to exert its usual positive price performance vis-a-vis gold when the latter is moving positively – but again it can come back even more sharply if the uptrend turns back down.