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LAWRIE WILLIAMS: Gold, silver, equities all volatile ahead of Labor Day holiday

Monday is Labor Day in the U.S. and Canada and is a public holiday in both nations.  Theoretically it defines the end of the summer holiday season, but often seems to stimulate a change in direction for the markets.  Will that happen this year?  We’ll have to wait for next week to see, but the portents are a little ominous for equities in particular as we have pointed out here before (See: Silver gaining faster than gold. Equities should beware Labor Day.)

Labor Day can also foreshadow a sharp change in direction for precious metals prices – for example the big fall in the gold price down from its then record highs in 2011, and 2012 (after a recovery), both could be attributed to post-Labor Day activity in the U.S. so it’s not necessarily relevant to an individual economic data sector.  However, as we pointed out in the article referenced above, the biggest U.S. stock market crash of all time – so far – in the equities markets, the Wall Street Crash of 1929/30 certainly seems to have been initiated by post-Labor Day activity in 1929.  Given the enormous parallels in the behaviour of U.S. equities markets in 1929 with the current year, coupled with what we see as the massive overvaluation of current U.S. equities markets, amidst what is possibly the worst U.S. economic downturn ever, an equities crash is almost certain to happen sooner or later.  This Labor Day could well provide the trigger for a complete change in direction for equities, or perhaps for precious metals, or even for both at the same time.

We had been hoping the sessions leading up to price close before the holiday might give some kind of guidance, but the days immediately before Labor Day tend to be potentially particularly volatile due to reduced market activity prior to the holiday end and the children going back to school next week.  Gold was initially weaker, heading back down towards $1,900 and silver below $27 too but maybe not too much should be read into these figures for now  Indeed gold and silver recovered and actually ended the day in positive territory. 

Equities indexes all fell sharply initially, but likewise we probably need to wait and see what kind of trend develops next week before drawing any real conclusions.  They were down very sharply indeed – the Dow was down over 1,000 points at one time - in early U.S. trading (which has to raise some red flags) but have since recovered much of their lost ground as I write.  Cryptocurrencies are down sharply too , while the dollar moved a little higher before ending pretty much unchanged.  Whether this is the preliminary sign of a big post-Labor Day selloff remains to be seen. Initial analysis certainly seems to suggest that all markets may be in for a rough period when business activity resumes after the holiday. Next week could thus well be an interesting one for precious metals and equities alike.

However, we think precious metals may ride any ensuing storm, if it occurs, better than general equities.  The latter may need a trend changing event to set up a likely sharp crash and Labor Day may just provide that.  Recent equity price rises seem to be totally out of sync with reality – hence our nervousness in the likely progress of the Dow, S&P and NASDAQ which all seem to have risen beyond financial comprehension. 

We are less pessimistic about further falls in gold and silver, but both of these – particularly the latter – may be reckoned to have risen faster than justified in July and early August, and may thus be due a continued correction.  However we do believe that this will indeed be just a correction, not a crash and gold and silver will bounce back in the final quarter of the year whatever happens in the current month.  Global precious metals ETF inflows remain positive, although perhaps not quite as strong as they were in the first half of the year, and demand does at last seem to be picking up in India, one of the key consumer markets for both gold and silver.

Meanwhile China, the world’s largest gold consumer for the past few years, seems to have cut its gold imports very substantially.  However China is also the world’s largest gold producer and does not export any gold, so presumably is absorbing its own production of around 380 tonnes, plus any scrap gold it re-refines, which still makes it a major consumer in the global context.  Gold flows out of Switzerland this year show that the U.S. has picked up some of the slack in terms of reduced demand in Asia, while ETF inflows and continued central bank buying – led by Turkey this year – are keeping up the demand pressure.

Silver, which had been performing poorly vis a vis gold up until March this year seems to have taken on a new lease of life which has resurrected investment demand for the metal.  While its price remains far short of the peak it reached amidst a buying frenzy back in 2011, in recent weeks it has risen far faster than gold in percentage terms and has moved from being a poor performer to being among the best performing asset classes year to date, comfortably outperforming general equities by a wide margin so far.  It continues to see some massive flows into silver ETFs globally and has certainly regained much of its lost investment lustre.

We do reiterate our previous warning for equity investors to beware a post-Labor Day selloff.  Initial indicators suggest a very nervous market today – justifiably so in our view.  Whether this is a portent of things to come when markets reopen next week remains to be seen, but if the Dow, S&P and NASDAQ open sharply down, watch out!  The long=predicted crash might well be with us.

04 Sep 2020 | Categories: Gold, Silver

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