LAWRIE WILLIAMS: Gold smacked down again - but remains resilient

Precious metals prices of late have been pretty volatile to say the least.  As soon as the gold price gets into the $1,500s it tends to be brought down sharply again – whether this is put down to profit taking or an engineered decline depends pretty much on whose opinion one seeks. 

Tuesday this week was no exception.  Overnight trading and then European markets had taken the gold price back up to close to $1,510 spot, but then the decline kicked in without there being much in the news to justify this apart from further optimism being expressed over the possibility of a satisfactorily negotiated conclusion to the U.S./China trade impasse.

The trade talks optimism, fuelled by positive tweets from President Trump, gave a boost to general U.S. equities, while both the dollar and gold declined - the latter coming off around $30 before a degree of stability re-appeared.  Gold closed in New York Tuesday at around $1,480 where it stayed overnight and was proving a little shaky Wednesday morning up until some disappointing U.S. retail sales figures were released, boosting the price by just over $10 before another burst of resistance to further growth kicked in.

Gold was closed Wednesday at around $1,490 so had recovered some of its losses but, after an early foray into the low $1,490s this morning in Europe, was then marked down a few dollars again.  There seems to be little investment appetite for gold while equities remain fairly strong, although as we have said before, equities may well be due for a serious meltdown sooner rather than later.  Until this happens gold demand may remain muted.  Pricing remains particularly subject to positive or negative U.S. data announcements and whether there is any concrete progress on U.S./China trade talks.

Key to gold’s price performance – positive or negative – may be the Fed’s FOMC meeting at the end of this month.  Odds at the moment suggest another 25 basis point interest rate cut, but this likelihood is probably already built in to the current gold price.  The interpreted language used in the statement following the meeting will be pored over for any evidence that the Fed’s interest rate cutsmwill likely continue or not.  Consensus at the moment is that we may well see a further cut this year at the mid-December FOMC meeting and possibly an additional continuation of the easing programme early next year too, but any deviation from this conjecture could have a serious negative gold price impact.

Jay Powell, Fed chair, has been under pressure from President Trump to cut rates further – or even push them into negative territory -  thereby likely making the U.S. dollar more competitive and benefiting U.S. exporters.  However Powell’s Fed may ignore such pressures (in theory at least) in order to maintain an aura of independence from the Administration, but Trump’s desire for a more competitive dollar will presumable be at least a discussion point in the FOMC deliberations.

Despite the headwinds which seem to be facing gold at the moment, we still see the price as moving onwards and upwards.  There’s just too much uncertainty on both the U.S. domestic front and in global geopolitics which will support the yellow metal’s safe haven/wealth insurance status.  Certainly the consensus opinion appears to be for a price surge between now and the year-end, or early next year.  Should the equities markets stutter seriously, as we anticipate, that will just add fuel to precious metals prices.  Talk of a potential recession ahead may also benefit gold and, perhaps silver, but the pgms less so given their status as industrial metals.  If industry turns down the pgms could too!  We are a little nervous about silver in this context as well, but it so far has had a closer price relationship with gold but perhaps has not performed quite as well as the silver bulls, and other commentators, have been predicting.

So, our advice is, for the time being at least, put your faith in gold rather than the other precious metals.  We see the downside as being pretty limited while equities look to us to be vulnerable.  And if they do turn down the drop could be severe, reminiscent of the tech stock collapse of nearly 20 years ago given it is primarily tech stocks that have been driving the markets up again!

17 Oct 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