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LAWRIE WILLIAMS: Gold soars past $1,850.  Is $1,900 next?

The gold price started the week strongly, surging above the $1,850 level in Asian and European trade, but was initially unable to maintain this falling back to the $1,840s as Monday progressed.  But once U.S. markets opened it took off again and is in the $1,860s as I write.  This rise has to be a sign that the $1,850 psychological barrier could now be behind us and points higher could well be hit in the short term.  We did comment in one of our recent articles that if the gold price were to move decisively up through $1,850 there would be little to stop it increasing further and thus it would probably put $1,900 gold firmly back in sight.

It seems to be that it is the fear of inflation rising beyond the U.S. Federal Reserve’s comfort levels driving precious metals, helped by the suggestion of a possible rise in interest rates sooner than the Fed has been predicting all along.  The recent statement by U.S. Treasury Secretary, Janet Yellen, may have inadvertently led to the knee-jerk reaction pushing precious metals prices higher.   

If anyone knows how the Fed works and thinks it is Yellen as a former Fed chair.  She is reported as saying “It may be that interest rates will have to rise somewhat to make sure our economy does not overheat, even though the additional spending is relatively small relative to the size of the economy”.  The comment caused a degree of confusion in the markets and although Yellen was quick to backtrack in stressing that she was not “predicting or recommending an imminent increase in interest rates”, that subsequent statement was seen as perhaps giving the impression that she was just adjusting her initial comments in the interests of market damage limitation.

The appointment of Yellen as the new Treasury Secretary has to give the impression that the Biden Administration is attempting to merge the opinions, if not the actual policies, of the Fed and the Treasury, despite the former’s supposed impartiality as per its charter.  If this is indeed the case, then any statement on inflation and interest rates from Yellen is likely to seen as mirroring the Fed’s likely future policies.  The Fed does not have a particularly good track record in predicting inflation levels, but does tend to be more circumspect in its post-FOMC meeting statements on such than the Yellen comment.  She must be out of practice!

The Fed, all along, has been emphasising that its priority is to bring unemployment down to the pre-pandemic level of around 3.5% and sees rising inflation as transitory and has thus been reluctant to raise interest rates, seeing no need for this so far.  It also has a certain amount of leeway in that it has consistently been undershooting its target 2% inflation level so a period of inflation above this percentage to bring it to the average rate may be seen as justifiable.

There is, though, the impression that the U.S. is experiencing inflation levels of 4% or more – there is even anecdotal evidence that the American consumer may currently be experiencing double digit inflation.  This could well prompt the Fed to take interest rate action at, or even before, the next FOMC meeting due to take place mid-June.

Japanese and European stocks are trending lower, although not heavily so, and U.S. equities are also falling as I write – apart from precious metals stocks which are moving higher.. as one would expect when precious metals prices are moving up  But the equities pullback is hardly surprising given the degree of overvaluation of many stocks by historic norms. Markets are nervous in case the Fed starts to tighten and cut off some of its QE.

Interestingly bitcoin is also seeing a sharp downwards plunge – BTC has fallen by over $20,000 off its recent peak after some negative comment from Elon Musk and Jack Dorsey – both previously very positive on crypto currencies. These coincided  with some negative statements from the U.S. Securities and Exchange Commission, the European Central Bank and others which indicated that various governments may be about to try to regulate, or curtail, the crypto market thus removing much of its appeal, particularly from the criminal element of society. 

We have long warned that the bitcoin mania was a huge bubble waiting to collapse given the 'currency' itself, in our opinion, has a zero inherent value.  Thus we suspect that bitcoin could have much further to fall yet, perhaps pushing some of the investment which had been going into it back into precious metals as a far safer wealth protector.  Bitcoin is proving to be just too volatile for investment safety.

So, at the moment things seem set fair for gold and silver in particular.  We would not be too surprised to see gold targeting the $1,900 level within the next week or two, although there could also be a short term correction due primarily to profit taking.  At the moment the dollar index is falling too, although not that significantly, but that too is helping boost precious metals prices a little,

17 May 2021 | Categories: Gold, Silver, US, Bitcoin, FOMC

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