LAWRIE WILLIAMS: Gold: Stair-stepping into the $1,900s
We have to be a little self-congratulatory in that the gold price has been performing as we had predicted, although has been moving up perhaps faster than we had foreseen. Yesterday gold breached $1,900 for the first time since it fell back below that level in early January on its way down to below $1,700 in early March, since when it has been stair-stepping its way back up to its current level of around $1,906 as I write. The big question now is whether it can maintain a plus $1,900 level, consolidate and then move further onwards and upwards, or fall back again into the $1,800s?
So far downward moves have been quickly reversed and although the yellow metal may yet be vulnerable to a price take-back, it currently looks set for a move up well into the $1,900s. Whether it can then continue its rapid advance, though, remains to be seen. $2,000 plus may be a step too far for now, but it certainly makes the predictions of gold regaining its 2020 high point of around $2,040, which it hit last August, during the current calendar year much more likely than the weaker prices had suggested in the past few months.
The latest boost to the gold price seems to have developed from the publication of what had been seen as disappointing Consumer Confidence data, meaning that the expectations of a rapid end to the Covid pandemic-related downturn may be proceeding slower than anticipated – at least in terms of public perception. A report from the U.S. Conference Board said that its Consumer Confidence Index fell to a reading of 117.2, down from April’s downwardly-revised reading of 117.5 (as opposed to 121.7 a month earlier). Economists had been expecting a reading around 119, so there is still confidence in continuing economic growth going forward, but this confidence level did not meet the expectations of the better predicted figure.
New home prices fell also, which won’t have helped sentiment, while expectations on inflation rose from 6.2% in April to 6.5% in May. None of these figures are disastrous, but taken together they have impacted negatively on overall consumer confidence and job growth expectations and look to have been positive for gold, and belatedly for silver too.
The heavily disseminated news on the huge initial falls in the bitcoin and other cryptocurrency prices, coupled with perceived weakness in equity markets, have increased worries that the gravy train may be coming to a halt. Bitcoin has recovered a little, but we suspect this gain may be temporary. Meanwhile the prospects for seemingly potentially out-of-control inflation, with government support for Covid-related unemployment due to fall away in around three months time, will have contributed to consumer nervousness.
What should be a little worrying for the gold investor, though, has been the performance of gold and silver mining stocks amidst yesterday’s big metal price rises. The main gold stock indexes – the HUI and the XAU – both fell – despite the gold and silver price rises. Often the gold stocks have tended to pre-empt metal price movements and this could well signify a metal price take-down over the next few days, so we wouldn’t be too surprised to see gold slipping back below $1,900 and silver below $28. But, given the likelihood of continuing supportive data, we suspect that if this were to happen it would be a shortlived correction and gold and silver would soon resume their upwards price patterns.
The stock price falls, though, make the better gold mining stocks in particular seemingly good buys. At a $1,900 gold price they will be making excellent profits and, as we have noted before, the bigger gold miners all pay dividends, at levels mostly well in excess of those that are available in the fixed interest markets. With the prospect of higher earnings driving up the stock prices, and leading to perhaps further dividend increases, as the miners release their Q2 earnings after the mid-year, these dividends provide some ever-welcome icing on the cake for the investor. If one sticks to the Tier 1 gold miners, their diversity of production sources protects against serious stock price downturns, while their size means the stock price gain potential is rather less than those of some of the smaller operators and better explorers. They tend to be much safer investments, but perhaps don't appeal so much to the gamblers of this world.