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LAWRIE WILLIAMS: Gold stuttering.  All else playing catch-up

We had been commenting earlier this week that almost all asset classes, with the exception of gold, had been suffering significant downturns in price.  Now it looks like the markets had been a bit premature and for the past couple of days, they have been seeing yet another trend reversal.  Equities, bitcoin and the oil price were all picking up and gold was stuttering, with the latter managing to stay mostly above the $1,800 level – but only just.  Indeed it did spike down well below $1,800 in this morning’s trade in Europe but was picking up slightly at the time of writing, although remaining still a couple of dollars short of $1.800.

The gold stocks were correcting too.  After some heavy falls on Monday, despite gold’s reasonable performance when all else seemed to be trending downwards, the major gold indexes were all moving down along with the general equities sector.  For the past couple of days, though,  they have been trending in a positive direction again, despite gold itself now looking weaker.  As we have stated before, at a gold price of $1,800 an ounce, most should be putting in a strong profit performance – and dividend payers should be able to generate excellent returns for their shareholders.

Perhaps key to gold’s likely future performance is that rising inflation levels, coupled with the U.S. Fed’s apparent reluctance to implement any tapering until unemployment levels are at, or near, pre-Covid levels, will keep real interest rates increasingly negative.  Given that gold’s oft-cited principal negative attribute is that it is a non-interest bearing asset, then when real interest rates turn negative that is usually a huge positive for the gold price.  In this latest case negative interest rates look to be becoming ever increasingly high and likely to persist for at least the next two years – and probably longer.  That is a massive positive for gold investment and its role as a protector of wealth.  But the yellow metal is still likely to face headwinds as it is currently.  Much will depend on the Fed holding its nerve and not starting to taper earlier than it has been saying.  However, even if it does it is unlikely to raise interest rates sufficiently to counter the negative real rate situation.

We had commented in earlier articles that July and August had been strong months for the gold price in the past couple of years, but Jeff Christian of New York-based  metals consultancy, CPM Group, points out that these months historically have been weak months for precious metals prices, which is certainly what we are seeing for July at the moment.  The past two years may just, therefore, prove to be exceptions to thye normal northern summer investment blues.

We have also seen another potentially very positive piece of news for gold, though, in that the Brazilian central bank has joined what seems to be an increasing list of countries expanding their gold reserves by quite significant amounts.  Central banks have been increasing their reserve holdings for some year, but the bulk of these rises had been coming from only two countries – China, which officially  ceased gold buying a couple of years ago, and Russia which had also ceased official gold purchases in favour of persuading its gold miners to sell their output on the international market (according to Metals Focus Russia is currently the world’s second largest global gold producer after China) in order to alleviate some adverse balance of payments trends caused by the huge fall in oil and gas prices – previously its biggest export earner.

So far this year, while China and Russia have apparently stayed out of the gold-buying coterie altogether, we have seen announcements of major gold purchases from Hungary (63 tonnes) and Thailand (90 tonnes), as well as the recent Brazilian one (41 tonnes), and intimations from some other countries – notably Poland and Ghana that they are planning to add significant amounts of gold to their reserves too.  There could well be others!  Meanwhile countries like India and Kazakhstan have been regular monthly gold buyers for at least the past couple of years.  Overall it looks, therefore, that central banks will remain strong purchasers of gold for now, which is definitely a big positive for gold’s supply/demand fundamentals.

There are worries that new variants of the COVID-19 virus are setting the world back in its efforts to reduce its impact.  We have seen, for example, a very worrying massive increase in new daily numbers of virus infections in the U.S., which is the primary driver of most markets – including precious metals.  With a big anti-vaccination element apparent in the world’s biggest economy, this is only likely to get worse before it gets better and this will likely have an undue impact on equity markets, and perhaps on bitcoin and the more industrial demand-driven precious metals, once the public becomes fully aware of the extent of this problem.  As happened earlier in the week gold could well benefit as a safe haven, but equities could suffer again as impressions of a rapid forthcoming end to the pandemic seem to receding.

22 Jul 2021 | Categories: Gold, China, Russia, Bitcoin, India

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