LAWRIE WILLIAMS: Gold stutters, silver slips but banks still raising projections
Lacklustre gold and silver demand as the northern summer holidays draw to a close have somewhat changed the pro-precious metals sentiment which was driving prices up until the start of the U.S. holiday season at the beginning of July. Gold and silver ETF inflows which had been heavy up until then have slowed – and even reversed a little (SPDR Gold Shares [GLD], the world’s biggest gold ETF, for example, has bled around 24.5 tonnes since the July 4 US Independence Day holiday, after adding a massive 340 tonnes of gold up until then). The gold price, after a post Brexit vote surge to just over $1,370 has been stuttering around the $1,330 to $1,345 range and failing to find direction. Upward movements into the $1,340s are quickly capped, while falls below $1,330 seem to be equally quick to find support to bring them back up to the current trading range. It seems there may be two forces at play here – Wall Street coming down strongly preventing any significant upside and perhaps the Chinese putting in the support at the lower levels to prevent significant price falls. Who will win this battle is anyone’s guess.
But what this has meant overall is that investor sentiment towards gold has cooled – and towards silver even more so. The latter is exemplified by the major change in movement in the Gold:Silver Ratio (GSR), which measures the number of ounces of silver it takes to buy an ounce of gold. The silver price tends to be more volatile than gold, moving up faster when the latter’s price is rising (showing itself as a fall in the GSR), but tends to weaken faster when gold is stuttering or falling, which it has been for the past few weeks. This year, the GSR came down from a high point of around 83 at the beginning of March, to 65 as recently as around three weeks ago, but is now back at 71. The sentiment moves quicker in silver than in gold! This has also been seen in a huge reduction in the sales of bullion gold and silver coins and bars – a sector which had been very positive during the first half of the year.
So what suddenly changed after July 4th to reverse the strong pro-precious metals sentiment that had been prevailing up until then. Indeed the sentiment reversal has been somewhat akin to the change in sentiment in the opposite direction which began immediately after the New Year. Historically July and August tend to be weak months for precious metals – something which is generally seen as U.S. holiday-related given the undue impact of the U.S. futures markets in setting the gold price. So perhaps there is nothing abnormal here and markets are just waiting to take a lead from the U.S. institutional investment sector once everyone is back at their desks post-Labor Day (September 5th this year) which is seen as the end of the holiday season.
But in the meantime market attention is focusing on the Jackson Hole symposium meeting at the end of this week involving key US Fed policy makers and economists and a following statement this Friday by Fed Chair, Janet Yellen. This is expected to give some guidance on the likely timing of the next Fed interest rate rise – September is seen as possible, but unlikely, November given zero chance because of the Presidential election, but December is seen as being on the cards. There will also be analysis of anything that might suggest a review of the Fed’s ultimate maximum likely rate hike and inflation targets in the longer term with recent suggestions that these may be brought down a few points.
While we may thus have to wait until September to see any real gold price direction emerge, bank analysts and commentators have been playing catch-up with gold price performance reality in their latest predictions. Most started the year with bearish forecasts – some extremely so with sell gold short calls (Goldman Sachs) for example who were predicting gold to fall to $1,050 or lower, and these have all been shot down by the yellow metal's performance year to date. Goldman Sachs is still perhaps less expectant of any significant gold price rise but has perhaps reluctantly suggested that $1,300 may now be a base case scenario. Others have been raising their average price forecasts for the second half of the year, but for the most part are seeing $1,400 or $1,450 as a maximum spot price for the year end and are looking at average prices in the mid $1,300s. But there are outliers – most recently Elliott Fishman of Scotia Bank Wealth Management who has just told Bloomberg News that he is confident gold will go to $1,600 by Christmas on its way to $1,800.
As for silver it definitely needs an upwards kick in the gold price to start outperforming again. If Fishman is correct then silver could indeed surge in the latter part of the year with the GSR resuming its downwards path. On this scenario we would see the GSR coming down to 60 or lower suggesting a silver price, with gold at $1,600, of around $26 or $27. But to achieve this the precious metals do need to see a return to the strong positive sentiment seen in the first half of the year, perhaps coupled with a pick-up in Asian demand - possible with the Indian wedding and festival season approaching and reports of good monsoon rains together with an earlyish Chinese New Year (January 28 2017) which could see good demand increases ahead of this in November and December.