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LAWRIE WILLIAMS: Gold survives another takedown as U.S. equities fall again

Friday saw some further interesting developments in the precious metals and equities markets in the U.S., which tends to set the scene for global markets.  Although Asian and European stocks were somewhat mixed in their movements, U.S. equities fell back sharply again after their partial recovery on Thursday, while gold looked at one stage to be taking a sharp knock, falling back below $1,750 for the first time in the week, before bouncing back strongly to end the week north of $1,770.  U.S. equities were probably affected by more disturbing U.S. virus stats suggesting that some states had been relaxing lockdown restrictions too quickly.  The nation again saw over 47,000 new virus cases and 663 new reported deaths on Friday.  These latest figures bring the U.S. tally for confirmed cases to well over 2.5 million and confirmed deaths to more than 127,000.

Globally the reported number of positive coronavirus cases is approaching 10 million and deaths half a million, but the true figures are almost certainly far, far in excess of these as the majority of countries now being affected have neither the health facilities, nor the reporting infrastructure to provide accurate figures, while reporting in many advanced nations is considered suspect! The fact that the gold price recovered so swiftly was not lost on the gold commentators out there, many of whom feel that this means gold is set to attack the $1,800 level sooner rather than later.  Certainly some of the other positives affecting the gold price – notably the continuing flow of the yellow metal into global gold ETFs, and the latest Swiss gold export figures which show strong gold movement into the USA, presumably to meet rising physical demand.

On the other hand, though, the ongoing global economic downturn as a result of the pandemic is biting into the key jewellery demand sector, while imports into key consuming nations like China and India seem to be running at a low ebb.  The higher gold price, coupled with COVID-19 related declining incomes is seeing a rise in gold scrap sales as people caught in the poverty trap, particularly in the East and Middle East, seek to realise some of their gold assets built up against such a rainy day!

At the moment, the strong investment demand seems to be outweighing the negative aspects.  Mine supply has also been interrupted is some parts of the world due to mostly temporary closures due to virus incidence in the mine workforces.  Overall, though, the uncertainties around supply/demand fundamentals may keep gold price rises in check, although we suspect the safe haven appeal of gold, given the problems being faced by the global economy which is far from recovering as fast as many had hoped, will keep things on a positive path.

It is also worth looking at some of the gold-related ratios which are followed by some sectors of the investment community.  The Gold:Silver Ratio (GSR) which we have often covered before, stays reluctant to move far away from 100 suggesting a re-rating of silver due to the strong industrial element in the metals demand fundamentals.  The level, which is very high (i.e. bad for silver) in historic terms does suggest that silver is heavily undervalued vis-a-vis gold, but he markets seem unmoved by this and perhaps a high GSR level may persist.  Silver will still probably move up and down with the gold price, which may offer a lower cost way into precious metals investment with the possibility of big gains should silver regain some of it lustre – but don’t bank on that!  Even so, the downside risk is probably fairly limited provided gold continues to perform positively.

However the ratio I would like to highlight here is the Gold:XAU Ratio (GXR) – ratio of gold to some of the bigger gold equities.  Historically, up until the 2008 Great Financial Crisis, the GXR mostly varied between 1 and 5.  It is currently at 14.4 (down from over 25) suggesting that gold mining company stocks are still heavily undervalued against gold.  Logically the higher gold price levels currently being seen should  impact gold mining company earnings very positively and the gold equities, which seem to have fallen out of favour, may be due a substantial re-rating once this becomes apparent as earnings statements are released. 

While we think mainstream equities will continue to fall, perhaps heavily, as the true impact and likely persistence of the virus pandemic on global economies is realised, the gold mining equities should be moving in the opposite direction.  Most of the bigger established gold mining companies pay dividends too, and these too should start to rise with improving gold-price related profits.  The bigger gold mining company equities are also a relatively safe bet with relatively limited downsides.  They may not offer the big upside potentials of some smaller gold miners and explorers but if safety in your investment choices is a priority these would seem to be a good choice.

27 Jun 2020 | Categories: Gold, Silver

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