LAWRIE WILLIAMS: Have we hit gold's, silver's and pgms' bottoms yet?

Lawrie Williams

The past couple of years have been littered with pro-gold analysts’ predictions that gold, silver et al have reached their bottoms, and now is the time to buy, only to see the precious metals complex then continue on its downwards path.  The recent recovery in the gold price to close last week above the psychological $1150 mark, and break through some long term downtrend lines, has brought these predictions into play yet again and it is worth contemplating whether the latest price moves are indeed the precursor to a sustained price recovery, or just another trap for the unwary investor.

Gold is obviously the key here as, whether it is logical or not, silver and the pgms all tend to follow gold’s lead to a greater or lesser extent despite there being the primary industrial element in demand for these, not shared in gold’s fundamentals.  That tends to mean that other factors play on the degree of movement in silver and pgms – the latter in particular – but overall still, if gold rises or falls we can expect the others to follow suit regardless.  Silver’s correlation to gold is the closest, but here price movement tends to be at a more exaggerated pace, both on the upside and downside, whereas for the pgms external economic factors have a more significant impact as has been seen in the relative performances of platinum and palladium in the immediate aftermath of the exposure of the Volkswagen emissions-rigging software on some of its diesel engine automobiles – but still the general trend is to follow the overall path of the gold price.  (As an aside, with regard to the VW scandal, as usual markets tend to over-react and we suspect that any demand differential between platinum and palladium which may result is probably less significant than initial market movements might suggest.)

So let’s take a specific look at gold.  There is still a significant element in the mainstream analytical community which sees lower gold prices ahead – in some cases significantly so – while the gold bulls are all predicting much better things ahead for the yellow metal  - in most case also significantly so!  This all comes from the ‘usual suspects’ on both sides who all seem to have entrenched positions.  The bank analysts for the most part are looking for $1,000 or below and the outright bulls for $2,000 and above.   The latest very negative forecast has come from French bank Natixis – which has been fairly consistently bearish on most metals over the past couple of years – and which forecast gold to average only $990/oz next year and $1,020 in 2017.

In the past week, however, there has actually been some breaking in the relative positions of some of the bank analysts though, although none could really be described as bullish, but as usual just being reactive to the latest movements in the metal price rather than sticking their necks out with any out and out trend breaking predictions. 

Even the mainstream technical analytical consultancies, although seen as calling for a slight improvement in prices overall, could not be considered bullish by the pro-gold community, although their largely fundamentals-based forecasting does perhaps represent the middle ground here.

The fact that gold closed the week above $1150 has perhaps added a little price momentum, but whether this can be sustained remains the key.  On the technical front the next key breakthrough level on the upside is seen at the 200 day moving average, currently at around $1176 – that’s only a rise of just over $20 from the Friday close and with the dollar tending weaker that can’t be ruled out as a possibility.  What may be worrying for the pro-gold fraternity is that global stock markets have appeared to be getting over their recent jitters and that there has been a big surge in short positions being taken in gold which suggests traders may be looking for a halt to the upwards moves.

Still the potential for a US Fed interest rates rise is overhanging the market, but as we have pointed out beforehand it should be the level of real interest rates which should be of primary importance here.  With actual rates in much of the rest of the world outside the US at around zero – or even negative – and in the US itself any potential Fed imposed rise would probably be only around .25% at most and still leave real interest rates in negative territory, there should actually be little impact on the gold price apart from perhaps a brief knee-jerk reaction if and when the Fed makes the decision to raise them.  This could well be this year still, although even Goldman Sachs  now feels decision day may be deferred into 2016.

China is back from its week long holiday and while it doesn’t seem to be trying to push the gold price in any specific direction at the moment many believe it is taking an anti-volatility position and exerting a degree of control to maintain a certain amount of price stability in the market place.  It is probably not in China’s best interests to see the gold price fall significantly and, again, as we have speculated beforehand, when the price fell below $1100 and virtually all the bank analysts were predicting further falls with sentiment very much against gold, something halted the drop in its tracks.  Could that have been Chinese buying?  We don’t know, and probably never will.

There does seem to be at least a small positive change in sentiment towards gold which may hearten the bulls and could well suggest that perhaps it has indeed bottomed.  Thus the next couple of weeks will probably be key to the metal’s likely performance over the remainder of the year – and of the other precious metals.  Gold is still just about range bound – although the range may have moved up slightly and it is at the top end now.  If it breaks out and can breach the 200 day moving average that should lead to computer-generated buying which could take it to $1200 and above.  But any upwards path is unlikely to be smooth so bottom fishers could still have plenty of buying opportunities if this should prove to be a true turning point.  But with so many bank analysts still predicting further gold price weakness, and presumably advising their investor and fund clientele accordingly, it would be dangerous to assume that gold has bottomed for sure.  But its prospects for rises ahead do perhaps look better than they have been for the past two years at least.

 

11 Oct 2015

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com