LAWRIE WILLIAMS: How low can gold go?
Contrary to my expectations, the gold price took another leg down on Wednesday to the $1,680s, its lowest level in over 2 years, while silver fell also to the $18.30s, also its lowest point for around 2 years. This all happened even though the U.S. dollar was showing some minor signs of weakness in terms of a fall in the dollar index from its 108.54 peak of a week ago. Since then the precious metals prices have mostly regained most of their lost ground, but look to remain vulnerable to occasional sharp falls in these extremely volatile markets, particularly if the U.S. dollar index regains its upwards path.
We had anticipated that the recent higher-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) data announcements would have spooked the markets sufficiently to stimulate rising gold and silver prices. Some have always considered gold, in particular, to be a hedge against rising inflation, but this has been shown not to be the case in current circumstances. It should still tend to be a recession hedge though and that realisation my account for its latest swift recovery.
There seems to be a rising consensus that inflation may well have peaked, or is close to so doing, and that the Fed could withdraw from its aggressive interest rate hike programme – perhaps gradually. This can be seen in the movement in the predictions of the CME’s Fedwatch tool. In the immediate aftermath of the latest CPI announcement the Fedwatch prediction was over 80% for a 100 basis point interest rate increase at next week’s FOMC meeting. Today this likelihood is put at only 22.5% - hugely cooler than just over a week ago.
There are several respected economic commentators out there who are predicting that the Fed will become more ‘dovish’ at subsequent meetings. With the U.S. economy almost certainly heading for recession – indeed it is probably already technically in one if the usually reliably accurate Atlanta Fed Q2 estimates are correct – the Fed could well need to try and take measures to stimulate the U.S. economy at the September FOMC meeting, if not before, if it is to avoid a hard landing. Hence the reduced expectations for a particularly big rate increase next week.
A weakening of the U.S. dollar’s comparative strength would also likely be an integral part of Fed policy, although given some of the trials and tribulations currently being faced by the U.S.’s main competitor nations, this may be hard to accomplish. A weaker dollar should benefit precious metals and there is little doubt that the dollar is currently overvalued.
The dollar index, although it has been trending stronger again, remains well below its peak and there has been a corresponding rise in the gold price back above $1,720 as I write, which will have allayed some of the gold investors’ fears somewhat, but prices are still very volatile. Equities and bitcoin have also been rising, perhaps strange behaviour in what is almost certainly a recessionary environment, but indicative of the market’s assessment of a more dovish future approach by the U.S. Fed. Where they will all settle may well now depend on the outcome of next week’s FOMC meeting and the spin put on it in the subsequent statement by Fed chair Powell next Wednesday evening in the U.S. and its interpretation by analysts.
The latest volatility appears to have been set off by a slightly disappointing rise in jobless claims, when the consensus had been anticipating a small fall in the numbers. But the numbers were not very significant. Such departures from data expectations may well move the markets in either direction over the next few days until we get more guidance on likely numbers from the FOMC meeting.
Meanwhile the European Central Bank (ECB) announced a 50 basis point interest rate rise yesterday – its first rate rise for 11 years raising the spectre of recession in Europe too. The ECB had been criticised as being late to the rate-raising party, but its policy is a little more complex as it has to deal with the likely effects of any increases on all member states which tend to have differing economic priorities. Nevertheless the 50 basis point rise did exceed expectations and probably boosted the value of the euro against the dollar, at least initially.
Our overall assessment is still that risk-on assets like general equities and bitcoin remain vulnerable to the general realisation that economies are almost certainly already in, or heading for, a prolonged recession. Higher than average inflation rates are likely to be with us for some time. If there are beneficiaries they are likely to be in gold and silver and their respective equities, but things are likely to remain volatile in all sectors until the end of the current quarter at least.