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LAWRIE WILLIAMS: Is gold poised for take-off as $1,700 level regained?

We noted during the past week that the gold price seemed to keep on holding the $1,700 level despite attacks seemingly designed to take it to a lower level for whatever reason.  On Thursday it looked like those looking for lower gold price levels might have succeeded. But on Friday, amidst a further plunge in general equity prices, the gold price regained this perhaps key $1,700 level and ended the week at $1,702 an ounce.  There will undoubtedly be further attacks on the price – indeed it came back down below $1,700 in after hours trading late Friday - but in our view this resilience suggests a launch pad for a gold take-off over the next few months.  It may well start tentatively, but has the potential to gain momentum and attack its 2011 all-time gold price high point in the next few months of the current year.

All this happened despite an apparent downturn in gold consumption in key markets and a likely annual fall in central bank gold purchases.  That is unless some other country, or combination of countries, steps into the void created by the Russian central bank’s (temporary?) halt to purchases of domestically-produced gold.

This apparent demand decline is being counterbalanced by record gold flows into gold-backed ETFs and a pick-up in gold and silver bullion sales in key markets.  China, the world’s largest gold consumer, may be coming out of its COVID-19 related lockdowns and we could see a pick-up in domestic demand here too, although it is unlikely to reach the levels of a few years ago. 

Here, I quote from one of Ed Steer’s recent gold and silver newsletters: “But one thing is absolutely crystal clear to me -- and should be to you -- and that is if the big money/deep state players are piling into physical precious metals via the various mutual funds and ETFs, it's a good bet that we should be doing it as well.” 

Assuming Ed is correct in his observation (and we think he is), this flow of big money into gold-related investments – and into bullion too – could effectively generate a base for the gold price from which the only path would appear to be upwards.  There may be setbacks – things seldom rise in a straight line – but we wouldn’t be at all surprised to see the $1,800 level reached within the next few months and perhaps a $2,000 peak (maybe a temporary one as no doubt there would be some substantial profit taking at such a key level) some time before the year-end.  We don’t see the mega-increases as predicted by some of the more bullish gold followers as being likely in the short to medium term, unless there is a substantial multi-governmental upwards revaluation of the gold price as an interim move towards helping bring down the enormous national debt levels.

As we’ve noted here before, we do see the equities markets downturns continuing until well into next year as the crippling effects of the coronavirus economic downturn becomes apparent.  News this weekend that Warren Buffett had completely sold out of airline stocks. And hadn’t found any investment sector to take their place despite the big equities markets corrections, may provide yet another blow to U.S. equities today, and thereby accelerate the appeal of so-called safe havens like gold.  U.S. equities were, in our opinion, way too high anyway and any correction was likely to be severe.  These things are always overdone, though, so when the recovery does come it may well be a sharp one initially – but we do not anticipate an overall  V-type recovery as some are predicting.  The fall-out from the measures taken by governments around the world in an attempt to mitigate the COVID-19 death toll will probably be far longer lasting in their impact than the multitude of economic optimists are forecasting.  Keep buying gold – the downside appears limited, unlike the general equities markets which may have much further to fall before the COVID-19 crisis plays out, while the upside to us continues to look positive.

04 May 2020 | Categories: Gold

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