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LAWRIE WILLIAMS: Is gold poised for takeoff?

Gold bulls may well have been disheartened by the recent performance of the metal price which has fallen to interim lows after seemingly poised for advance with several days of successive closes above the $1,300 level.  But this was not to be – but yet the day may not be far off where gold enters a period of sustained strength, although perhaps not yet.

The gold price still seems to be inordinately tied to the easily manipulatable COMEX gold futures market in the U.S. and to the also manipulatable strength, or weakness, in GLD – the world’s biggest gold ETF.  Metal price weakness has gone hand-in-hand with a series of gold withdrawals from GLD which has bled no less than 32 tonnes of gold so far this month after effectively zero change in March.  Additions of around 36 tonnes had been made to its gold holding total in January and liquidations of 51 tonnes in February.  We have speculated here that easily followable GLD holding levels – volumes are published on a daily basis – may be being used by those who may wish, for whatever reason, to suppress the gold price given that the COMEX futures market is perhaps coming under additional scrutiny from the U.S. Department of Justice.

Gold withdrawals from GLD effectively add to global gold supplies and gold investors will remember that the big gold price downturn of 2012-2015 was precipitated by, or perhaps caused, a massive offloading of gold from GLD.  To an extent the outflows from GLD and some other gold ETFs are serving to help balance out the inflows from increased central bank purchases which are continuing apace after record inflows last year.

But given the gold price’s seeming dependence on the strength, or otherwise, of the U.S. economy there has been a plethora of data coming out of the world’s largest economy suggesting that arguably things are not looking nearly as rosy as the politicians, and some economists, would have us believe.  PMIs are running well below expectations, as are housing starts and sales and retail sales also remain weak, particularly in the key auto market.  Retail stores are closing at an unprecedented rate and some big names look to be in serious trouble.  On the other hand, some other economic indicators do seem to be doing better and equities markets continue to perform, which doesn’t help the gold price – if equities continue to grow why invest in gold where price movements are pretty static?  But there’s an underlying feeling that stock market growth may well be nearing the end of its uptrend and may even start to turn down sharply in the very near future. 

Should a recession actually be ahead, there is little though that the Fed can do to ward it off.  Its ammunition store has virtually run dry, so if markets do start to turn down sharply, any decline may quickly become a rout.  Interest rates are at a level where cuts can only give the economy a marginal boost at best, unless they go truly negative which would almost certainly be contrary to Fed opinions, and the Fed has not been able to reduce the rather horrendous balance sheet position to any significant extent and any process to implement further reductions looks to have stalled.  Much may depend going forward on a reasonably satisfactory outcome on U.S./China trade negotiations, but with China’s latest GDP figures showing something of a recovery there is perhaps little incentive for the latter nation to make the kind of trade con cessions the Trump administration is demanding.  Meanwhile the U.S. trade deficit remains very firmly in the red.

And it’s not only the U.S. economy which may be showing sign s of potential weakness ahead.  Europe, for example, is seeing severe weakness ahead of the possible British exit from the EU with some key EU economies showing significant signs of stress – and not only the usual suspects.  The EU’s two remaining principal superstates, Germany and France, could both be heading for serious economic difficulties.  It is perhaps an anachronism that the U.K., despite all the Brexit doom and gloom and uncertainties, is currently seeing its best employment statistics on record.  True its economic growth may have dwindled, but it‘s still holding its own with the rest of Europe and doing rather better than many other EU states – notably EU powerhouse, Germany, which seems to be being hit harder than the U.K. over the prospects for a no-deal Brexit..

Amidst all this economic turmoil, China and Russia are both continuing to amass gold, while the latter has pretty well already succeeded in ditching U.S. dollar related entities from its forex reserves.  The former may be doing the same but from a much higher starting point.  As Jim Rickards points out in his new book, gold may already be becoming a key element in trade settlements between a network of similarly minded nations which are all trying to ditch dollar reliance in global transactions.  And as the dollar begins to lose its global trade dominance we could see it begin to weaken against competitor currencies which would be positive for gold as the two are usually  inversely correlated.

None of this is likely to happen immediately, but the trends to favour gold all seem to be falling into place.  There may well be headwinds experienced along the way, but we stand by our forecast of $1,400 or higher by the year-end, and it could move quite a bit higher still in 2020.

23 Apr 2019 | Categories: Gold

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