LAWRIE WILLIAMS: Is the gold breakout sustainable in the face of illogical equity rises?

The gold price looks to be set at somewhere north of $1,750 despite some early attempts to bring it back down again.  But it has been here before and has not been able to sustain this breakthrough level.  Will it be different this time around?  Meanwhile general equities still appear to be rising – illogically in our view given the world is in the midst of a recession which is probably deeper, and more widespread, than anything ever seen before.

The equity snake oil salesmen seem to be in control for the moment.  They preach that the only way for equities is upwards and totally ignore the current recessionary impact on the earnings of many, if not most, corporate entities.  These are earnings which in the good old days did indeed drive equities markets higher when the global economy was rising, thus boosting most corporate earnings – even though such increases were largely at the expense of declining purchasing power of most currencies.  I’m not an economist but a supposedly pragmatic mining engineer by background so some technical market aspects may pass me by, but none of the rise in equity prices in the current environment makes any sense to me.  Completely worthless stocks are being bid up to ridiculous levels and many others are commanding prices hugely in excess of those justified by current and future earnings.  By all logic most equities are heading for the ‘mother’ of all collapses, which will hit the markets probably sooner rather than later.

As for gold and silver, the former at long last seems as though it may have broken through the $1,750 barrier, which it had made a run at several times over the past few weeks.  Yesterday it even hit the $1.769 level we were talking about in our most recent article (Gold Ends Week On An Upnote. Breakout Ahead?), Indeed it closed in Asia and opened in Europe at around this level today.  But we don’t see this as even a temporary 2020 top.  $1,800 gold and $18 silver seem firmly in sight. With even Goldman Sachs predicting $2.000 gold in 2021, these two prime precious metals are at last seeing something of a re-rating in the eyes of the high wealth investor, as witness the big continuing flow of capital into the gold and silver ETFs globally.  A number of big name investors have already gone on record as saying they are steering clear of equities – probably until well into 2021 at least, as they foresee a major market crash ahead.  As we have said before it’s wise to follow what the really big investors are doing.

The Goldman Sachs analysts are basing their forecast on the continuation of low real interest rates and worries about pressure on the purchasing power of major currencies as a result of central banks effectively printing virtually unlimited amounts of new money and building up enormous national debt positions.  Perhaps a recipe for inflationary pressures to start to be generated.  But other analysts see the Goldman Sachs predictions as conservative and are looking for higher precious metals price levels still.  We certainly think $2,000 gold is on the cards, perhaps earlier than Goldman Sachs is predicting, but maybe not a lot higher for the time being.

Some analysts are looking for silver to substantially outperform gold in percentage terms, but given the metal’s industrial attributes this may well get held back by recessionary correlations and we don’t see it rising much above $20 an ounce in the near future.  But even a $20 plus price range represents around a 12% rise from where it is at the time of writing.  With our nervousness about equity prices going forward, as we have been saying in the past, the precious metals look to be a good investment bet without most of the downside risk potential we see in equities.

24 Jun 2020

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).

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