LAWRIE WILLIAMS: Latest prediction – gold at $2,100 by year end.
I had gone on record in my writings that the gold price would recover from its sharp post-FOMC meeting falls to back above $1,800 by last week, while silver might be a little slower to regain the $23 level, but would probably do so by this week. Equity prices would likely trend a little lower as the likely effects of the U.S. Federal Reserve (the Fed)’s more aggressive easing proposals generate more detailed analysis. So it has come to pass and, as I write, gold is at over $1,820, silver is at around $23.20 and global equities have been mostly falling.
That is the logical outcome of the Fed’s proposed remedies to counter the current high inflation levels now that it claims to have brought unemployment levels down to where they perhaps should be. In our view, however, these moves in precious metals prices and equities have not yet gone far enough. The gold:silver ratio has also reacted positively for silver in that it has come down below 79 after peaking at close to 81 only a week ago.
True the Fed will have found some justification for its proposals in the latest official nonfarm payroll data which has shown strong job creation levels as we are beginning to exit the adverse effects of pandemic-controls, but perhaps these recoveries and downturns have not yet gone far enough. Equities have fallen, but not yet dived sufficiently so to cause alarm and force the Fed to reverse some of its proposals.
We are thus looking for continued upwards movement in precious metals prices and further equity falls. These would likely occur once the Fed tightening programme actually starts to get under way, and particularly if rises in interest rates look as being as aggressive as many market analysts and commentators are predicting. The Fed’s moves, once they start to take effect, could be far more damaging to equity markets and the U.S. economy than most market influencers are prepared to admit.
Let us consider again what the likely effects of Fed policy changes will be. The ending of the asset purchasing programme, which has indirectly been filtering excess money into the equity markets, will alone be a massive blow to seemingly ever-continuing stock price rises. Higher interest rates will begin to reverse the excessively low borrowing costs which have enabled businesses to expand at a very low cost. Inflation seems to be continuing to increase to the kinds of levels which will lead to a downturn in retail sales as consumers need to tighten their belts accordingly.
We should interject here that the real inflation rate being experienced by the general public may well be around double that suggested by official government figures. John Williams (no relation) who runs the thought-provoking shadowstats service, calculates official government data in the way it used to be assessed before being massaged to present a less-damning picture – almost all governments tend to do these kinds of goalpost moving data restructuring exercises. This service assesses current U.S. cost inflation at near 15% as compared with the official Consumer Price Index (CPI) figure of 7%. The shadowstats calculation probably represents the real price rises being experienced by the average householder far better than the official CPI data would suggest.
As for precious metals, these do not generate interest per se. They do tend to hold their value against domestic currencies, though, and whatever the Fed does it will not be able to raise interest rates fast enough to make real interest rates positive (i.e. higher than the inflation rate) for some time to come. A zero interest rate generator is thus a far better asset to hold in times of negative real rates, which is the primary reason gold and silver in particular dominate as safe haven assets, particularly if other popular investment options, like equities, are seen as vulnerable.
Interestingly the latest gold price outlook from Wells Fargo Bank seems to take all the above factors into account and is thus somewhat ahead of the herd. We would anticipate other bank analysts to come up with similar conclusions as the Fed’s tightening programme gets under way. Wells Fargo analyst Austin Pickle comments as follows: “Risk asset returns may be choppier with higher volatility this year, which could prompt a rotation back into the perceived safe-haven — gold. The bull commodity supercycle should lend its support as well, as it is the tide that lifts all commodity boats.” Pickle thus feels that gold could end the year at around the $2,100 level – slightly higher therefore than our own estimate of a flat $2,000. However it’s nice to have confirmation that we are not the only ones predicting a strong gold price increase over the remainder of the year.