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LAWRIE WILLIAMS: Like a rubber ball, gold keeps bouncing back

Those of us who are old enough may remember the Bobby Vee hit song of 1961, Rubber Ball.  Rather naff lyrics with the refrain ‘Like a rubber ball I keep bouncing back to you’ and a female backing group whose main purpose seemed to be to keep singing ‘bouncy, bouncy’ somewhat repeatedly.  But naff lyrics or not, the song would seem to suggest parallels with the recent gold price performance.  Gold does seem to be bouncing back yet again after repeated attempts by various elements to knock it down and keep it there.

(Nostalgia trip:  those who would like to listen to the Bobby Vee song over 50 years afterit was first released, click here.)

Short term the gold price seems to be prone to what should actually be pretty irrelevant moves in the USA centred around economic growth (or lack of it) and the U.S. Fed’s interest rate policy, whereas the prime driver should, in reality, be the continuing high levels of Asian demand which are seeing a huge ongoing flow of physical gold from West to East. 

But, as the world’s biggest economy, U.S. financial data have perhaps an undue impact on the price of the yellow metal that should probably bne more justified purely on supply/demand parameters.  This U.S. pricing effect is backed by what are still probably the most important global futures markets for precious metals and these paper markets are readily manipulatable by the big money, with the volumes of metals traded bearing no relation to physical realities being many, many times greater than the volumes of physical metal produced globally.

After falling to well below $1,230 briefly a few days ago, gold has thus bounced back againup to around $1,260 at the time of writing.  The latest bounce is attributed to more trials and tribulations for President Trump generated, it would seem, by an almost universally hostile media led on by various anti-Trump factions in the political and economic spheres.  The latest reports suggesting that Trump ‘leaked’ confidential information to the Russians -  regarding an ISIL plot to utilise altered laptops to bring down an airliner  - to an outsider doesn’t seem that unreasonable if true, but properly spun such a supposed security breach can play out strongly in the kind of divided society that is being seen in the USA today.

North Korea’s successful testing of what appears to be an intermediate range ballistic missile, which the nation’s leaders say is capable of carrying a nuclear warhead represents another threat to global stability – as spun by the media, yet in retrospect the USA has been under far more serious nuclear threat before and it seems, to this observer, that the likelihood of Kim Jong Un initiating a nuclear strike is minute.  He may, in the eyes of the media-fuelled public, be insane, but almost certainly not that insane given that the USA has the capability of totally wiping North Korea. and Kim Jong Un, off the map.  These provocations are designed to test President Trump’s resolve and, like his predecessors, unless he too is insane, he will likely be found wanting in terms of a military response.  If the U.S. were to challenge North Korea with conventional weaponry it would probably ultimately prevail, but at what cost?

So, in our view, political instability in the USA, coupled with global geopolitical threats from North Korea, and in other areas which could yet flare up, should keep gold - and the other precious metals which tend to move in concert with it – in a relatively strong position.  The ever-continuing flow of physical gold from West to East, will ultimately affect availability and support the price, whatever the U.S. does.  The dollar is seen as vulnerable, which is also dollar gold price supportive.  The U.S. Fed may continue to raise rates -very slowly - and has the intention of inflating its way out of its crippling debt situation, which will mean real interest rates will remain at or around zero or negative regardless of the actual rate level – also gold supportive.  Gold will, in our view, continue to bounce up and down, although whether it will achieve the momentum to bounce to new highs may well take time, but we think it will get there in the end.  Probably not this year or next, but perhaps by the end of the decade.

Thus the gold rubber ball may drop and bounce back some more depending on ups and downs in U.S. economic data and overall perception of the performance of the economy, but we reckon the upward bounces will become progressively higher – ending in lift-off if the circumstances are right.  When this will happen we can’t forecast, but we see it as inevitable at some stage, but if, and when, it happens the value of the dollar may be depressed accordingly.  Don’t expect gold to do anything more over time than protect your wealth – something it has done over the ages.  History does tend to repeat itself.

17 May 2017

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).

e: lawrie.williams@sharpspixley.com

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