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LAWRIE WILLIAMS: Markets meltdown – is this the shape of things to come?

The latest market shenanigans may even prove to be an opportunity for some.  A huge smack-down in gold and silver, as well as equities, yesterday and today may well have provided an opening for bargain-hunting precious metals investors.  This price drop may be a last gasp attempt to salvage something by the big short holders in silver, in particular, and in gold, who had been looking at financial disaster if precious metals prices had continued to rise.  If some of these big short positions are now liquidated then that will emphasise the point.

Gold fell around 3% at one time and dropped back below $1,900 for the first time since late July.  It subsequently recovered back to over $1,900 but still ended nearly 2% down on the day.  It tested the $1,900 level on the downside again on early Tuesday morning trade in Europe, but then recovered a little.  As I write it still looks vulnerable but not so much so as silver which continued on a downwards path.  As is normal in its performance vis-a-vis gold in a declining price scenario, silver fell much more in percentage terms – almost 7% on Monday with the Gold:Silver Ratio (GSR) rising to over 76 and it rose further still to over 78 on Tuesday morning. A higher GSR is negative for silver in its price comparison with gold. 

U.S. equities came crashing down too, with the Dow and S&P both falling rather more than the slightly more resilient NASDAQ with its tech focus.  The Dow fell pretty much pari passu with gold, falling by over 3% at one stage before making something of a late-in-the-day recovery ending just under 2% lower.  Whether this foreshadows the oft predicted major collapse in U.S. equities remains to be seen – we suspect there may be an interim recovery, but be warned, yesterday;s equity performance could be a signal that the reality of the pandemic-affected downturn in the U.S. economy is at last beginning to impact on the investment sector.

It was notable, though,  that there were substantial deposits into the principal gold ETFs worldwide on Monday indicating that funds and institutions retain confidence in gold going forwards in spite of the big banks’ big short positions in gold and particularly in silver.  In reality it seemed unlikely that an equities markdown would also see an accompanying meltdown in precious metals prices – the opposite would seem to be more likely.  That is why we feel that there was a somewhat different investment agenda in the precious metals futures markets which resulted in something of a gold, silver and PGMs crash.  We therefore do not think that there will be a permanent mark down in precious metals and we still stand by our price target of a return to $2,000 gold before the year end.

Silver investment could well be more adversely affected though and may take more time to recover as recent  investors will now have experience of the volatility possible in the silver price – which works both ways.  It tends to perform better than gold when the latter is rising, but can come crashing down far more in percentage terms than any fall in the gold price might suggest.

This article is published ahead of U.S. markets opening – their performance today may well set the scene for their likely future path and will be followed with interest.  Watch this space.

22 Sep 2020 | Categories: Gold, Silver

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