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LAWRIE WILLIAMS: So what’s happening to gold – and silver?

What a difference a week or two makes in gold sentiment – and in silver which has fared even worse with the gold:silver ratio running close to 80 again at one point – a level which usually is at the top end of the comparison and would seem to signify a great buying opportunity for silver bulls – but is it?  Gold sank to $1204 before making a small recovery, and silver to $15.07 before making a slightly larger one (in percentage terms at least.) Prices do seem to be clawing their way back upwards at the time of writing, but is this just a blip in a continuing downtrend?  As I write, gold is at $1214 and silver at $15.60.

No doubt the dastardly bullion banks with their huge short positions in both precious metals are being seen as the principal culprits.  Certainly trading volumes have been far higher than one would expect, particularly at the tail end of last week, but as usual these are paper gold (and silver) transactions driving the markets, but this time aided by sales of physical metal out of the big ETFs.  Gold and silver bulls feel that the end-game is nigh and the big bullion banks (of which JP Morgan comes in for particular stick) will switch tack and drive prices back up again making mega profits on metal they have bought on the cheap.  But is this just wishful thinking - no-one really knows.  Second guessing the big banks is a mug’s game.  JP Morgan, for example, always seems to come out on top in its trades – far more so than normal balanced financial markets would suggest.  No wonder there is ever-continuing talk of blatant market manipulation by the big guys.

So what of the fundamentals.  There has long been talk of the centre of gravity of the precious metals market moving east – certainly the metal itself is flowing eastwards with China and India taking in huge amounts, so whatever is coming out of the gold ETFs, and much more, is effectively making its way via London and Switzerland to Asia.  India this year, with its imports perhaps swelled by purchases ahead of the July 1st GST decision, has already imported more gold than for the whole of 2016, and is heading for an annual import level not seen for around five years or so when it used to be the world’s largest gold importer.  That No.1 position has been usurped by China for the past few years, and Chinese demand this year is still running fairly high at around the same levels as in 2016, although comfortably lower than the record 2015 year.  China and India between them account for around 65% plus of global new mined gold production on their own. 

With other Asian and Middle Eastern nations also buyers, and with central banks perhaps adding some 350 tonnes to their reserves (notably Russia, Kazakhstan and Turkey), and scrap supply expected to fall, gold supply will likely be in deficit this year, although the impact of this may well not be apparent in price terms. There is plenty of above-ground stock of gold which might get released onto the market should a shortage of gold lead to a strong positive price impact, although we see this as unlikely.

We may also be seeing peak global gold production this year.  Indeed it may already be behind us, although any fall-off will initially be very small and have little price impact, at least for another couple of years. But looking ahead we should expect a gradual increase in the supply/demand deficit, but perhaps not sufficiently so as to see anything but a gradual positive effect on metal prices, although the continuing flow of physical metal eastwards could see specific supply shortages develop in the West.  These could surface particularly if global tensions increase, or equities markets crash, thus stimulating more safe haven insurance investment.

And what of silver?  There are always considerable differences of opinion as to whether silver supply is actually in deficit or not.  For the unwary it is a much smaller market than gold and thus far easier to manipulate to the big money’s advantage.  It is apparent though that silver inventories held by the big banks – notably by JP Morgan (again) and Scotiabank, are enormous and one should presumably expect the banks to capitalise on these to their advantage at some time in the future – but when?  Meanwhile silver will likely stay depressed until the gold price turns up again – which could be soon – and if it does we should expect the gold:silver ratio to come down a few notches meaning that silver will likely do better in percentage terms than its more expensive sibling, but it does need gold to rise to do so.

10 Jul 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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