LAWRIE WILLIAMS: Take-downs not diminishing gold and silver investment interest

As happened a week ago, gold and silver prices were taken down quite sharply on the futures exchanges yet again at one point last week, but this does not appear to have put off those investors who would see the major precious metals advance.  General equities still remain mixed to stronger, led by the tech stocks on the NASDAQ, but some of these appear enormously overvalued and a bursting bubble – notably for TSLA, which is now by far the biggest global automaker by market capitalisation – could have dire consequences for those private investors who have been carried away by the tech stock euphoria.  If, or rather when, the bubble bursts for TSLA, which has achieved its position on market hype, powered by a charismatic founder, rather than on profits, or even potential profits many years hence, other overpriced ‘tech’ stocks may well be brought down to earth with it.

Gold and silver have been resilient despite efforts to crash their prices, but they have not yet been able to break out for any length of time above about $1,810 for gold and around $19.50 for silver, but we think it is only a matter of a short time before these price levels are breached significantly. 

A new equities crash could well be the trigger for such an event.  Bill Bonner’s “howling mad” comment from another of my recent articles really sets out the crazy position which U.S. retail investors have placed themselves:  “The last quarter was the best for the Dow Jones in 33 years. But for the economy, it was the worst quarter in history!” and if the Dow is mad then the NASDAQ is probably worse with the ridiculous TSLA stock price gains leading the charge to higher equity index levels.

Something is thus hugely amiss in American equity markets.  Take the following graphic published by Zerohedge last week which shows that in daytime trading the S&P 500 has actually lost ground over the past few weeks, but overall the index is up substantially purely due to overnight trading:

S&P 500 Absolute performance from start of May

 

Source:  Zero Hedge

As Zero Hedge points out, over the period shown the S&P 500 has risen 314 points, but virtually all of this increase has occurred outside regular trading hours.  There’s definitely something awry here, perhaps suggesting that perhaps all the gains have occurred outside normal market hours presumably fuelled by the plethora of home-based day traders carried away on the market euphoria following the erroneous suggestion that markets can only go up!  Professional market traders must be licking their lips as they will continually to be able to take trading profits while the madness persists.  When the market crash happens – and it will - many individual investors are going to get their fingers burnt, while most of the professionals will probably get out early, or in good time.  Was it ever thus?

Meanwhile we expect gold and silver to move onwards and upwards, driven in part by the excesses of the U.S. Fed in trying to prevent an overall economic collapse.  Interestingly the weekend saw the publication of Murenbeeld & Co’s  latest gold price forecasts which are remarkably bullish for this usually cautious economic  forecasting team.  They assess three gold price forecasting scenarios – a pessimistic case, a median case and an optimistic one and apply an assumed weighting to each of these scenarios.  This allows them to come up with a weighted average for the quartyers moving forward to which they add a small amount for assumed geopolitical influences.  The net outcome of their latest forecast is an average gold price of $1,861 for this year’s Q3 and $1,966 for Q4 (the actual gold price average figure for Q2 was $1,711 and Q1 1,583, which demonstrates how bullish the new estimates actually are).  Indeed the $1,966 estimate for Q4 suggests that at some stage during the quarter the gold price will comfortably exceed $2,000 spot.  A more detailed analysis of the Murenbeeld predictions will be published in a subsequent article.

The silver price has been outperforming gold in percentage terms for the past few weeks with the Gold:Silver Ratio coming back to between 93 and 94 – still a historically high level (high is bad for silver vis-a-vis gold).  We do not preclude the ratio coming down a few more points to 90 or less, although we don’t see it dropping a great deal lower, but the volume of silver going into the silver ETFs remains hugely elevated suggesting some of the big money may be anticipating a bigger ratio fall.  But taking the Murenbeeld forecasts at face value this would suggest that, with the ratio at 90, silver will average $20.68 in Q3 and $21.84 in Q4.  That does suggest that silver is now a good investment bet, and with the chance that the ratio could move down further, along with a rising gold price, silver has to be a good investment gamble, even at current prices.  As with gold, the downside risk is fairly limited – particularly compared with what we see as hugely inflated general equity markets.

Gold and silver mining stocks perhaps offer the best opportunities for some substantial investment gains though, should gold and silver prices continue to move up strongly as the Murenbeeld forecasts predict.  Again, downside risks would be reduced by sticking to the gold majors which offer relative safety in their geographical and numeric diversifications of mining operations.  They mostly also pay dividends which offer ongoing income too.  The Q2 financials are beginning to come out over the next few weeks and we should expect some very positive figures given the rises in metals prices between Q1 and Q2.  Q3 is off to a hugely positive start too which bodes well for these stocks going forward.

18 Jul 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).

e: [email protected]