LAWRIE WILLIAMS: The State of the Gold Market and where it may be headed

Readers of my musings here will be aware that I rate the opinions and forecasts of Canada’s Martin Murenbeeld extremely highly among gold analysts.  He might be described as mildly bullish on gold, but calls it as it is at any given point int time, and sees declines as well as rises in his forecasts.  In other words he is a gold realist rather than a perma-bull so in terms of his views on what has happened to gold in the past very eventful week, and where it might go from here, I value his opinion strongly.

In his latest Gold Monitor weekly newsletter - see www.murenbeeld.com for info. - Murenbeeld looks at the drastic behaviour of the markets in the past week to 10 days which has seen U.S. equities lose any gains they had made year to date - and more. Gold, on the other hand has had a fairly positive week, but is still down around 4% year to date so is still being outperformed by equities, just.  But any continuation of gold’s rally (which seems likely) and a further decline in U.S. equities, which is also a definite possibility, could see this position reverse by the calendar year end, if not in the next few days.

Much of the blame for what has happened to the dollar and U.S. equities could perhaps be blamed on President Trump’s trade war with China which, at least in the short term, appears to have backfired rapidly.  It has not been helped by the arrest in Vancover of China’s Huawei Technology’s CFO and the company founder’s daughter, apparently at the U.S.’s behest pending possible extradition south of the border to face accusations if Iran sanctions busting.

As emphasised in a chart in the latest Gold Monitor, despite China being the principal target of proposed tariff impositions in Trump’s U.S. trade policy imports from China are holding up - or even rising over the past few months, while U.S. exports to China have fallen off a cliff. A strong dollar, tax cuts and a solid economy are, according to Murenbeeld’s analysis, fuelling U.S. consumer demand for foreign-made goods. China’s trade retaliation and slowing economy are damping their demand for American products. Maybe it is early days yet in tariff impositions on Chinese goods taking effect, but even if imports of Chinese goods start to fall as a result they could are likely to be replaced by similar goods from other low cost economies not the subject of U.S. tariff impositions, while U.S. global goods exports will continue to fall if the dollar remains strong.

Murenbeeld sees the bottom line of the past week’s markets performance thus: ‘We continue to look for a weaker dollar going forward, a pause in Fed rate hikes, and a recovering equity market. Only the latter is mildly negative for gold, and it may be neutered by safe haven interest in gold arising from the many geopolitical and other crises looming on the near, medium, and long-term horizon.

Regarding the above comment the Fed has already appeared to express doubts on the future pace of tightening, although the markets do not anticipate it holding off on the likely 25 basis point interest rate increase at the FOMC meeting in just over one week’s time.  Although a further sharp fall in U.S. equities in the coming week might, just, cause the Committee to change its mind.  It is likely to be under pressure from President Trump to keep interest rates, and thus the dollar, down given his tariff impositions seem to be having the effect of increasing the dollar index and, ultimately, putting up the cost of manufactured goods to the U.S. consumer.

Unlike some, though, Murenbeeld does not see a U.S. recession looming in 2019 and sees U.S. equities making something of a recovery - although he does seem to intimate a recession arising further into the future.  But although rising equities may seem to be a negative for gold, we think the impact of the recent sharp equities falls - and the collapse of bitcoin (at one time towards the end of last week BTC looked to be heading down to $3,000 and ETH to $90) - has probably resurrected some of gold’s safe haven asset appeal.  Any further weakness in equities will exacerbate this - particularly if gold continues to rise towards the year end.

We probably disagree with Murenbeeld regarding the timing of a U.S. recession.  The signs are already there that this may be happening sooner rather than later and perhaps the only way of putting off the eventual day may be a managed reduction in U.S. dollar parity - but whether other countries will allow the U.S. dollar to fall against their own currencies, or devalue in concert, remains to be seen.

Murenbeeld looks for a gradual climb in the gold price going into next year.  The first real hurdle may be the breaching of the largely psychological $1,250 level, to which it came close this past week.  Then the next target may be the taking out of the 200-day moving average, currently around $1,256.  If it succeeds in doing that next week the likely way from then is upwards, with the next major resistance level seen as in the mid $1,280s.  If gold can take this out before the Christmas holiday we may well see gold back at $1,300, or higher, by the year end, although breaking above all, or any, of the above targets may well be resisted strongly by the Fed-supporting bullion banks playing the paper gold futures markets.

09 Dec 2018

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