LAWRIE WILLIAMS: Tough times for precious metals and equities
All the precious metals were showing further signs of weakness at the start of the current week ahead of the U.S. Federal Open Market Committee (FOMC) meeting today and Wednesday and following on from last week’s strong falls. Equities too have been suffering all around the world. Prices have been hit by the strong dollar, rising U.S. bond yields, and apparent demand weakening in the key Asian markets all happening at the same time. Whether the trend will continue when the dust settles post the FOMC meeting and more sober analysis takes hold remains to be seen.
It is almost a foregone conclusion that the Fed will effectively raise U.S. interest rates by at least 50 basis points tomorrow, and in all probability indicate a similar-sized rise to be implemented at the June FOMC meeting in what we feel will be a vain attempt to try to exert a degree of control on rising inflation. While equity market reaction over the past few days has perhaps discounted some of these effects already, the reality of their likely imposition, when coupled with the running down of the Fed’s balance sheet, could well be enough to knock the markets back even further – perhaps not quite into recession territory yet, but getting close. We suspect, it will then become clear that these Fed interest rate and tightening moves will have little effect on the inflation level, which may well not yet have reached its peak. This may thus require further Fed medicine, which could then provide the tipping point and, if this comes about, we could see a severe equities crash and a move to safe haven investment of which gold would possibly be a major beneficiary.
The above scenario is not a certainty, but we feel is a strong likelihood. While gold could advance under such circumstances, the other so-called precious metals may not follow suit, though. Silver and the platinum group metals may be primarily driven nowadays by industrial growth, although silver still has a bit of a propensity to follow gold’s directional path, and the scenario painted above presupposes something of a global economic downturn which could have an adverse effect on industrial metals – which is why we have also seen something of a downturn in most base metals prices – notably copper which is seen as a guide to global industrial health.
As we have stated before, Fed interest rate rises are still unlikely to move real interest rates out of negative territory which tends to be beneficial for the gold price, but for the time being the stronger dollar and correspondingly higher bond yields are tending to counter this stronger gold price trend. A weakening of demand in key gold consumption areas like India, China and Thailand, as seen in the latest Swiss gold export figures (See: March Swiss gold exports show mega switch in direction) may also be contributing to gold price weakness, although the lower gold price may contribute to a resurgence in demand in countries where there is a higher degree of gold price sensitivity. Gold-backed ETF inflows seem to be holding up reasonably well so far though.
Thus we still see the gold price regaining at least some of its lost ground as markets settle down again after the FOMC meeting, although we are not so confident about the other precious metals.
Inflation remains a major contributor to global economic uncertainties, and will continue to do so as long as the Russia/Ukraine war continues and the effects of economic sanctions on Russia are perhaps increased. We live in a more and more uncertain world, it seems, as time progresses. Who knows what the future will bring. Gold supposedly thrives on uncertainty, but the same is probably not true for the general equity markets.