LAWRIE WILLIAMS: Uncertainty reigns as gold touches $1,950 again
Although it was not allowed to close above $1,950 at the end of the week, the gold price still made strong gains, settling at a little over $1,946 at the end of Friday’s trading. According to kitcocom it did temporarily breach $1,950 at one stage, but it may have to wait for Tuesday’s Consumer Price Index (CPI) data release to regain this level, and perhaps move higher still, which would not surprise us.
There’s probably a lot riding on the CPI announcement. Many commentators, ourselves included, anticipate the CPI count my come in at close to 9% year on year which would pile even more pressure on the Fed to raise the Federal Funds rate by at least 50 basis points at the next FOMC meeting, and perhaps implement a faster balance sheet reduction programme than it had previously been forecasting. The equities markets would likely suffer if this is the case. Business has become perhaps too used to an ultra–low interest rate environment and money being pumped into the economy and a reversal of this might prove to be too much of a shock for the system to accommodate without a corresponding price downturn.
There has, indeed, been some continuing underlying commentary that equity prices, which reached an all-time peak point late last year, are riding rather higher than their profitability levels and immediate growth prospects would appear to justify. True they have come back a few percent so far this year, but contrast this with the price performance of safe haven assets like gold and silver, which are both up over 6% in 2022 to date, and in our opinion set to carry on moving higher if inflation levels look like persisting in their upwards path. Indeed the ‘black swan’ event to beat all recent such shocks - the Russian invasion of Ukraine and the imposition of some stringent economic sanctions on the former - is adding another element to the inflationary mix, There seems to be little the U.S. Fed is likely to be able to do at, or before, the May FOMC meeting to mitigate this rising prices pattern.
Incidentally, while the gold price has strengthened a little, gold stocks (as indicated by the HUI index) have risen even more, as we had suggested they would in earlier articles, with around a 25% increase year to date. They are reaping the benefits of higher metal prices which are substantially influencing profit performance and dividend potential. Some of the gold mining majors, for example, are seeing a metal price almost double their cost of production. True, cost inflation will cut into some of this advantage, but cost rises in the mining sector take time to impact returns and if precious metals prices continue to rise, as we think they will, there could be even more good gains for precious metals stocks ahead.
Coming back to the gold price itself, if general equities look to be in a downwards spiral, which could turn out to be severe should the economy move into recession or a period of stagflation due to Fed interest rate moves, then safe have assets like gold should tend to see good positivity. While the Fed probably can’t raise interest rates fast enough to exert any serious level of control on inflation for fear of precipitating a massive equity market downturn, the combination of a still exceedingly low Federal Funds rate, coupled with the high inflation level means that real interest rates will effectively remain strongly in negative territory for some time to come. Again, as we have commented beforehand, negative interest rates tend to be positive investment-wise for non-interest-generating assets like gold, which have a history of retaining their value regardless.
We are thus somewhat pessimistic on the global economy overall in that we see inflation continuing to remain strong and equities, apart from precious metals stocks, continuing on a downwards path. We do see gold continuing to strengthen, perhaps only gradually, but still passing the $2,000 mark and heading to a new high before the end of the year.
Of course if Tuesday’s CPI figure comes in below forecast then we could see something of a setback in precious metals price growth, but perhaps only a temporary one. Price movements up and down may thus still continue to be data driven, but the data is more likely to be positive for gold and negative for equities as we see the progress of the global economy over the remainder of the year.