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LAWRIE WILLIAMS: Unsustainable equity markets. All the more reason to invest in gold and silver

We have to admit, we do not understand equity investors seemingly piling in to the stock market despite a plethora of data and events which should have them looking almost anywhere else to protect their wealth.  As one of my U.S. readers succinctly puts it-“We now have a rather unusual negative trifecta at work. We have the worst economy since the Great Depression of the 1930s, the worst pandemic since the flu of 1918, and the worst protests (riots?) since the late 1960s.”  And yet the major global stock indexes all seem to be turning upwards on the back, apparently, of what looks to us to be a huge overdose of central bank monetary easing.

The funds being released from the U.S. Fed, the ECB, the BoE etc. may be designed to offer some protection to individuals and help maintain some degree of spending in an attempt to help kick start the economy when we all emerge from the global pandemic.  But in reality it can do little more than temporarily paper over the enormous cracks in the economy caused by pandemic-related control measures.  Yes, it is offering a degree of protection for those businesses which have been allowed to stay open, or where a good part can be handled remotely, but for those millions who have lost their jobs – some of which may take years to return – and the staggering number of businesses driven into bankruptcy, including some major household names, or just hanging on by the skin of their teeth, things may never be the same again.

My reader/commentator goes on to note that in comparison with the Woodstock era in the 1960s when similar forces were at play “we have a very nasty backdrop, and I would argue it's much worse than the late 1960s. Stock valuations were quite high back then, but they are much higher now, and we currently have a much higher level of debt across the board. Plus, the Fed has been unleashed to do whatever it wants, and the consequences of its policies are liable to lead to some of the stagflation we saw in the 1970s.  Thus, it continues to be my assumption that what we're about to see is going to be something like what occurred in the 1970s and that's liable to include higher taxes and other policies that are less friendly to financial markets, which at some point are going to be crushed.

We would similarly warn of much worse consequences arising than occurred in the 1970s and would take the 1930s as our blueprint.  The Fed, and the other central banks, are unlikely to go on printing money and increasing debt for ever, despite what they may say now.  As lockdown strictures are eased, central bank largesse will fall away and be replaced by taxes and other revenue-raising moves.  Equity markets will likely crash as the true realisation of the economic disaster facing countries all around the world will at last be recognized and safe haven investments like gold and silver will likely come into their own.

Currently precious metals prices are being held down.  $1,750 gold seems to be the point at which all manners of precious metals price suppression is being seen – indeed every time gold rears its head above the $1,740 mark the reaction to bring the price down has been both immediate and rigorous.  This will not last for ever. 

Huge volumes of gold and silver are still flooding into the precious metals ETFs.  Ed Steer points out in his daily newsletter for example that “There has been 10.04 million troy ounces of silver deposited into SLV during the first two business days in June -- and 60.49 million ounces has been added since May 1.  That's almost every ounce of silver that's been mined since May 1...and up until and including yesterday”.  He sees this as an impossibility – other silver ETFs have been seeing big inflows too – so some big holders, like JP Morgan, must also be contributing to these flows which could well rpresent a turnaround in precious metals fortunes ahead.

Incidentally, Allianz’s chief economic adviser Mohamed El-Erian is reported as saying equity investors’ mindsets are ‘farcical’ in driving up equity valuations in the face of some of the worst economic data ever seen.  Even so, gold and silver have been marked down again this morning and equities appear to be rising once more on optimism, in our view totally misplaced, on continuing central bank money printing and signs that governments are easing lockdown restrictions worldwide.  Yet virus cases are continuing to accelerate in Latin America and the Middle East and remain at a very high level in the U.S. and the UK.  We don’t see this ending well for the equity investor, but still see gold and silver as being the best medium to long term beneficiaries.

03 Jun 2020 | Categories: Gold, Silver

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