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LAWRIE WILLIAMS: UPDATE - Silver: Maybe I spoke too soon but still a gamble.

My article of Tuesday saying we wouldn’t be surprised if silver fell to $10 an ounce may have been a little premature.  Silver remains weak for the time being and could yet fall a little further but perhaps not quite as far as $10 or below if reports we are hearing on the non-availability of physical metal prove to be correct.  Also the behaviour of the gold price in its apparent reluctance to fall much below the $1,500 mark without making something of an occasional comeback belies the apparent overall weakness in the two key precious metals.  We still have little confidence in the future paths of the pgms though, but they could make some gains if and when gold and silver prices do take off.

While much of what I wrote in my other recent article (Silver sandbagging may not be over yet) will still be accurate and relevant, the degree to which I reckoned silver might still fall may have been over-pessimistic.  Yesterday the Gold:Silver Ratio (GSR) hit a perhaps ridiculously high 127 before easing a little.  However, prices of both gold and silver remain under some selling pressure which looks ever-increasingly like engineered selling on the futures markets exacerbated by sales necessitated by margin calls, 

The wild swings in equity prices may have prompted individual investors and funds to climb back into the market in the assumption that they might be picking up bargains as encouraged by so far mistaken media pundits.  Instead they have been caught in the proverbial dead cat bounces and have ended up throwing good money (often borrowed) after bad. 

We fear the markets have further to fall yet with virus cases accelerating in the U.S. and Europe.  Both silver and gold are probably at lower levels than can be justified, but they may well not have hit bottom yet! Yes they will almost certainly recover some months, or even years, down the road but there could be more grief for precious metals investors yet as virus fears continue to grow.

As for the pgms, platinum looks to have been hit even harder than silver and we certainly wouldn’t be surprised to see palladium once again trading below the gold price.  Whether it will come back to parity with platinum, or below it perhaps won’t happen yet, but it may over time.  And as for rhodium – only a couple of weeks ago it was trading at around $12,000 an ounce.  Today it is at $3,500.  How the mighty have fallen!

What we are hearing from sources in the U.S. and Europe, though, is that the price falls for both gold and silver are almost entirely futures markets driven (in other words by paper gold and silver markdowns) coupled with dollar index strength.  This only really suits those financial institutions which held massive short positions in both metals.  We suspect that once the majority of these short positions have been unwound, the prices could be let rip, at least temporarily.  We also hear of substantial premiums being applied to both gold and silver bullion prices, in part because of the  short supply of pysical metal, but also because of the huge and rapid short term price volatility for both gold and silver which has meant that dealers have to impose premiums as they might otherwise be caught out by rapid price movements between orders and delivery.

Today we anticipate the U.S. virus case count will pass the psychological 10,000 case level and given the slow roll-out of testing that probably hides an underlying virus infection level of several times that.  The Trump Administration is paying the price of apparently not taking the virus as a serious threat to the U.S. economy until perhaps a couple of weeks ago.  This seeming complacency has not been a U.S. problem alone.  Many countries’ governments appear to have sat on their hands in the initial stages of the virus spread, seeing it as a China problem alone.  They are paying the price now with over 220,000 proven cases worldwide not to mention around 9,000 virus-associated deaths with both figures rising by the day.  Indeed the death count could, in reality be much higher.

It may also be, though, that it is in government and central bank interests to see gold and silver prices kept under control but the Trump Administration will be particularly concerned with the strength of the dollar against competing currencies as this will make U.S.-manufactured goods increasingly uncompetitive in global markets.  The problem is that the Fed has already cut the U.S. base interest rate effectively to zero and seems to be extremely reluctant to take them into negative territory.

The latest FOMC meeting is currently under way and eyes will be on any outcome on the interest rate front.  President Trump has in the past suggested the negative interest rate solution which puts the FOMC into a between a rock and a hard place situation.  If it does go negative, which it is presumably extremely unwilling to do, that could bring the dollar back a little and thereby boost the gold price.  But then the rest of the world might all cut interest rates into similarly negative territory – at least those that are not there already.  This would be an enormous blow to global confidence in penalising prudence and who knows what would be the result in investor sentiment.  Talk about unleashing  a whirlwind!

But then nothing like the current financial situation has occurred before with the spread of a virus causing governments to take unprecedented steps to control it.  The measures that are being taken are themselves hugely recessionary and unemployment will soar.  More people will likely be put out of work than in the depths of the depression of the early 1930s.  It took a world war to reset that situation.  Let’s hope history doesn’t repeat itself as weaponry nowadays is far more lethal and could likely lead to a true Armageddon if the power of competing militaries is used to its full extent.

OK I’m painting a worst case scenario here and it probably won’t come to that.  How can one protect one’s wealth under current circumstances, or even perhaps profit from the shake-out that is to come.  There will be a small group of companies which will be profiting from the current situation – there always are.  And as for the utilisation of precious metals, one investor I have been corresponding with suggests buying precious metals ETFs while bullion is in apparently short supply and subject to premiums – ETFs tend to reflect the prices as set by the futures markets (thus are not affected by these premiums).  And when the whole system stabilises and the premiums on bullion fall away, sell the ETFs in favour of buying bullion which by then will surely be on a strong upwards path.  That appeals to my logic – but in the oft repeated mantra of Michael Lewitt of Credit Strategist fame perhaps one should just ‘buy gold and save yourselves’. 

Silver maybe offers a better possible long term return than gold, but if the 60% of silver which depends on industrial usage doesn’t pick up then that perhaps becomes more of a gamble.  And whatever you do, don’t buy on margin!  That holds you too much hostage to fortune if things don’t work out as planned.

Asian equities tumbled again overnight, and European ones have also turned down after a slightly stronger opening.  We anticipate that U.S. markets may also be weak today once the growing extent of the virus spread becomes apparent and its likely impact on the economy.  Economic observers reckon that  we are already in a recession in Europe and North America and things are only likely to get worse before they get better.

The only light at the end of the tunnel at present is that China reported zero domestic new cases today – and only a small number of infections among people returning to the country from around the world.  South Korea is also showing a sharp reduction in new cases.  All this indicates that some of the most dire predictions of virus spread may be far too high, although if they have the effect of making more people take the precautions against its spread than they otherwise would then perhaps they are justifiable.

Whatever happens the world will get through this episode, but it will take time and have a huge impact on people’s lives and livelihoods.  Gold and silver may still prove to be the best investments to mitigate wealth losses, but even these may have further to fall yet but almost certainly not nearly so far as the general equities market.

19 Mar 2020 | Categories: Gold, Silver

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