LAWRIE WILLIAMS: Views on gold somewhat mixed. We remain bullish.
We said in a previous post that the gold price would likely be volatile moving forward, and so it has proved to be with different markets moving it in contrasting patterns with no specific direction prevailing for the moment, Consequently gold has been bouncing around the $1,800 level – a healthy enough price for the gold miners whose stocks have tended to remain undersold despite their strong profit potential at this price level – but precious metals prices are not predominantly taking off to the positive, or moving downwards, as various commentators seem to be predicting.
We are a little surprised at gold’s apparent resilience despite the publication of the minutes from the June FOMC meeting. These confirmed the mixed sentiments of the meeting participants with regard to the likely timing of a potential rise in the Federal Funds rate perhaps sooner than the markets had initially suspected. When the first intimations of this slightly more ‘hawkish’ viewpoint were expressed in the immediate aftermath of the meeting itself, investors and traders marked gold prices down very substantially. This time around, late trading yesterday saw gold off a few dollars, where it remained in Asian trade. Europe initially took it back up above the $1,800 mark and early U.S. trade seemed to confirm this, but as the day went on it fell back below $1,800 again, but not significantly so at the time of writing.
The other precious metals all turned weaker – noticeably the gold:silver ratio widened to near 70, suggesting silver was performing even worse than gold. The pgms were also sharply lower too.
We are always of the opinion that markets tend to over-react to anything that gives the slightest hint of differing conditions, and this has certainly proved to be the case here. While there does seem to have been a slight movement in opinion among the Fed members regarding the timing of the next interest rate rise, so far Fed chair Powell has remained adamant that this will not happen until perhaps late next year at the earliest. Given the Fed’s priority is to see unemployment reduced to pre-COVID levels, if these do not come down sufficiently the ultra-low interest rates may even be held down until well into 2023 or beyond.
Remember too, the Fed has some leeway on inflation. As Powell says inflation may currently be higher than anticipated, and may persist higher for longer, but the fact that inflation targets have been undershot for so long means that the Fed can live with higher rates for rather longer than the markets have been suggesting, just to bring the average up to the official target level. Some commentators have even suggested that a period of comparatively high inflation may help the Fed mitigate the huge debt it has been building up through its bond-buying programmes.
The dollar seems to be trending weaker again today, but still remains well above its lows of a few weeks pack, and equities are falling sharply too. The northern summer looks like it may be a difficult time for the investor in all markets, but overall we remain bullish gold. For the moment we see positive factors outweighing negative ones in the medium term at least.