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LAWRIE WILLIAMS: Were the pundits wrong? Precious metals out of favour

On the face of things all those predicting a positive path for precious metals this year, ourselves included, have perhaps been proved wrong – at least as far as gold is concerned so far.  Gold is by far the most visible of the precious metals, so its fall to date is perhaps attracting over-exaggerated media attention.  As Covid-19 virus effects across the globe appear to be diminishing, and there does seem to be the prospect of things getting back to somewhere approaching normal, equities markets have been rising and gold, in particular, looking ever weaker.   It seems that those who had been predicting a surging gold price in the face of what still has to be the worst economic downturn in most of our lives, are being proved wrong by the day as gold continues to drift downwards,

But wait.  We are less than two months into the current year and gold – even though it has seen nearly six months of apparent weakness, is still at levels it had only risen to as recently as June last year, although it is currently around 14% below its August 2020 peak.  In the equities markets this level of fall would be seen as a correction, albeit a severe one.  Can gold recover some of its lustre?

Silver, on the other hand is a metal where the price tends to follow that of gold, but in a more exaggerated manner, both on the upside and on the downside.  Thus one would expect its price to have dived alongside that of its sister metal.  But this has not been the case, at least so far.  Since June last year when gold was last at its current level, silver was around 4% lower than it is today.  On past performance one might have expected its price to be well below today’s level given its usual performance in relation to a falling gold price.  This suggests that either gold has fallen too far, or that silver is substantially overvalued.

We would suggest that the former is the reality of the current situation.  True silver is something of an anomaly in that it seems to be in a supply squeeze at the moment, but gold usually acts as a bellwether on the state of the global economy in general.  Despite the seemingly booming equity markets, the effects of the global pandemic are almost certainly far more serious than markets are currently showing.  Equities, particularly in the U.S., which tends to set the pattern for the world, have been buoyed up by central bank initiated largesse.  But this cannot conceivably continue ad infinitum and at some time it will start to be wound down given global debt levels are already at seemingly unsustainable levels.  And when this begins to happen the positive sentiment that has been pushing stock prices ever higher, will start to fall away and safe haven investment will likely be resurrected.  The big question is how long this will take to come about?

Central banks will, of course, be reluctant to reduce their quantitative easing programmes, for fear of attracting blame for any resultant change in sentiment that might bring home the realisation of how bad the Covid-19 hit on the economy has really been.  In fact the pandemic effect may not have been as bad as many were predicting at its start, not least because much of the tech sector has, in reality, done well out of it.  With more people effectively confined to their homes, digital and home delivery companies have mostly benefited and these companies may have been overhyped in the markets with a consequent surge in stock prices that may well prove not to be justified by likely earnings and profitability. 

This may also have dwarfed the huge hits taken by companies which have been decimated by the pandemic.  With many of these being smaller localised companies, the true economic devastation caused by the pandemic will only become apparent once there is a return to near normality.  This will emphasise the closure  of many small, and not-so-small, businesses and the huge number of people hitting the unemployment lines.   

There will be an equities crash.  The only question is when, and how deep?  And as for precious metals, there has to be uncertainty as to how they might perform in any ensuing liquidity crisis, which may well depend on how severe this crisis turns out to be.

19 Feb 2021 | Categories: Gold

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