LAWRIE WILLIAMS: Will gold recover its glister?

The short answer to the title above auestion is yes, definitely. The only question in our minds is one of timing. We lean towards seeing at least a small recovery this year – perhaps back to $1,300 or higher as a few major bank analysts have been suggesting - and it is perhaps significant that the biggest investment bank of all, JP Morgan, appears to have gone long gold after being for quite a time the biggest gold short – or so we are led to believe. And JP Morgan is not renowned for making bad calls on the market!

As to gold reaching $5,000 or higher, that is probably likely too, but when it will achieve this is altogether another matter. If it does so within the next couple of years, as some hope and predict, this would only be as a result of some major geo-economic or geopolitical crisis – be careful what you wish for! More likely it may take ten years or more to reach this kind of level. But then $1,000 gold seemed a crazy prediction only a few short years ago. With U.S. debt levels in multiples of trillions of dollars, and seemingly ever-rising, perhaps $5,000 dollar gold is nearer than we would like to think.

With the U.S. Fed seemingly determined to ‘normalize’ interest rates, whatever that may mean, the cost of servicing that debt is already phenomenal, which may put the Fed on a collision course with the Trump Administration. President Trump, as a former businessman, is biased towards low interest rates and perhaps a weaker dollar which both seem contrary to the Fed’s current policies. However his overly-aggressive tactics – somewhat contrary to diplomatic norms – may only succeed in raising hackles amongst friend and foe which may lead to outcomes which would not be seen as normal, or even sensible, in a business environment, with a potentially damaging effect on the U.S. and global economies.

But while we feel gold is likely on an overall upwards path it may not be all plain sailing. Many commentators and analysts foresee a severe equity markets crash ahead – perhaps even more severe than in 2008. And if one remembers what happened to gold then it crashed back along with equities as individuals and institutions sold off the good investments with the bad in an attempt to maintain liquidity. The bearish gold commentators are quick to bring this up, but what they seem to fail to mention is that the drop in the gold price only lasted two or three months. From then it went from strength to strength up to new record levels before peaking in early September 2011. We’re not necessarily saying the same pattern will happen again given institutional holdings of gold have probably fallen sharply.

But much will depend on the performance of the dollar which has been boosted by the initial effects on the forex markets of the Trump-imposed tariffs and the likely resultant global trade war. As we have pointed out this has been perhaps an unintended consequence leading to a slip in some other key global currencies, rather than specific strength of the greenback. After all the USA is still mired in an enormous debt situation and President Trump has intimated that a strong dollar is not what he was aiming for with his tariff impositions. The dollar index has slipped back a little over the past couple of days and if this fall continues, gold will surely benefit.

But watch the big gold ETF, GLD. Liquidations have continued from this post the Labor Day holiday, but the size and frequency of these appears to have diminished. If they turn round altogether and we see gold being added back into GLD this would be a signal that the tide indeed has turned. Gold bulls live in hope!

20 Sep 2018

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com