LAWRIE WILLIAMS: Game on: Gold at 1,620, silver over $18, pgms surging. Will they be allowed to stay up?

Monday saw a surge in the gold price into the $1,580s but U.S. markets were closed that day for Presidents Day.  The big question was could the gold (and silver) price surge be maintained once U.S. traders and bankers were back at their desks.  On Tuesday though gold surged through the psychological $1,600 an ounce level and silver back up through $18 and yesterday overnight and early European trading took gold up to $1,610 to a close at $1,611.30

This morning, after an early stutter in Asia, European markets are again seeing gold go higher and at the time of writing is closing on $1,620 and seemingly trending higher still.  General equities turned higher yesterday and are mixed to a little lower so far today.  We believe this shows an unwarranted complacency over the impact of the Ncov-19 virus on the Chinese economy, its knock-on effects on global trade and GDP and the possibilities of a global recession.  According to Chinese figures, which many no longer find believable, the virus spread seems to be being slowed down considerably. But deaths are still rising quite alarmingly.  Deaths are beginning to appear outside China too, although the number of countries reporting incidences of the virus seems to have stabilised.  But it is still early days yet.  The virus was only first recognised about 2 months ago.

Many observers have noted that annual seasonal ‘flu spreads just as fast and kills many more people than have been reported as dying due to Ncov-19 infection.  That may be true, but if the new virus poses less of a danger to life than the ‘flu, why then has China taken such drastic measures to try and control its spread?  The Chinese Government obviously considers the new coronavirus much more of a threat.  The population is almost in a state of panic and many in even supposedly unaffected areas of that nation are loath to leave the supposed safety of their homes.  That will not only affect domestic purchasing, but factory production.  That’s bound to have a seriously adverse impact the Chinese GDP.  Some observers even suggest the Nation’s GDP could end lower in the first quarter of the current year rather than the 5% plus GDP growth forecast before the virus onset.

There used to be a saying that if the U.S. economy sneezes the rest of the world catches a cold.  China’s current dominance in global trade and consumption would make this saying even more relevant to China ‘sneezing’ in relation to today’s global economy, and particularly in terms of the Ncov-19 virus even more apposite.  We are already seeing major Western companies forecasting production and sales downturn with supplies of Chinese manufactured parts on which they rely being severely interrupted – particularly in the auto manufacturing and tech sectors, while companies like Apple, which also rely on Chinese manufacture of high end complete products could see a big impact on sales ahead.

Virus cases are beginning to build outside China.  The jury is out as to whether we will see anything which could be described as a true global pandemic, or whether the measures being taken to curb its spread prove to be effective.  But we must expect things to get worse before they get better with an adverse effect on consumer spending at least, as people will be wary of frequenting crowded shopping environments.  There may well be a boom though in online shopping!

As to gold and the other precious metals, they will all likely benefit, although we fear that people will ignore the demand threat to pgms, particularly if the huge falls in auto sales continues.  Silver will probably be dragged up on gold’s coattails.  We suspect gold in the high $1,600s, or even higher, within the next couple of months as people seek the proverbial safe havens in times of crisis.  Silver might even hit $20.

 It may also prove to be more difficult now for activities in the futures markets to have any suppressing influence on gold and silver price.  The U.S. Department of Justice (DoJ) has shown a willingness, heretofore unseen, to bring criminal charges against employees of perhaps the U.S.’s largest bank, JP Morgan accused of illegally manipulating precious metals futures prices.  Can it just be coincidence that the latest surges in precious metals prices have occurred closely following the announcement by the DoJ of the latest slew of criminal prosecutions for ‘spoofing’ the futures markets.  If the DoJ is prepared to go up against JP Morgan, it surely will discourage others from undertaking similar activities?

However, be warned, both gold and silver could adversely affected, silver particularly so, if the virus onset should be the trigger for a global equities meltdown.  Too many funds and individual investors have been buying on margin in the recent raging bull market, and there may come a reckoning with good (safe) assets like gold and silver having to be sold off to maintain liquidity – often unsuccessfully.  While this may provide a great buying opportunity, one should recognise an initial threat to wealth preservation.

Even someone who I recall as an arch gold bear, renowned economist Nouriel Roubini, writing in the UK’s Guardian, (See: The white swan harbingers of global economic crisis are already here)now sees a role for gold ahead as a replacement for U.S. Treasuries held by potentially hostile (to the U.S.) superpowers like China and Russia.  He sees many financial and geopolitical problems which could all blow up in 2020. The final paragraphs of his article make for alarming reading in the least:

“As of early 2020, this is where we stand: the US and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of US Treasuries are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the US and four revisionist powers are escalating; and the real-world costs of climate change and other environmental trends are mounting.

This list is hardly exhaustive but it points to what one can reasonably expect for 2020. Financial markets, meanwhile, remain blissfully in denial of the risks, convinced that a calm if not happy year awaits major economies and global markets.”

Should Roubini’s fears be even half realised then the gold and silver markets could be in for an extremely wild ride.

20 Feb 2020

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