Here follows a lightly edited and updated version of an article I published on the info.sharpspixley.com website earlier today. (To read original article click here)
We wrote here recently about the short term headwinds facing gold and the longer term positives, but some of the short term negatives seemed as if they fell away at a single swoop yesterday! Could the 800 point fall in the Dow be the start of the much predicted equities collapse? Indeed the Dow and the S&P 500 were both down around 3% on the day and the NASDAQ down a massive 4%. These falls have been mirrored by big falls in general equities in Asia and Australia, and this morning in Europe. The equities sell-off has continued today, but not, so far, as severely as yesterday.
As perhaps another indicator, yesterday a massive 273,851 ounces of gold were added to the SPDR Gold Shares ETF (GLD) – that’s over 8.5 tonnes and is the first positive movement of gold into GLD for nearly 3 months, and a very sizeable amount to boot. We have stated here before that one should watch GLD additions or withdrawals as a guide to institutional sentiment towards gold and since April we have mostly seen withdrawals – an enormous 141 tonnes of gold had been taken out from GLD from end-April until yesterday. Again could this be a turning point for gold? One day’s figures are perhaps not a sufficient indicator of what’s to come, but are a and it is essential to monitor this indicator as a guide to precious metals sentiment.
Today we have seen a big rally in the gold price which has hit its highest level since the beginning of August, up over 2% at its intra day peak so far today. Silver has seen a slightly stronger increase too, but not enough yet to see it break out from its correlation with the gold price. But investor interest has been strong as witness the high level of silver Eagle sales out of the U.S. Mint. It has the potential to outperform gold should the rallies in both metals continue.
As always commentators’ views are mixed on the likely effect of yesterday’s falls in equities valuations. Some see them as a buying opportunity in an ongoing bull market pointing to a similar fall in February from which the major indexes made a fairly rapid recovery. All eyes will be on the Dow and the S&P over the next few days to see if the falls will continue, or if there will be a bounce back.
We are entering a time where Fed tightening by raising interest rates may well be making markets nervous. President Trump has been quick to lay the blame for yesterday’s fall on the Fed’s policy of raising interest rates thus leading to a stronger dollar (which has adversely affected the gold price in dollars if not in some other currencies). This fall in other currencies against the dollar has had a counter-effect on some of the Administration’s tariff impositions. Yet even so some U.S. manufacturers are already warning that the tariffs on Chinese goods in particular will have a negative impact on input and consumer prices.
So, we are likely going to see a steady increase in U.S. inflation, and unless there is a slew of positive data on job creation, wages and in PMI forecasts, we could see sentiment turning down which could further impact U.S. equities markets. If equities are seen as likely to fall further this could see an increased move towards safe haven assets like gold and silver.
Although be warned, if equities markets really do tank as some are predicting, then precious metals prices could suffer too as individuals and funds/institutions struggle to maintain liquidity and are forced to sell off good assets with the bad. We saw this happen in the 2008 market crash, although it should be noted that gold, in particular, was far quicker to recover than equities and climbed back to pre-crash levels while equities were still falling.
And what of silver? This has had a pretty torrid time of late as represented by a gold:silver ratio (GSR) at around its highest level for around 20 or more years. When the GSR has been this high in the past it has tended to precede either an economic crisis or a big stock market turndown, or both. Is that what we are now experiencing? We have often said we don’t anticipate a return to the supposed old average GSR of around 15 as the out and out silver bulls will suggest, but a return to the 70 level, or even 60, could be on the cards with a huge positive impact on the price of silver. vis-a-vis that of gold
This morning, gold has already regained the $1,200 level which had previously seen major resistance to an increase coming in. And once U.S. markets opened the price shot up another $20. If this level is sustained through the end of the week and equities continue to fall, then we could see a big surge in precious metals prices in the days and weeks ahead. Chart followers had been pointing to a gold close above $1,215 as being the significant level from which gold might continue to appreciate and, as I update this article gold is sitting comfortably higher than this level. it obviously remains to be seen whether it will stay there, but we think there is a good chance of it so doing and then move on to get some of its lustre back.
Bitcoin too has been stuttering with BTC down around 5% and the smaller cryptos, like ETH, mostly down more than 10%. We have long warned that we have no confidence in the stability of a bitcoin investment and this kind of volatility perhaps makes the point for us. Some observers reckon that BTC will fall to around $2,000 by the year end, or even lower, and some of the lesser cryptos to close to zero. We wouldn’t be surprised if this were to come about!
Will the bullion banks allow a rise in the precious metals prices? There is so much silver above ground, that a sustained price rise seems to be unlikely. Perhaps, gold will fare better over the long term.
And, you analysis may prove correct in that we will see a sharp drop in metal prices during an equity market collapse, before we finally see a new secular bull market in the precious metals.