More Gains are on the Horizon
Posted on Oct 09, 2019 at 12:00 am
A turbulent week, lots of prevailing uncertainties and a much discussed volatile market- this sent the investors talking as we saw gold prices ranging from $1460 to $1510. Crossing the $1500 mark was indeed encouraging for gold.
Starting from June and through the beginning of September, gold and silver prices were back in bullish mode. Gold rose to its highest price since 2013 and silver to its peak since 2016. The nearby gold futures contract traded up to a high at just under $1560 per ounce. Silver peaked at just under $19.54.
Previous weeks had often seen the gold price brought down to just below the $1,500 level at the week end despite wide fluctuations in price midweek.
As I have stated in many of my articles that world over there are many factors that influence gold and the same was seen in the past week.
• US China trade war- The main reason to initiate tariffs on Chinese products by the US is to help in gearing up the US manufacturing sector by making Chinese goods expensive. Basically to replace them with US domestic production. We all know that any pick up in the US manufacturing index will not happen overnight and any such development is most likely negative for gold, but currently we don’t see any significant amicable talks happening on either side.
• Weak US Data- Certainly the latest PMI data suggests that U.S. manufacturing is seeing something of a downturn as the strong U.S. dollar is making exports even less competitive. That is why President Trump is berating the U.S. Federal Reserve for not cutting interest rates fast enough, or sufficiently enough, to see a downturn in the U.S. dollar index and a rally in the yellow metal. A weak economy means a weak dollar and we all know that dollar is inversely related to gold. So any weakness in the green back will result in strengthening of the yellow metal.
• Golden Week Holiday- Golden Week holiday shopping demand for gold jewellery has been particularly strong suggesting that portents may be good for a gold demand pick-up in the final quarter of the year. With the Chinese New Year, followed by another Golden Week holiday period, occurring on January 29th next year we should see rising Chinese demand anyway as jewellers and fabricators stock up ahead of likely New Year buying for the year of the rat, despite the apparent U.S.-imposed sanctions and tariffs which do appear to be having and adverse effect on the country’s economic growth
• Gold demand - Bullion hit the highest in more than six years in September as slower growth, the trade war and rate cuts spurred investor demand. Central banks have been major buyers too, especially in emerging markets. Official purchases will likely continue as protectionist policies and geopolitical concerns add to demand thus pushing prices further.
• Geopolitical tension- Geopolitical tensions remain in the air and these could affect the gold price positively in the next few weeks.
- Trump Impeachment- The possible Trump impeachment process seems to be gathering steam, while foreign policy issues could well raise ever more uncertainty.
- North Korea’s President Kim is making unhelpful statements over possible nuclear disarmament, while that country’s recent apparent submarine missile test launch seems to have raised the stakes.
- Iran is proving to be something of a stubborn dislike; while Russo-Chinese-European moves to circumvent the dollar in global trade by bypassing the U.S. dominated SWIFT global financial system could put a dent in the benefits the U.S. incurs from being the world’s dominant reserve currency. While any such effects could take several years yet to materialise they do promise an end to the power of the petrodollar in global oil trade, and could mean a reduction in the impact of U.S. sanctions on Iran.
• Equities- For the moment the U.S. equities markets remain relatively stable, but with a degree of nervousness apparent. The Fed’s likely further cuts in interest rates at end-October’s meeting, and possibly at the December meeting too, may find favour by President Trump in devaluing the dollar and benefit equities, but the continuing overpricing of tech stocks in particular could blow up at any time, and if they start to fall could bring down the rest of the market with them.
However, although in our view the logical likely progress of the gold price from now is upwards, some technical analysts reckon the charts portend a short term downturn – perhaps even to $1,400 or below. We don’t see that as happening, but if it does it should present an excellent buying opportunity as the long term trend is for the price to advance. But with the gold price things seldom run smoothly and we could well experience ups and downs in its progress to higher levels
Markets rarely move in a straight line, and corrections can be healthy for bull markets. A price retracement cleans out stale long positions and creates an environment that brings in new buyers. Some market analysts and traders believe that the two precious metals will experience a deeper correction, and lower prices are on the horizon. I believe that any price weakness in the gold and silver markets will turn out to be a buying opportunity.
I continue to believe that more gains are on the horizon for the gold and silver markets over the following reasons-
Interest Rates- Falling interest rates in the U.S., Europe, and around the world makes gold and silver more attractive as stores of wealth compared to fixed-income instruments. The trend in interest rates is bullish for the prices of precious metals.
Brexit -Gold and silver rose to their previous medium-term peaks in July 2016 in the aftermath of the Brexit referendum. Gold traded to $1377.50 and silver to $21.095 per ounce.
The uncertainty surrounding the future of the UK and EU could cause more than a little volatility in markets across all asset classes and is supportive of the prices of precious metals. Gold and silver are safe havens during times of uncertainty.
U.S. political scenario-The U.S. is a politically divided nation. The U.S. House of Representatives has started an impeachment inquiry to remove President Trump from office. At the same time, the 2020 election campaigns are now in full swing.
The uncertainty of the U.S. political landscape over the coming years will add to uncertainty in markets, which is supportive of precious metals prices.
Other world currencies- Central banks around the world continue to be net buyers of gold. China and Russia have vacuumed in all domestic output to build reserves, and that trend is likely to continue. At the same time, both countries and others have purchased the yellow metal. The official sector is adding to gold reserves.
View the recent correction in the gold and silver markets as another buying opportunity. Both markets can be volatile and could fall to even lower levels before turning higher again. However, any further selling would only make the value proposition for both metals more attractive.
Data from the U.S. -will dictate the direction of gold prices this week. Basically, lower Treasury yields and weaker stock prices will be supportive for gold. A rise in yields and trader demand for risky assets will encourage selling. The biggest influence on prices will be the direction of the U.S. Dollar.
I continue to remain bullish on the two metals that are the world’s oldest forms of currency. Gold and silver are a means of exchange that have been around a lot longer than any of the legal tender in circulation around the world today.