Big Correction In Gold, Silver And Platinum

(Sept 6, 2019 - Lawrence Williams)

Nothing ever runs smoothly in precious metals valuations and Thursday and yesterday saw all the profits of the previous few days in gold, silver and platinum wiped out in a few short hours.  The spot gold price fell back from over $1,550 on Tuesday to a low of $1,502.40, silver from $19.60 to $18.13 and platinum from $994 to $930.  All three have recovered a small part of this lost ground so far amidst conflicting indicators so one suspects the falls may have been overdone, but those who are unhappy with precious metals complex strength were quick to take advantage.

The media suggest that the big precious metals price decline on Thursday was due to reports that trade discussions between the U.S. and China would resume next month, coupled with a strong figure, above expectations, for payroll data.  These factors were positive for U.S. equities, but the reaction was distinctly negative for precious metals.  However, Friday’s weaker than expected non-farm employment statistics contrasted with the day before’s data and saw something of a brief recovery in the precious metals complex.  But then they mostly turned back down again with gold ending the week at $1,506.50, silver at $18.22 and platinum at $948.  Palladium has proved to be more volatile and moved back ahead of the gold price but now seems to be heading back down a little faster than the other precious metals, but is still above the gold price.  We should also make mention of rhodium here.  This is a rarer platinum group metal, mainly utilised alongside palladium in exhaust system emission control catalysts for petrol (gasoline) driven vehicles, has seen its price decline substantially over the past couple of days after seemingly climbing to dizzying heights.  Some had speculated it was heading for $5,000 an ounce but it ended the week back down to $3,850.

Volatility in the precious metals complex is thus looking more pronounced.  First there was the strong move upwards once markets opened after the U.S. Labor Day holiday and then they were brought down to earth again on Thursday and yesterday.  We will now probably have to wait until next week to see if they start stabilizing or if the volatility will continue,  There seems to be a propensity for the markets to move prices up or down on each successive piece of often conflicting U.S. data which tends to ignore equally relevant data from elsewhere in the world.

As noted there was a positive equity market reaction to news of the resumption of trade negotiations between the U.S. and China, the world’s two largest economies, but this market optimism could well be misplaced.  Both sides hold strongly conflicting positions on many of the factors of contention, and both nations have leaders who are loath to lose face by agreeing to concessions that might be seen as benefiting the other side.  In theory the Chinese have more to lose in any trade impasse with the U.S., but if President Trump is relying on this to give him the advantage, as it might in a normal business negotiation, he may well be disappointed with the reality.  Political maneuvering is not the same as in business and Asian cultures are far more dependent on face saving solutions than the West and we’re not sure President Trump understands this, or would pay any attention to such political niceties even if he does.

In theory, at least, we see the short to medium term future for gold and silver as distinctly positive.  We also think there is a strong possibility of an equities crash in the near future.  We see markets led down by what we rate as a distinctly overvalued tech sector, and these stocks dominate the equity indexes, supported by what we have referred to as the relatively recent IPOs of the ‘unicorn’ stocks, which are mostly so mired in debt that any longer term profits may well be illusory.  This all makes an equities crash sooner rather than later almost inevitable in our view.  This all brings back memories of the year 2000/01 dotcom meltdown.  History does have a habit of repeating itself and investors seldom seem to learn from past calamities!

An equities crash would support safe haven investing in gold and silver, as will the U.S. Fed’s likely programme of further rate cuts this year, somewhat supported by Fed chair Jay Powell’s statement late in the week.  Somewhat surprisingly this did not seem to give end-week support to the precious metals, but we suspect further analysis of what he said will affect markets positively next week, although predicting the path of precious metals prices is notoriously prone to be proven wrong!  However we still feel that overall the future for precious metals remains positive and the price movements early in the past week could be a foretaste of what lies ahead.