The Labor Day Inflection Point

labor-day-inflection-point

The Labor Day Inflection Point

September 1, 2020

The past week has been a bit of an up/down/up period for gold and silver and the big question is as to whether the closing price on Friday represents a platform from which precious metals may take off again, or an interim high with further falls ahead. We think the former should be the case given gold’s and silver’s apparent propensity to bounce back rapidly from take-downs to edge upwards, although both precious metals still remain well short of their high points reached in the first week of this month, when both gold and silver had looked likely to break out into the stratosphere.


Berkshire Hathaway + Barrick Gold


Perhaps that was a case of too far too fast for the markets, which paused for breath and saw prices fall sharply. There was something of a rebound around 10 days ago as I write when $2,000 gold was again breached after news of the Berkshire Hathaway Barrick Gold purchase, but since then markets have been pretty mixed and seen substantial falls interspersed with minor to quite substantial recoveries. Last week ended with gold, although on the upwards path again, still around $100 off its early-August high and silver climbing again, but around $2.50 shy of its earlier peak.

The latest sharp up/down/up movements for both precious metals occurred around Fed chair Jerome Powell’s opening address to the virtual Jackson Hole meeting of the financial great and the good on Thursday. This occurred even though most of what Powell said came as little surprise to the financial community – the comments on the Fed’s change in tack on inflation and unemployment had been widely predicted in the financial media ahead of the actual statement so the strong market reaction could be said to have been largely unexpected.

Powell’s opening remarks, which pointed to the easing of the Fed’s prior inflation target, saw precious metals move sharply higher initially, but they were brought back down again hard – indeed to far lower levels than they were prior to Powell’s presentation - within the next hour. There seems to be a sector of the financial community determined to see gold and silver fall, for not exactly altruistic reasons, which sees any economic statement as an excuse to bring precious metals prices down, regardless of whether that statement is, in reality, positive or negative for the metals. Could this perhaps be because of the huge short positions held in gold and silver by some big financial entities which would lead to enormous losses should these positions have to be unwound in the face of seemingly ever-rising gold and silver prices?

The FOMC-proposed average inflation target, as noted by Powell in his speech, of 2%, implies that the Fed will try and push inflation to above the 2% level given it has only averaged 1.4% since 2012, although how it will achieve the higher figure remains to be seen. But the implication of a higher inflation target in the short to medium term, coupled with low interest rates which will have to continue, suggests real interest rates will stay close to zero, or negative, which is very positive for gold – and by association for silver too.

Once the whole financial community had the time to more fully digest the content of Powell’s speech and the Fed’s change in emphasis and its likely effects on the U.S. economy and the U.S. dollar moving forward, the dollar started to fall further and gold and silver moved sharply upwards again. They were then brought back a little towards the week’s close. Overall, though, all the losses seen after Powell’s statement on the Thursday were more than recovered on the Friday. It now remains to be seen what the current week will bring given the recent volatility in both gold and silver prices. There’s a battle going on between precious metals bulls and bears and who will come out on top still remains uncertain, although our analysis would favor the bulls.

So, to us, viewing the U.S. situation from afar, we remain positive about the likely progress of the precious metals for the remainder of the current year, and perhaps well into next – or even beyond. There is a U.S. Presidential election to negotiate, and seldom will there ever have been quite such a broad divide in U.S. public opinion. The rhetoric flowing, particularly from the Republican side, looks like it will become ever-increasingly combative and vitriolic, and one of the dangers is that President Trump, who is both very media-savvy and well aware of policies which may appeal to his prime support base, will become increasingly hard-line in both his international and domestic actions.


China


China, and Chinese companies operating in the U.S., is likely to be in the forefront of his policy pronouncements, but however justified such attacks may be, global relations are usually better served by at least a degree of compromise – and serious compromise just doesn’t seem to be a part of the Trump repertoire. Dealing with the Chinese Communist Party and its leadership should perhaps not be seen as having a parallel in normal business negotiations where bullying tactics by the assumed stronger party may well be effective. In dealing with Asian nations ‘saving face’ becomes increasingly important and if China is pushed too far the consequences could be disastrous for both parties. China has already been employing some disturbingly aggressive militaristic tactics in the South China Sea (effectively its home ground) and if provoked further these could escalate into a serious military stand-off, or even action. If this should happen the impact on precious metals prices could be enormous.

Similarly, in the U.S. itself, the President seems to be taking an increasingly hard line against some of the protests (both peaceful and violent) which have been springing up in several major population centres. Again this will appeal to Trump supporters and he hopes may also appeal to some of his opponents. But here again the position could backfire and polarize, and increase, the opposition to the Trump agenda. There are thus many uncertainties and gold and silver tend to thrive on such.

But the above only looks at a couple of the worrying myriad of geopolitical factors which the short to medium term future holds. There is, of course, an overriding scenario which presents perhaps an even more unsettling effect on the uncertainty surrounding what we see as an advisable move into gold and silver as safe haven investments. That is the coronavirus pandemic itself and its likely continuing effects on the U.S. and global economies. Nobody knows how long the virus impact will continue, but the realization of the enormously adverse effects it will likely continue to have on our everyday lives for months and perhaps years to come will gradually begin to sink in = which should provide yet another positive for gold in the months ahead.

The big anomaly which has been facing us is that despite what is probably for all of us the worst economic recession that has ever hit us – or is ever likely to – the equities markets have been rising, seemingly in an unstoppable manner. Employment figures which would have been seen as disastrous only a few short months ago, are hailed as positives and equities rise buoyed up by central bank and government largesse.


Government Debt Levels


But all this comes at a long term cost. Government debt levels have been rising exponentially and this will eventually come back to haunt us all. Taxes will undoubtedly rise, many household name companies will cease to exist and permanent unemployment will revert to what would have been seen as totally unacceptable levels pre-virus and only a few short months ago.

The boom in equities has been one of the reasons gold and silver prices have not risen faster than they have. Once the economic impact of the pandemic begins to be truly understood, and government monetary support falls away, as it inevitably will, equities markets will find their new levels, which have to be far, far below where they are now. Gold and silver may also suffer temporarily too as investors face liquidity problems and need to sell safe assets at fire sale prices, but they will recover fast and go on to trade far higher as happened in 2009-2012.

Those among us who have put our faith in precious metals to see us through the economic downturn should hang on. Those who are waiting in the wings should consider climbing on the precious metals bandwagon. The downside risk is low and the upside potentially wealth-saving. On the other side of the coin, should general equities start to crash the downside in those markets could be enormous!

I’ll leave you with one final thought/observation. Beware Labor Day. There are enormous current economic parallels with the 1929 Wall Street Crash. After early falls equities markets had seemed to be going from strength to strength, right up to the 1929 Labor Day holiday, after which it was all downhill, apart from the few gold stocks which were around in those days. The Labor Day holiday often seems to coincide with a major market inflection point. Could it happen again this year? General equity prices are totally out of sync with corporate performance, as they were in 1929, and if what we see as the inevitable crash happens, it could well begin in the fall. History does tend to repeat itself. Buy gold and protect yourselves!

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