Labor Day sees the end of the U.S. summer and everything tends to change as the financial community returns to its desks. Where will they take gold and silver this time?
Today is Labor Day in the USA, the official end of summer as far as the country’s citizenry is concerned, and everything changes. From tomorrow the top bankers, fund managers financiers etc. are back at their desks supposedly refreshed from their summer in the Hamptons, the Caribbean or points further. Summer dependent businesses close down for another year, women start wearing fall and winter fashions regardless of the temperature – and the silly season in news comes immediately to an end. The equity market professionals are back and the next pattern of investment flows will rapidly start to establish itself.
For gold and silver investors everything could change. Some kind of direction will likely establish itself, but whether this will be upwards or downwards remains to be seen. If the past is anything to go by, September can be a strong month for precious metals, but it isn’t always so – take 2011 for example. Arguably the major turning point in the gold price after its heady days through the 2011 summer started immediately after Labor Day that year, but this has tended to be the exception. Those who move the markets saw a gold price rise through June, July and August 2011 which they reckoned was overdone – and the general trend in price has been downwards since with gold currently sitting some $500 below its heady 2011 peak.
This year gold and silver made something of a recovery from their recent nadirs through the summer months, but we don’t think this will have been seen as an over-excessive gain by the financial community in the same way that that of 2011 was. There does seem to have been something of a change of sentiment with regard to precious metals. Some safe haven talk has resurfaced, there is an increasing realisation that almost all the physical gold which may have been released by investors in the West has been taken up in the East – and more. Comex gold inventories have been slipping away and there are indications that some of the big bullion banks, JP Morgan in particular, are turning long on gold. Things could thus be about to change for the better for the precious metals investor.
But in the world of gold nothing is certain. There is the overhang of a possible, or even probable, Fed tapering of its bond buying programme. This has to come to an end sooner rather than later, but the Fed’s problem is to make the winddown in QE lead to a soft landing in equity markets which are nervous that any reduction in stimulus will have an adverse effect on company performance and the recovery, such as it is. Initially the markets saw the gold price as likely to be adversely affected by a winding down of QE, having been boosted by its implementation, but with further analysis it was also realised that the overall rise in the equity markets had also been stimulated by QE, and these could be even more vulnerable to its gradual withdrawal. As we pointed out here some time ago, gold was strongly on the rise well before QE was put in place. Equities were not!
What are things to look out for in the months ahead with regard to gold – and in markets in general? Firstly, the big gold ETFs – GLD in particular – could be seen as the true bellwether as to where gold is likely to trend. The big sell-off seems to have come to an end – or, at the very least, going through a hiatus. Recently GLD has picked up a small amount, but if heavy sales re-commence, then this is obviously a bad indicator for gold. Should purchases – even on a small scale – continue, this is a positive sign that sentiment is changing in gold’s favour.
Eastern buying: There are already indications that the improvement in the gold price has seen a slight slowdown in the volume of Chinese buying, with Shanghai gold premiums reportedly dropping back. However, gold premiums in India remain at very high levels following the government’s imposition of big precious metals import duties, with the recognition too that these are leading to gold smuggling on a hugely increased basis. One can probably discount India’s official gold statistics in the next few months as being totally unrealistic as they will not include the reportedly strongly rising grey market. As with Prohibition in the U.S. in the 1920s, banning, or discouraging by fiscal means, something that people really want can even serve to stimulate demand and there’s little sign that Indians’ appetites for gold hoarding has diminished.
The long and short positions on COMEX will need to be watched closely too – particularly those of the big bullion banks who seldom bet against uncertainty! And they have the financial clout to effectively corner the market – or indeed a significant part of it. Even more so with silver!
But, overall, it is the state of the U.S. economy and its supposed recovery that may yet be major factor for both gold and equities. Any recognition that recovery is slower than the Fed would like, especially if unemployment fails to come down to target levels, would make any tapering – perhaps apart from a token reduction – increasingly unlikely. Good for gold and equities, although at some stage the continuing parlous state of the overall economy may start to have an increasingly adverse impact on the latter.
What other factors are out there? The lower gold price and the likelihood of some serious strike activity in the South African mines may have a negative impact on global gold production. But, in truth, small changes in newly mined gold supply have little impact on the market at present. New production is so dwarfed by swings in investment and hoarding demand nowadays that it is largely irrelevant in the market place.
Gold will tend to continue to be moved by various U.S. statistics and indicators, both up and down depending on the ebb and flow of employment figures, housing starts, budget issues, etc., but also by the threat of an escalation in the Syrian conflict and unrest in Egypt, with possible spill over into other states where there is continuing tension between the Sunni and Shia Muslim factions. If the U.S., or any other western power, is drawn into military action in Syria this will be yet another destabilising factor in world geopolitics which should be positive for gold. The Eurozone crisis will also continue to raise its head from time to time as this is nowhere near played out yet.
In short there are any number of factors which may impinge on gold and silver prices in the months ahead. One needs to follow the likely indicators closely. Overall, these factors look to this observer to be more likely positive than not for precious metals investors. Safe haven investment in gold may well be beginning to return – there are so many uncertainties out there and the potential downsides in the equities markets, in the U.S. and Europe look to be greater than those in gold. We could be in for an interesting few months as markets play out, political tensions sway – and the Fed makes its intentions on QE a little clearer, although it seems that obfuscation may remain in this latter respect. Again, as we’ve said before, if gold does continue its recent rise, silver should do even better – but, as was seen on Friday, even a temporary fall in the gold price can leave to an even bigger one in silver in percentage terms. It is much more of a gambler’s metal, but it could be a good gamble
Gold Goliath is not your typical gold dealer.