Silent Alarm

Like Conan Doyle's watchdog, the gold market hasn't barked at intruders.

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There is a lot of news about, fake and otherwise, not least information that ought to be shaping the market for gold. The precious metal remains at around US$1,200/oz despite economic optimism having just hit its lowest level for nearly seven years, China and the U.S. trading tariff hikes, and the price of base metals having slumped as a result.

In its latest monthly fund manager survey, Bank of America Merrill Lynch reports that 24% of investors expect global growth to decelerate in the next 12 months. This is the worst outlook since December 2011. A net 16% of the survey respondents thought that corporate earnings would not improve by 10%, or more, over the next year, compared with a survey six months ago when a net 35% that thought they would. The survey concluded that the decoupling between the U.S. and the rest of the world is expected to continue.

Of more immediate concern, Beijing has retaliated, as everyone knew it would, to President Trump's decision to impose duties on more than half of China's imports into the US. However, markets drew comfort from the tariffs being at the lower end of expectations, which suggests there might still be room for manoeuvre.

It is curious that gold is following the US dollar, and ignoring adverse political and economic news. As the CEO of Sharps Pixley, Ross Norman, observed this week, investors are bemoaning gold's "sideways price action, despite some pretty alarming noises from news stations".

I'm reminded of the pivotal exchange in Arthur Conan Doyle's 'The Adventure of Silver Blaze', in which Sherlock Holmes told Inspector Gregory to consider "The curious incident of the dog in the night-time." When the Scotland Yard man observed that the dog "did nothing in the night", the fictional detective responded: "That was the curious incident".

In the 1892 short story, Holmes solved the disappearance of a famous racehorse, and the murder of the horse's trainer, by recognizing that no one had heard barking from the watchdog during the night. The point, of course, is that the absence of what was expected, or negative facts, can be as important as confirming what was expected.

Nevertheless, in his latest newsletter, Mr Norman said that precious metals might be nearing a turning point. Precious metals lease rates are tightening, and, just as buying and selling affects prices, so borrowing and lending affect lease rates. Sharps Pixley argues that if a market is undersupplied then it follows lease rates will rise, which can have a knock-on effect om metal prices. Mr Norman does warn that "tight markets alone are rarely sufficient to lift the prices other than in the short term … but it's certainly constructive".


Caution for Equities

Whilst precious-metals investors are cautiously optimistic (as they always seem to be), Sprott Inc. signalled a "note of caution" for equity investors in an article on September 18. The author, Tekoa Da Silva, noted that the S&P 500 index bottomed in March 2009 at 666 and has subsequently steadily advanced to over 2,900 — a rise of more than 330% in less than 10 years.

This equity price rise means that the current average price/earnings ratio of companies represented in the S&P 500 index is about 22, as reported by S&P Global, compared with the historical average of around 16 times earnings. Mr Da Silva quotes Ben Graham in his 'A Century of Stock Market History', who observes that during corrective equity markets, average P/E ratios often fall to between 6 and 10. These reversions illustrate a phenomenon Mr Graham refers to as the 'Rule of Opposites', in which extreme variations in price are often followed by continued extremes in the opposite direction — rather like night follows day, winter follows autumn, and upset stomachs follow over-indulgent eating.

In his recent article, Mr Da Silva observes that "an asset that preserves purchasing power well over time is gold". "Over thousands of years," he says, "gold has preserved its purchasing power relative to other commodities. It has endured the collapse of nations, civilizations and thousands of fiat currencies. Gold and other precious metals tend to be sensitive to inflation and can assist in offsetting the currency risk of cash holdings (a reason central banks often hold large quantities of gold)."

The appeal of gold is ubiquitous; strange though that the precious metals market hasn't recognised the prevailing clear, and apparent, economic dangers. We are still waiting for it to bark.


Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.