Have Gold and Silver Really Bottomed?


"The fundamentals seem to suggest that gold will move significantly upward rather than downward in the short to medium term."

Gold and silver

At the recent Mines & Money conference and exhibition In London there was a perhaps surprisingly upbeat feel given the poor performance of metals prices over the preceding two to three years.

While this optimistic mood seemed to apply to precious and base metals producers alike, as is the norm nowadays it was the gold companies which were looking for the biggest upside. Perhaps this was because those that can nowadays afford to participate in an event like this—it is expensive to exhibit and to attend—are those who are going to survive in the current price environment come what may. But perhaps even more prevalent was the perceived view that things were at last truly bumping along the bottom and that the only way forward was up.

There are a lot of factors supporting this latter viewpoint, but it's probably just as well for the bulls out there not to get too carried away as many of these bullish factors have been around before and still prices have continued to be driven down. But this time perhaps the optimists do have a point.

On gold and silver demand, this appears to be riding high. Chinese Q4 demand as represented by Shanghai Gold Exchange withdrawals has been just as strong as it was in the 2013 record year. True demand had slipped pretty badly in Q2 and Q3 compared with a year earlier, but it has staged a huge pick up since the end of September. But perhaps even more significant has been India's return to the gold buying spree with November gold imports officially put at 150 tonnes, although some assessments had even suggested it might have been as high as 200 tonnes.

Silver demand has also been seen as extremely strong, although it is much harder here to get any accurate statistics on total global supply and demand. However there has been a recent estimate that in 2015 silver will be in a huge supply deficit of as much as 11 million ounces from analysts at HSBC. In truth silver and gold demand are very hard to predict because so much for both precious metals is dependent on "investment" offtake and this can be hugely swayed by prevailing perceptions at the time and much of this depends on media spin—and for the most part those with bearish views have been winning this particular game. Silver does also have very significant industrial usage, and this is seen as continuing to grow strongly now that the decline in photographic usage due to the dominance of digital in the field has now mostly passed – and in industrial usage for silver we are pretty confident in suggesting that indeed the only way is up.

But back to gold, as this is really the key to virtually all precious metals prices. Where gold goes, so go the others in the sector, and probably in a much more volatile manner. There are those who say that traditional supply factors—newly mined gold and scrap supply—are actually irrelevant to gold price performance because there is so much gold in above ground 'hoards' which can be released into the markets. But they ignore the fact that the huge majority of this hoarded gold is in very strong hands and unlikely to be released short of some enormous global catastrophe.

To an extent they were correct in 2013 when there was massive offloading from the big gold ETFs partly countering the really strong demand from China. But readily available gold from this source has hugely diminished this year while Chinese demand has again been seen to pick up and India is coming back into the fray in a massive way (although perhaps in quantities to worry the Indian government again sufficiently to seek new import restrictions—we shall see.)

What of supply? CPM Group in New York is predicting yet another year of new mined supply growth in 2015 as projects and expansions already in the pipeline reach full capacity, but sees a downturn further ahead without a big gold price increase. Others foresee the downturn in production beginning to impact earlier with peak gold seen in the current year. But in either case any increase in mine supply has been more than counterbalanced by a sharp fall in scrap supplies as those who had been prompted into selling their family heirlooms have mostly already done so and anyway the lower gold prices have made this much less attractive.

There are other factors out there suggesting that gold could really be at or near its bottom this time around. Gold Forward (GOFO) rates have been suggesting a physical shortage of metal for some time now. Central banks have been continuing to buy, although the biggest recent buyer, Russia, is perhaps being brought to its financial knees by low oil prices and economic sanctions (all engineered by the U.S. in Russian eyes). This may well limit purchases going forward and some are suggesting it could start liquidating some of its gold to help try and prop up the ruble. One suspects this might only happen as a last resort as President Putin is a strong believer in gold's value as overriding that of its currency reserves. Also never underestimate Russia's capacity for surviving long periods of economic travail. One doubts if the current economic situation will deter President Putin in his moves to protect what he sees as ethnic Russian populations in the old Russian controlled- but now independent—states. Headlines in Western media may well suggest Russia is on the brink of economic collapse, but is this just wishful thinking by those opposed to President Putin's policies and by the U.S. in particular. We shall see how this one plays out probably by the year end.

So what else is out there either pro or anti gold? Nervousness is beginning to build on major stock exchanges. The almost unprecedented rise in general stock prices has made gold and gold stock investment less and less attractive over the past three years. There is perhaps the beginning of a perception that this is nearing or at its end and is also showing up in the beginnings of a recovery building in mining stocks as investors chase real bargain prices.

There has also been a certain amount of resilience in the gold price around the $1,200 mark. The market seems to be looking for a true breakout above or below this level. At the moment we would favour an upwards breakout, but trading gets increasingly thin as Christmas approaches which can make for strange anomalies resulting from determined players in such markets – and recently most of such action has been to drive the price downwards.

As we've noted before, the fundamentals seem to suggest that gold will move significantly upwards rather than downwards in the short to medium term—but then many respected analysts have been predicting a gold price bottom throughout the past three years of price decline. Will this just be another such occasion?

Lawrence Williams

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