Un-Seasonal Expectations

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Despite the winding down of East Asia’s Lunar New Year gold buying binge, I expect the yellow metal’s price will continue to move up in the weeks ahead - but not without some struggle as gold works to reestablish upward momentum and renewed credibility.

Historically, with the arrival of the Lunar New Year, gold demand and the metal’s price typically enter a seasonally weak period — but the typical seasonality is no longer a reliable guide to gold price prospects.

The usually weak summer months this past year saw gold run up to new historic highs above $1,900 an ounce . . . and, contrary to expectations, the seasonally strong autumn months saw gold prices fall sharply, all the way back down to $1,525 or thereabouts.

Changes on the Demand Side

Now, with winter upon us, I don’t expect gold prices will drop with the temperature as they often have at this time of year.  Instead, I believe that there have been important changes on the demand side of the gold market that now overpower or outweigh any remnants of seasonality.

For one thing, institutional investor participation has grown by leaps and bounds, as has retail demand for bullion coins and small bars.

Similarly, official-sector gold accumulation has become an extremely important non-seasonal factor effectively removing several hundred tons of gold from the market in each of the past two years.

I expect central bank demand not only to continue but possibly expand in 2012 with China and Russia leading the pack — and a growing number of countries underweighted in gold relative to U.S. dollar-denominated reserves joining in this official-sector gold rush.

These buyers - private investors and governments alike - don’t care what the weather is.  Instead, their behavior is a reaction to macroeconomic and political developments in their own countries and around the world without regard to the time of year.

And, institutional traders and speculators - who lately account for much of the short-term volatility in the metal’s price - are often governed by new and changing trading modalities and algorithms.

For example, the increased importance of “portfolio rebalancing” by index, commodity, and hedge funds has, for now, introduced a new element of seasonality, one that weighed heavily on gold in late December and early January when many of these funds were large-scale sellers of gold, mostly in futures and other derivative markets, but nevertheless with negative price consequences that are now past.

Shrinking Free Float

Continuing Chinese gold accumulation has important long-term significance that is not generally acknowledged by many gold analysts and market pundits.   Simply put, China’s private-sector gold purchases are unlikely to be sold back to the world market any time soon, certainly not for many years to come and even at much higher prices.

Not only are gold exports from China illegal - but many, if not most, Chinese savers and investors buy gold with no intention of selling sometime in the future just because prices rise, inflation subsides, equity prices tumble, or any of the other drivers that might trigger sales by Western investors.  For the Chinese, these are long-term, quasi-permanent holdings.

The same can be said of central-bank gold purchases, not just by the People’s Bank of China, but by most of the central banks that have been building gold reserves in recent years.

As a result, the supply of available gold in the marketplace — what I call “free float” – is diminishing . . . and any pickup in gold demand for jewelry, investment coins and bars, official reserve accumulation, etc. will have a more high-powered affect on the metal’s price than might have been the case a few years ago.

More Money Will Fuel Gold’s Ascent

Prospects of further monetary easing by the world’s three top central banks - the U.S. Federal Reserve (the Fed), the European Central Bank (the ECB), and the People’s Bank of China (the PBOC) - also know no season and are also becoming more supportive.

In each region, signs of slowing economic activity, unacceptable or worsening labor-market conditions, and continuing restrained consumer price inflation suggest that central banks will press harder on the monetary accelerator in the months ahead.

As in the past, quantitative easing or other steps to raise credit availability by the Fed, the ECB, and the PBOC could fuel surprisingly big moves in the price of gold in the months ahead.

Wild Cards

Finally, there are a number of “wild cards” that may affect gold prices - for better or worse - in the days and weeks ahead.  At the top of my list:

• America’s political log-jam and Washington’s inability to reach a consensus on important federal debt and budget measures;

• Heightened tensions in the Middle East - with saber-rattling by Iran, oil-price uncertainties, approaching Egyptian elections, and the threat of civil war in Syria;

• Europe’s continuing sovereign-debt crisis, further downgrades by the credit-rating agencies, the looming Greek default and departure from the euro-zone, possibly followed by other deeply indebted countries.

• And, perhaps most importantly, how the U.S. dollar reacts in world currency markets to any of these unfolding developments and to further monetary easing by the U.S. Fed.

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Gold Sizzles

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In case you hadn’t noticed, gold prices have been surging to new all-time high rising to $1,878.90 an ounce in intraday trading on Friday, August 19^th.

Whether gold continues to skyrocket, settles into a new trading range around recent levels, or plummets as high prices discourage buyers and encourage profit-takers is anyone’s guess.

At some point, however, we will see a correction, perhaps a sizable one.  After all, even strong bull markets never move up in straight lines.  I would not be surprised to see gold stumble - falling back $100, $200, or even $300 - before prices begin working their way higher once again.

My advice to gold investors is to use sell-offs, when they occur, as opportunities for scale-down buying.  And, those who are underweighted or own no metal should gradually acquire physical metal with their focus on long-term portfolio protection rather than short-term profits.

Adding to my short-term caution has been some price-related relaxation of physical demand and the appearance of increased quantities of gold scrap returning to the market, especially from India and other price-sensitive national markets.

I’m confident gold’s long-term uptrend will continue in the months and years ahead, ultimately reaching a multiple of today’s record level.

Limited Downside Risks

Gold will soon begin to benefit from increased seasonal demand - demand that should support the yellow metal’s price and limit downside risks right through New Year’s Day.

There are three distinct sources of seasonal demand: (1) Western jewelers step up fabrication demand ahead of Christmas gift-giving late in the year; (2) Indian dealers begin stocking up ahead of the late summer and autumn festivals and wedding season; and (3) in December and January, the approaching Chinese lunar new year triggers another sharp rise in gold demand.

For sure, irrespective of the season, Asian demand - principally from China and India - for physical metal will continue to underpin these markets and limit downside risks as buyers step-up on any sharp price dips that may occur.

So, too, will bargain hunting by a number of central banks eager to raise their official gold holdings without disrupting the world gold market by increasing upward price volatility.

Bullish Economic Forces to Continue

There is no reason to believe that the forces and factors pushing gold higher - in the past weeks, months, and years - are simply going to disappear anytime soon.  I’ve been talking about many of these for years . . . and, I expect I’ll still be talking about these same pro-gold forces for years to come.

At the top of my list of bullish forces supporting the long-term gold-price uptrend are: (1) recognition of recessionary trends in the industrial economies and the implications for future monetary policy; (2) the lack of faith in the U.S. dollar and the euro; (3) increasing Western investor participation - both retail and institutional - in the gold market and the re-legitimization of gold as an asset class; (4) continuing expansion of the big Asian markets, China and India, even if growth moderates in these countries; (5) rising official-sector demand as emerging-economy central banks seek reserve diversification.

Steroids for Gold

The recent rush of gold buying is, in large part, a rational response to rising uncertainty, anxiety, and fear that the U.S. and European economies are stumbling badly . . . and world financial markets are increasingly vulnerable to an epileptic seizure, or worse.

World stock markets and industrial commodity prices are reacting to the same uncertainties, registering the downward shift in expectations about future economic growth.

In recent days, signs of renewed recession on both sides of the Atlantic and Europe’s worsening sovereign-debt crisis are raising expectations that the Federal Reserve and European Central Bank (ECB) will both be compelled to pursue evermore stimulative monetary policies beginning with a new round of quantitative easing in the United States and stepped-up ECB purchases of sovereign debt and/or interest-rate cuts in Europe.

These policies - and the implications for future inflation and monetary debasement - are like steroids for the gold market, causing investors and central-bank reserve managers to seek the protection of gold.

In any event, whatever happens in the U.S. and European economies, it is hard to imagine a realistic scenario that won’t push gold prices significantly higher.

Central Bank Acquisition: More Important Than You Think

Importantly, contributing to gold’s recent swift rise has been the growing interest and stepped-up acquisition of gold by the official sector.

This was underscored by the Central Bank of Venezuela’s recent announcement that it was repatriating much of its official gold reserves from foreign custody.  Statistics from the Bank for International Settlements (the BIS) suggest that a number of other countries have, in the past year, repatriated gold rather than store it in the custody of the Bank of England, the New York Federal Reserve Bank, or in the vaults of other central banks.

While these are not purchases of gold affecting the world market supply/demand balance, the trend toward repatriation illustrates the special role gold plays as an asset of last resort among central bank reserve managers.

Increasingly, central banks are buying gold:  South Korea announced a couple of weeks ago that it had purchased 25 tons over the past two months, almost tripling its central bank gold holdings.  Thailand’s central bank, too, has been an important buyer, recently adding nearly 18 tons to its official gold stocks.  Even the Banco de Mexico bought 100 tons earlier this year, joining China, Russia, India, and Saudi Arabia - all of which bought large quantities in recent years.  Russia continues to buy gold regularly from its domestic production - and, we think, China does likewise though it chooses not to report its purchases.

Recently published statistics of official-sector gold demand greatly under-estimate actual central bank purchases.  In addition to significant on-going purchases by the People’s Bank of China, a number of other central banks are likely buying gold on the sly.  At the top of my list of candidates are the reserve-rich OPEC central banks, like Saudi Arabia and possibly Kuwait, which may use their sovereign wealth funds to purchase metal on their behalf without the need to include this metal on the central bank’s books.

News of central-bank gold repatriation - and, even more so, outright purchases - is likely to encourage more central banks underweighted in gold to begin or continue buying.  Like much of the new demand coming from private investors, central bankers are apt to be purchasers for the long haul, holding gold as a diversifier and insurance policy against what they perceive to be the growing risk of U.S. dollar and European currency depreciation and debasement.

I expect the rising trend in central bank interest and accumulation of gold will be an important force in the market for many years to come.  In the meantime, bargain hunting by a number of central banks eager to raise their official gold holdings without disrupting the world gold market will help limit downside risk.

For more on gold’s day-to-day developments and short-term prospects, follow me on Twitter @NicholsOnGold.

Filed under: Gold Briefs | American Precious Metals Advisors, central banks, China, euro, European Central Bank, gold, gold investment, gold price, inflation, Jeffrey Nichols, monetary policy, Quantitative Easing, sovereign risk|No Comments

Gold’s Long March Upward Continues

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Despite gold’s recent run up to new historic highs, I believe the yellow metal’s price has far to go - both in future percentage appreciation and duration before the great gold bull market comes to its ultimate cyclical end.

Right now, there is no evidence of a buying frenzy to suggest we are anywhere near a long-term top . . . but there are plenty of rock-solid fundamentals that suggest the market is healthy with plenty of room to move higher.  Moreover, the world economic and geopolitical environment remains very supportive - and seems likely to remain pro-gold for years to come.

My forecast, published here on NicholsOnGold and in other speeches and reports, of $1700 gold by year-end 2011, now seems within easy reach.

And this is just the beginning of gold’s next great leap upward, a leap that will carry the metal to $2000 an ounce in 2012 - with prices heading still-higher, quite possibly to $3000, $4000 and maybe even $5000 an ounce by the mid-to-late years of the decade.

From a long-term perspective, gold prices near $1500, should we ever return to that level, $1600, or even $1700 an ounce will prove to be bargains.

As I have cautioned in the past, expect high two-way price volatility and periodic sharp corrections, corrections that some will mistake as the end of the bull market - but consider these opportunities for “scale-down” buying, opportunities to acquire additional metal at bargain-basement prices.

A Pause that Refreshes

Rising some $300 an ounce from its January 2011 low point and more than $120 in just the past few weeks, gold has scored a series of successive all-time highs.  Now, however, there is certainly some risk of a sharp short-term correction, particularly if the political-economic news on either side of the Atlantic looks less threatening to financial market stability.

A political compromise to raise the U.S. Treasury debt ceiling and agreement to narrow the Federal deficit in future years that avoids any downgrading of Treasury debt by the rating agencies would remove or reduce an important source of anxiety that has contributed to gold’s recent strength.  News of positive movement toward or actual completion of an agreement could trigger a swift - but temporary - gold-price retreat.

Speculative long positions held by institutional traders on world derivative markets have increased sharply in recent days.  Should the market lose upward momentum, speculative pressures could quickly turn negative.  Moreover, if the short-term news turn bearish for gold, liquidation of these long positions and/or institution of new speculative short positions could leave the market especially vulnerable to a swift correction .

Adding to my short-term caution has been a price-related relaxation of physical demand and the appearance of increased quantities of gold scrap returning to the market, especially from India and other price-sensitive national markets in recent weeks as prices rose above $1550 and approached $1600 an ounce.

I expect Indian and Chinese scrap reflows will diminish significantly over time, even at high price levels.   In the meanwhile, should gold approach or fall below the $1550 level, scrap supplies will quickly abate and price-sensitive demand, smelling a bargain, will re-appear.

Hot Summer, Hotter Autumn

Contrary to the view expressed by most serious gold analysts, we said in past reports that gold would not pause for its typical summer vacation — and it hasn’t!  Nor would we see this summer a seasonal relaxation in price volatility.  Indeed, it has been a very hot summer as gold moved up smartly to achieve new all-time highs with plenty of fireworks and price volatility both up and down.

However, come September, positive seasonal factors will kick in - and, other things being equal, give gold still more firepower. There are three distinct sources of seasonal demand, all of which will likely contribute to demand and higher prices as we move into the later few months of 2011:  First, jewelry manufacturers step up fabrication demand ahead of Christmas gift-giving late in the year; second, Indian dealers begin stocking up ahead of the autumn festivals and wedding season, and in expectation of good harvests and healthy household incomes in the gold-friendly agrarian sector; and, third, later in the year and in early 2012, we should expect a sharp rise in gold investment and jewelry demand associated with the approaching Chinese lunar new year.

For sure, irrespective of the season, price-sensitive Asian demand - principally from China and India - for physical metal will continue to underpin these markets and limit downside risks.

So too will bargain hunting by a number of central banks eager to raise their official gold holdings without disrupting the world gold market by increasing upward price volatility.

Central Banks Rediscover Gold

Official statistics published monthly by the IMF show that central banks, as a group, have been busy buying gold.  Russia, India, China, Saudi Arabia, Mexico, and Brazil have been among the big buyers in recent years and a number of other countries have added smaller amounts of gold to their official reserves.  One big surprise was Mexico’s purchase of some 100 tons earlier this year as a hedge against the possible decline in the value of their U.S. dollar reserve holdings.

Moreover, a recent survey of 80 central bank reserve managers predicted that the most significant change in their official reserve holdings in the next 10 years will be their intentional build up in gold reserves.  They also predicted that gold will be their best performing asset class over the next year and sovereign debt defaults will be their principal risk.

Sovereign Debt Crisis Prompts Safe-Haven Demand

European Central Bank president Jean-Claude Trichet a few weeks ago raised the alarm level on Europe’s debt crisis to “red,” warning that the crisis is nowhere close to being resolved . . . and he also warned of the “potential contagion effects across the [European] Union and beyond.”

Meanwhile, Europe’s sovereign debt problems are worsening and the likelihood of sovereign default by one or another of the more vulnerable periphery economies is increasing, despite the past week’s patchwork aid package that avoided (or more likely postponed) a sovereign default by Greece.

Despite all the talk among finance ministers and the European central bank, it looks like the future fate of “periphery’ country debt is increasingly in the hands of the credit rating agencies who view any delay in full repayment as partial default.

Several factors suggest that the European debt crisis will continue to worsen:

Longer term, the more restrictive fiscal policies the periphery nations (Portugal, Ireland, Italy, Greece, and Spain - the so-called PIIGS) have been asked to accept will push their economies deeper into recession - and increase, rather than decrease, government deficits and borrowing needs for years to come.

More immediately, the downgrading of sovereign debt by the rating agencies raises interest rates and borrowing costs - and pushes these countries closer to the brink (a lesson that the United States needs to learn before it also finds itself with higher Treasury borrowing costs should we suffer a cut in our own debt ratings on U.S. Treasury securities).

As credit ratings decline for the peripheral countries, the rising cost of refinancing maturing debt make it all that much more difficult to keep their heads above water.  Reflecting the recent deterioration in credit ratings, Greek two-year bond yields last week were over 35%, Spanish 10-year bonds hit a record 6.3%, and Italian 10-year bonds were  also yielding around 6%.  Higher borrowing costs will increase government deficits and make repayment of past debt all the more difficult.

An important aspect of the crisis is that default on European sovereign debt, debt that is held by many European banks, will require the banks to write-down these questionable assets, leaving them with insufficient capital and effectively bankrupt.

The broader effect of bank failures on the European economy, capital markets, and banking system could be far more devastating than the Bear Sterns and Lehman Brothers debacle in the United States - and would likely result in the European Central Bank along with the U.S. Federal Reserve flooding financial markets with newly created money, depreciating paper currencies, inflating prices, and boosting gold.

I continue to believe that ultimately the euro, Europe’s single currency, will be replaced by a multi-currency system - with the core countries possibly retaining the euro while the periphery nations will revert each to their own monetary unit or a deeply devalued renamed euro of their own.

With no solution in sight, Europeans will continue to abandon the euro for “safe havens” including gold and, ironically, the U.S. dollar.  At the same time, the problems of the euro will discourage its acceptance as a reserve currency by some central banks - and make gold an even more attractive alternative.

Meanwhile, Back at the Fed

The U.S. economy is still mired in recession, or worse.  Nearly everyone knows it, even if the official statistics show some positive growth in real GDP.  Unemployment remains stuck at over 9 percent.  The huge inventory of foreclosed homes held by banks continues to weigh heavily on home prices.  Various economic indicators released in the past few days and weeks are pointing to the second dip in what may be called a double-dip recession.

So far, most Washington politicos and Wall Street bankers are in denial, refusing to see the worsening signs of renewed recession.  Instead, they are arguing for restrictive economic policies that, if enacted, would exacerbate the developing downturn . . . and which future history books will liken to the policy mistakes of the 1930.

The Fed also fails to see, at least publically, the writing on the wall.  Having ended its program of quantitative easing at the end of June as scheduled, it will - in my view - soon be forced by rising unemployment and sluggish business activity to resume monetary stimulus in one form or another.  Contrary to popular belief, the Fed can stimulate the economy and liquefy the financial system through open-market purchases of securities and even real assets, not just Treasury securities but stocks, corporate bonds, commercial paper, mortgages, credit-card debt, student loans and even real estate.

The resumption of quantitative easing (QE3) or some other program of monetary stimulus will be reflected in a swift and significant jump in gold prices.

As I have said in past reports and speeches, the only viable and politically acceptable means for America to dig itself out of its unbearable burden of excess debt - federal, state and local, housing, and other private-sector debt - is to pursue a pragmatic policy of higher inflation that will deflate the ratio of outstanding debt to nominal gross domestic product (GDP) to historically acceptable and manageable levels.  This is what we did in the 1970s, a decade of stagflation, and we’re already doing it again.  Indeed, under Chairman Bernanke’s lead, the Fed is quietly pursuing this policy of targeting somewhat higher U.S. price inflation.

Pursuit of a mildly inflationary monetary policy will not however excuse the Congress and Administration from developing a responsible believable program of long-term spending restraint and deficit reduction.  However, now is not yet the time to impose these restrictions on an ailing economy - though articulation of a realistic bi-partisan plan for long-run deficit and debt reduction would help calm world financial and currency markets.

Whatever happens in the U.S. and European economies, it is hard to imagine a realistic scenario that won’t push gold prices significantly higher in the months and years ahead.

Other Pro-Gold Trends Continue

Meanwhile, other important pro-gold trends continue unabated.  These bullish trends include:

• The growth in Chinese, Indian, and other Asian gold demand accompanying their expanding economies, growing wealth, rising inflation, and historic affinity to gold in jewelry and as a saving and investment medium.
• The expansion of the gold investment infrastructure around the world - such as the development of gold exchange-traded funds and other forms of physical gold . . . or the implementation of gold distribution systems through banks and other retail outlets in China, India, and elsewhere).
• The recognition of gold as a worthy asset class for inclusion in investment programs and portfolios of individuals; pensions, endowments and other institutions; sovereign wealth funds; and central banks.
• The relative stagnation of new gold-mine production (certainly in comparison to the growth in gold demand) and the rising costs of discovery, development, and operation of new mines.

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Dog Days of Summer: Cooling Off for Gold Unlikely

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The days and weeks ahead could be tumultuous for gold with the yellow metal’s price primed to move one way or the other depending on news from European finance ministers, the European Central Bank, the Greek Parliament and, last but not least, the Fed’s FOMC policy-setting committee and Chairman Bernanke’s news conference later this week.

Technically, gold remains range bound with good support, as we saw last week, between $1515-$1522 and overhead resistance in the $1545-$1555 range.  A break out in either direction, perhaps triggered by news of a more fundamental nature, could signal a bigger move.  Should prices fall, we would view this as a “scale-down” buying opportunity.

Zoned Out

Eurozone finance ministers meeting over the past week-end once again could not agree on a bail-out package for functionally bankrupt Greece, which runs out of cash to pay its debts in the next few weeks . . . and even if they could agree the European Central Bank (ECB) threatens to declare a Greek default if private lenders don’t share the burden with Greece’s public-sector creditors.

The chief risk is that a number of major French and German banks would have to mark down the value of Greek debt on their books, leaving them undercapitalized and in need of recapitalization by the ECB to remain solvent.  Moreover, as credit ratings decline for all of the peripheral countries, their rising interest costs to refinance maturing debt make it all that much more difficult to keep their heads above water.

Quite possibly the Greek parliament in a vote of confidence this week for Prime Minister Papandreou will accept more austerity measures as part of the deal to win Eurozone funding . . . but even this “favorable” outcome will only provoke more rioting in the streets of Athens by public-sector workers unwilling to accept more of the burden of adjustment and a further erosion in their living standards.

Chances are the Eurozone finance ministers and European Central Bank will find a way to postpone the hard decisions that will ultimately end Europe’s failed experiment with a single currency.  But, sooner or later, whatever happens, it is difficult to imagine a scenario in which gold does not emerge the winner, even if the immediate short-run reaction is a sell-off in gold, as we have seen at the start of past financial panics (think Lehman Brothers) as investors seek the liquidity of cash.

Eyes on the Fed

Meanwhile, U.S. and world stock markets are now undeniably in a downtrend if not a full-blown bear market . . . and incoming economic indicators are pointing to a second phase in what is quickly becoming a double-dip recession.

So far, most Washington politicos and Wall Street bankers are in denial, refusing to see the worsening signs of renewed recession.  Instead, they are arguing for restrictive economic policies that, if enacted, would exacerbate the developing downturn . . . and which the history books would liken to the policy mistakes of the 1930.

The Fed also fails to see, at least publically, the writing on the wall - and is preparing to end its program of monetary easing through the purchase of government bonds, a program that both creates new money in an attempt to liquefy the economy and finances the Federal debt at low interest rates without having to go hat in hand to our foreign creditors.

All eyes and ears in the gold and world financial markets will be focused later this week on the June FOMC meeting and Chairman Bernanke’s press conference for the Fed’s assessment of the economy, inflation and employment prospects, and any hints of forthcoming adjustments to Fed policy.

If the Fed, indeed, ends its program of quantitative easing at month-end as scheduled, it will - in my view - soon be forced by rising unemployment and sluggish business activity to resume monetary stimulus in one form or another.  Perhaps not QE2 - a second round of quantitative easing might be difficult to swallow - but a rose of some other name.

We think the only viable and politically acceptable means for America to dig itself out of its unbearable burden of excess debt - federal, state and local, housing, and other private-sector debt - is to pursue a policy of higher inflation that will deflate the ratio of outstanding debt to nominal gross domestic product (GDP) to historically acceptable and manageable levels.  Indeed, under Chairman Bernanke’s lead, the Fed is already quietly pursuing this policy of targeting somewhat higher U.S. price inflation.

Pursuit of a mildly inflationary monetary policy will not however excuse the Congress and Administration from developing a responsible believable program of long-term spending restraint and deficit reduction.  However, now is not yet the time to impose these restrictions on an ailing economy - though articulation of a realistic bi-partisan plan for long-run deficit and debt reduction would help calm world financial and currency markets.

Adjusted for consumer price inflation, using official government data (data that tends to seriously underreport actual inflation felt by American households), suggests that gold should be selling today for at least $2500 an ounce . . . and considerably more if we were to account for the government’s underreporting of actual inflation.

Paper Tiger

Europe’s troubles and the collapse of the euro as we now know it will make the dollar look good by comparison . . . and a rising dollar against the euro could briefly dent gold as traders fall back of the historical inverse relationship between gold and the U.S. dollar exchange rate vis-a-vis competing currencies in world foreign exchange markets.

But a rising dollar would be nothing more than a “paper tiger” soon to be deflated by America’s budget mess, sagging economy, and renewed U.S. monetary stimulus.  As noted at the outset of this brief essay, a setback for gold should be greeted by investors as another buying opportunity as it surely would by those central banks wishing to build gold holdings without disruptively sending gold prices higher.

Hot Summer Ahead

Most gold pundits are anticipating a traditionally quiet summer of the yellow metal.  Historically, gold prices have exhibited strong seasonality - with relative weakness in the Northern Hemisphere summer months and maximum relative strength late in the calendar year.  To a large extent, this seasonal pattern has been a reflection of culturally determined buying habits in the major gold-consuming countries and regions.

For example, India - often the biggest gold-consuming nation - usually enjoys a pick up in gold buying in September when harvests boost income and spending in the agrarian sector, a sector with a high propensity to buy gold for jewelry or saving with any excess income that comes their way.  Around the same time begins a string of festivals that continue into May, festivals that are propitious for marriage, hence requiring gold dowries.  These festivals are also believed by many Indians to be a lucky time to buy gold as an investment.

Also in September, in the United States and other Western nations, jewelry manufacturers begin stocking up and fabricating gold jewelry for the December Christmas gift-giving season followed closely by the February 14^th Valentine’s day, which is also accompanied by much gold jewelry gifting.

Around the same time, the Chinese or Lunar New Year occurring in January or February heralds in a period of gold demand for jewelry fabrication and gift giving across Greater China . . . and is also seen by many as a propitious time for gold investment.

But these seasonal factors are diminishing - largely because investment demand, which knows no season, is growing rapidly in importance and, to some extent, displacing jewelry demand.  First, there is the expansion of secular, long-term, hoarding demand for gold reflecting the growth in incomes in Greater China and India.  As incomes rise, so does demand for gold jewelry and investment bars, in these countries - which increasingly occurs independently of seasonal, festival, marriage, or gift-giving considerations.

In many countries, too, we are seeing an increase in official or central bank buying:  In recent years the list of gold buyers has included China, India, Russia, and a host of other countries for whom seasonality plays no role whatsoever in the decision to accumulate gold reserves and diversify away from the U.S. dollar.

And, importantly, powerful economic and geopolitical forces that also exhibit no seasonality are now increasingly governing short-term investment and speculative trading demand for gold.  The extent to which the typical summer “doldrums” for gold will be overwhelmed by unfolding economic and political events remains to be seen.

But, clearly, gold-price direction and volatility will be affected in the weeks and months ahead by the economic developments discussed above, namely U.S. monetary and federal budget policies as well as Europe’s sovereign debt crisis and the coming disintegration of region’s common currency.

Moreover, what we haven’t talked about the potential for events across North Africa and the Middle East to trigger a rush into gold - because instability spreads to Iran and/or Saudi Arabia; because Afghanistan or Iraq deteriorate into all-out civil war; because democratic reform in Egypt or Tunisia is replaced with new tyrants less friendly to the West; because regime change in Libya, Syria, or Yemen herald in worse; or because oil supplies and prices become less secure.

Clearly, events in this region are not proceeding as first imagined by Western powers.

So, it remains to be seen if the coming summer will be a period of calm and relative stability for gold . . . or a period of great “sturm und drang” with sharply rising prices and greater volatility.  Odds favor the later.

Whatever the immediate future holds in store, we remain firmly committed to our bullish gold-price forecast with the metal trading at or close to $1700 later this year with still higher prices in the years ahead.

Filed under: Gold Briefs | American Precious Metals Advisors, central banks, China, economics, European Central Bank, fiscal policy, gold, gold investment, gold price, India, inflation, Jeffrey Nichols, Mideast, monetary policy, money supply, Quantitative Easing, sovereign risk, U.S. dollar|No Comments