Most gold pundits are anticipating a traditionally quiet summer for 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 pickup 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 Feb. 14 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. Increasingly, rising income in these nations 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 in the decision to accumulate gold reserves and diversify away from the U.S. dollar.
Perhaps more important, 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 economic developments, namely U.S. monetary and federal budget policies as well as Europe’s sovereign debt crisis and the coming disintegration of the region’s common currency.
Moreover, potential is unpredictable for events across North Africa and the Middle East to trigger a rush into gold — if instability spreads to Iran or Saudi Arabia or both; if Afghanistan or Iraq deteriorate into all-out civil war; if democratic reform in Egypt or Tunisia is replaced with new tyrants less friendly to the West; if regime changes in Libya, Syria or Yemen herald in worse rulers; or if oil supplies and prices become less secure.
Clearly, events in this region are not proceeding as once imagined by Western powers.