Precious Metals

Gold currently struggling

Gold thrives on political and economic uncertainty. Time and again, the metal’s price has been a measure of global anxiety.

So why has the price been struggling to retain recent gains? If it is truly a “safe haven,” why haven’t more funds fled conventional equity and debt markets and sought safety in gold? Why isn’t gold advancing much more rapidly?

Today, the catalog of economic and political uncertainties seems to worsen week by week, among them: turmoil in the Middle East; rising oil and commodity prices; concern about currency debasement and a decline in the U.S. dollar’s value; and the disasters in Japan.

Those observers and analysts of the gold market, like me, who are old enough to remember the 1970s — a decade beginning with America at war in Vietnam, further marked by rising oil prices, plummeting U.S. auto sales and a bankrupt auto industry; a decade of sluggish economic activity with double-digit inflation and price controls at home and declining American prestige abroad; a decade culminating in the Iranian hostage crisis and a record-high gold price briefly near $875 an ounce in January 1980 — wonder why gold isn’t again zooming to stratospheric heights.

Part of the answer is that we have become inured and insensitive to the bad news, news that is dished out daily across our media-driven world.

Part of the answer also lies in the traditional seasonality in the gold price.

Typically, gold’s annual cycle commences in the autumn, in September, with the Indian harvest, as farmers and agrarian workers put some of their earnings in gold, the traditional medium of saving and investment in much of rural India.

Until the recent emergence of China as a gold-hungry country, India was year in and year out the largest consumer of gold, often buying 500 to 700 tons annually, so the seasonal pattern of Indian demand was, and remains, large enough to influence the monthly price pattern in the world market.

Indian buying then continues into October with the Hindu festival of lights, Diwali, considered by Indians to be an auspicious period to buy gold, and the commencement of the Indian “Wedding Season” when parents often buy gold for dowries.

At the same time, in the Western world, jewelry manufacturers begin buying gold to fabricate jewelry for the year-end Christmas season, which accounts for the lion’s share of annual jewelry sales, aided in part by Valentine’s Day gift giving in February.

Meanwhile, late in the year and continuing through January or early February the Lunar New Year celebrated in China and much of East Asia contributes to strong seasonal demand for gold — for jewelry as well as for saving and investment, as many consider it an auspicious time to buy not only for gifts but for one’s own security.

Although the Indian marriage season continues into May, that country’s buying is typically most intense in the autumn and winter months. Indeed, most of the seasonal buying around the world culminates in February and March. As spring begins, global gold demand can drop off quite sharply — and buyers in many countries feel no urgency to buy. Instead, savers, investors and speculators become more price sensitive, buying less on price rallies and more on price weakness.

Clearly, there is much more to the gold price than seasonality. I believe the fundamentals for gold are very positive — and sooner or later I believe the fundamentals — including the rise in global economic and political anxieties we face — will rule the market.

Jeffrey Nichols is a recognized expert on the economics of precious metals markets. He is managing director of American Precious Metals Advisors (www.NicholsOnGold.com) and also serves as senior economic advisor to Rosland Capital LLC (www.RoslandCapital.com), a retail dealer of precious metals investments and numismatic coins. Follow Jeff Nichols on Twitter @NicholsOnGold.


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