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August Marks the Start of Gold’s Most Bullish Season
Last Thursday, July 31, gold dipped down to $1280 per ounce, its lowest price since mid-June. The stock market fared no better that day, with the Dow falling 317 points. Oil prices also came down, despite threatened disruptions due to geopolitical tensions in Ukraine (a conduit for Russian energy supplies) and the Middle East. It’s almost as if investors saw the dreaded month of August on the horizon and decided to sell everything. After all, August, September and October comprise the worst three-month stretch for stocks in market history and stocks recently tanked in August 2011 and in September and October, 2008.
|Source: Kitco.com, based on the London pm gold fix (July 31 to August 31)|
We don’t advise selling good stocks to buy gold – as many “gold bugs” seem to advise – but if investors want to diversify their currency accounts, August looks like the perfect time to trade in some temporarily overvalued dollars for the safety and diversification of the world’s greatest time-tested currency – Gold – especially at this time of the year, August, which marks the beginning of gold’s annual late summer surge.
Historically, June and July have been negative for gold (see chart, below), but August marks the beginning of gold’s strongest season. This Bloomberg chart shows that August through November marked the peak seasonal price increases for gold during its recent bull market surge, 2000 to 2011.
The reason gold tends to rise in the last few months of the year is that jewelry fabricators must order their supply of gold bullion to fashion into jewelry for the major world holiday seasons, many of which are tied to gold gift-giving. These holidays include Ramadan in Muslim lands, the Diwali season in India, then Christmas in the West and the Chinese New Year (late January or early February) and Valentine’s Day. Each of these holidays increases jewelry or bullion demand, especially in India and China, the top two nations for gold demand, both of which are nurturing a large and growing middle class – hundreds of millions of people who have been yearning to buy gold their whole lives, and can now finally afford it!
7 Media Myths about Gold
It’s always amusing to watch the mainstream media coverage of gold – a metal which seems new and strange to them. Mainstream investment analysts fare no better when handicapping gold. Bond analysts look for yield and find none; stock market analysts seek earnings, but gold doesn’t provide those, either. Traditional investors look for computerized trading (like gold ETFs), but gold’s historic value usually emerges from holding it in your hand, not from seeing pictures or quotes about it on a computer screen.
Here are seven reasons the press cites for the weak gold prices – and why those reasons may be irrelevant:
#1: Gold is no longer a Crisis Hedge: Despite the outbreak of several hot wars this year, gold has not risen sharply. Two responses: (1) Gold has indeed risen after the outbreaks of global tension, such as the Crimean vote in mid-March, and the escalation of tensions in Ukraine and the Middle East in May and July. However, (2) Most of these conflicts amount to political posturing, saber rattling, or an accidental downing of a passenger jet. The level of violence (so far) has been relatively low, so gold hasn’t “soared.”
The Wall Street Journal stated this link most clearly in their headline: “Even in Rockets’ Glare, Gold Dims.” The author, Liam Denning, opens up by saying “Paranoia, war, economic dystopia: The world of the gold bug isn’t a very happy place.” That’s not really true, in our view. We believe that gold has risen in the last 15 years due to rising global prosperity, not war or inflation. When the world prospers, billions of more people can afford gold jewelry for their loved ones, or gold investments for their secure future. We do not need war to help our gold investments grow, even though war can give gold a temporary boost.
#2: Gold is no longer an Inflation Hedge: Inflation is now closing in on the Fed’s stated 2% threshold, but gold has failed to rise much. Responses: (1) 2% inflation is not the Fed’s “limit,” but its target rate. They WANT to see 2% inflation, since a little bit of inflation is preferable to the threat of deflation. And (2) Higher inflation could return soon, due to possible European energy shortages. When the Fed’s many trillions of QE dollars begin to circulate, we could see “too much money chasing too few goods,” the classic definition of inflation. If we see inflation rising above 5% per year, gold could rise sharply.
#3: India still imposes gold import restrictions. There was great hope that the new (Modi) regime in India would relax gold tariffs, but they have failed to cut those rates (so far). However, Indian consumers have begun buying gold in anticipation of higher prices when those gold restrictions are finally relaxed. The volume of gold imports into India soared 65% in June (vs. June 2013), a strong indication that pent-up demand in India is reaching the boiling point. Also, even if gold restrictions stay on the books in India, silver demand will rise. In fact, the World Silver Survey 2014 reports that India’s silver bar demand hit 80.7 million ounces in 2013, the highest ever recorded and eight times the demand in 2012.
#4: Demand has collapsed in China. The Wall Street Journal reported two weeks ago (in an article, “Dip in Chinese Demand Puts Pressure on Gold” by Tatyana Shumsky) that the China Gold Association said that gold demand in China fell 19.4% in the first six months of 2014 vs. the first half of 2013. But they are comparing a peak period of demand to a more “normal” year in 2014. Also, the China Gold Association only measures gold imports coming to China through Hong Kong, omitting any government imports into Beijing. China does not announce until long after the fact that they have has added gold their foreign exchange reserves, but China did say that it doubled its gold reserves from 2001 to 2009. China still has a relatively low amount of central bank gold, so they are no doubt quietly buying more each year.
#5: The gold supply is rising, putting a damper on gold’s price. The China Gold Association report also said that China’s domestic gold production rose by almost 10% in the first half of 2014 vs. the same period in 2013. That gets all the headlines, but the quiet story beneath the headlines is that South African mining volumes since 2000 are off by more than 50% and U.S. new supplies have fallen by about 15%.
Newly-mined gold supplies declined from a peak of 2645 tonnes in 2000 to 2409 tonnes in 2008. Since then, global supplies have risen back to 2650 tonnes per year, but John Hathaway, co-manager of the $1.6 billion Tocqueville Gold Fund, said (in Barron’s): “Because of cutbacks and a more conservative approach to capital expenditures by managements of most mining companies, it looks to us like new mine supply will level off and maybe even decline after next year. You’ll still have gold being mined, but the supply isn’t going to rise, possibly for three or four years starting in 2016. Even at current mining rates of 2650 tonnes per year, he says, the above-ground global supply of gold is only growing 1% to 2% a year.
#6: Wall Street has cooled off to gold – once burned, twice shy – but Wall Street momentum can change on a dime. Once gold begins rising, Wall Street changes its mind fast. According to data from the U.S. Commodity Futures Trading Commission, the net long position in gold futures rose 20% in the first week of July, the highest weekly gain since March, when gold was rising over the Crimean situation. The trend continued in the second week of July, when the CFTC data showed that large speculators continued to raise their net-long precious metals holdings. But then, the mood changed back to negative in the second half of July. All we need to see is a move to $1350 gold and Wall Street will likely be on board again.
John Hathaway predicts that a supply crunch could result if New York traders wake up to gold again: “If we’re at a stage where, for whatever reasons, Western demand for gold awakes from a 2-1/2-year nap, there is probably going to be less of it to go around, and we could get dynamic moves on the upside.”
#7: Bitcoins are the New Gold. The popularity of bitcoins has not diminished, despite a price correction which makes gold’s wide swings look stable by comparison. Last December, both gold and bitcoins traded at around $1200, but now gold has risen back to near $1300 while bitcoins trade for around $600.
The sales pitch for bitcoins centers on their limited supply, due to complex algorithms, and their inherent privacy – far removed from the prying eyes of Uncle Sam – but that may be an illusion. Regulators don’t like to see underground trading gain legitimacy. Last month, New York’s top financial regulator proposed tough new restrictions on bitcoin companies. The Wall Street Journal reported that “the proposed license includes a long list of requirements for bitcoin businesses. Companies would have to provide extensive safeguards for consumers, including transaction receipts, disclosures about risks, and policies to handle customer complaints. Companies also would have to follow anti money-laundering rules, maintain a cybersecurity program, hire a compliance officer and verify details about their customers.”
Gold has 6,000 years of recorded history in its favor. Maybe bitcoins will eventually compete with gold on an even playing field, but nature has already provided us with the perfect rare and private coin: Gold.