Gold Investing "Strong 'Til May"
Seasonal patterns in the Gold Price examined by a long-time analyst and investor...
PUBLISHER OF the Gold Newsletter and president of Jefferson Financial – the company behind the annual New Orleans Gold Conference – Brien Lundin speaks here to the Gold Report about how his outlook for Gold Investing in 2011...
The Gold Report: When we last talked in September, Brien, you said you saw "very good arguments for significantly higher Gold Prices." Have those arguments now changed?
Brien Lundin: A bit. Back then, the Gold Investing environment was tough because it was so uncertain. There weren't any clear trends. We didn't know if the economic recovery was really taking hold.
At this point, we've firmly established that the economy is in a fairly steady uptrend. This is good for gold in the long term, though I believe it's a bit bearish for gold in the short term. As the economy rebounds over the long term, we'll see a lot of pent-up monetary pressure unleashed. For example, the Federal Reserve is now holding about $1 trillion in excess bank reserves. Right now, that doesn't count as money; but once the banks begin lending and those reserves are turned into loans, they instantly become currency and have a multiplier effect on the economy. We'll see a resurgence in monetary inflation as the economy rebounds and gets into a higher, more stable rate of growth.
Also, as the economy strengthens, we'll see more intense use of metals and commodities. There will be a wealth effect, which will be good for gold, Gold Mining, and for the rest of the metals complex, as well. But until we get there, it's a bit negative for gold because investors will perceive strength in the economy as negative for gold, anticipating that the Federal Reserve will begin to hike interest rates.
TGR: In the December/January issue of Gold Newsletter, you said that at $1380 per ounce. there was $100-200 of pure speculation in the Gold Price. How much pure speculation would there be at $1300?
Brien Lundin: Not much. Frankly, I think the decline from $1420-1320 per ounce. pretty much wiped out a lot of the speculative excess. It blew away a lot of the froth, and we've essentially run out of sellers. Just yesterday I issued an alert saying that gold appeared to be bottoming, but that soon – for some reason yet to be discovered – it would be ready for a rebound. I was thinking in terms of days, not necessarily hours. Come to find out, today [February 3] gold is up $20. I've likened the market, as it stands now, to a stack of dried tinder just looking for a flame. The gold market is looking for a fundamental spark to carry it higher.
TGR: But you see a lot of fundamental support above $1300 per ounce...?
Brien Lundin: Absolutely. I doubt there's more than another $50 of downside in gold from these levels. There really isn't much speculative fervor left in the market and not many sellers either.
TGR: How cautious should investors be about the emerging rebound in the US?
Brien Lundin: We've learned that anything can happen. The economic rebound, as it stands now, is not rock solid. It's vulnerable to a number of exogenous shocks, globally and internally. But I don't think we have the potential for a credit crunch like the one we saw in 2008. The Fed has demonstrated to the markets that it won't allow that. If anything resembling such a situation occurs again, I think the resulting flow of money from the Fed, and the Fed's track record from the last go-around, would lead to tremendous volumes of Gold Investing.
TGR: Of all the ways the economy could go from here, what is the best- and worst-case scenario for gold?
Brien Lundin: The best case for gold would be to muddle along with a bit of economic bad news here and there. That would signal the Fed's intention to keep loose monetary reins on the economy and continue flooding it with more liquidity. Frankly, I think we probably won't see that.
The worst case for gold over the short term would be major evidence of strong economic growth and a decline in US unemployment. The Fed is watching the unemployment rate like a hawk. That will be the primary determinate of whether it decides to curtail quantitative easing part 2 and whether it decides to implement a third dose.
TGR: Were you in favor of the tax-cut measures invoked at the end of 2010?
Brien Lundin: Absolutely. That was necessary for any prospect of an economic rebound. The tax cuts are one of the primary drivers of the strength we are seeing right now. We need these relatively lower tax rates to see some growth in the US Just as importantly, it was necessary to get that question resolved and out of the way. The market hates uncertainty.
TGR: In the February issue of Gold Newsletter you discuss how the Bollinger Bands for gold often predict movements in the Gold Price. Briefly explain that concept to our readers, please.
Brien Lundin: I'm not much of a technical analyst, but every now and then I find things that seem to be fairly compelling. This is one of them. Bollinger Bands are the lines that are drawn by, say, one standard deviation above and below a certain moving average. With my good friend Ron Griess at thechartstore.com, I have been tracking this technical indicator for some time. We noticed that when the Bollinger Bands for a moving average for gold start to pinch or tighten, it has historically signaled an impending price breakout. It works in other markets, as well.
In the February newsletter, we featured a 50-day moving average for gold and the associated Bollinger Bands, which began to pinch once again. There are a lot of ways to interpret this, but to me it signals that the market is figuratively coiling like a spring. When this happens, typically, there is a price breakout in one direction or the other. As in any consolidation pattern, that breakout is usually in the direction of the major long-term trend. With gold, especially over the last 10 years, that trend has been up.
TGR: So, when these bands contract, it signals that there could be a price breakout either to the upside or downside.
Brien Lundin: Correct.
TGR: You also suggest there is evidence – from both a contrarian and a seasonal gold demand perspective – that gold should break to the upside. Can you talk about those two arguments?
Brien Lundin: That's a good way to put it. From a contrarian standpoint, the sentiment in the market has fallen severely. Some of the indicators, such as the Hulbert Gold Newsletter Sentiment Index (HGNSI), had dropped considerably recently while gold was still trading at fairly high historical levels. The market was primed, from a contrarian perspective, to rise. It wasn't overbought by any means; if anything, it was oversold. From a sentiment perspective, that was a positive indicator for gold.
From a seasonal standpoint, we're in the midst of the Chinese Lunar New Year celebration as we talk, which historically is a period of strong demand for gold in Asia. We're also entering the Indian wedding season. Typically, springtime is a very positive period for physical gold demand, and that's usually reflected in the price.
Ron Griess and I were discussing this the other day. He compiled the most comprehensive study of seasonality in Gold Prices that I've ever seen, and turned up some surprises. Looking at the average one-month percentage rise or fall in the Gold Price from 1968-2010, we see that January and February are strong months, as are April and May. I was surprised to see that March is typically a down month for gold. Summer is slow, as we know, and it perks up in August. The best month of the year, on average, has actually been September.
TGR: Could you leave us with some thoughts on what's happening in the gold market, and what people should expect over the next three to five months?
Brien Lundin: I think that 2011 is likely to shape up as a very typical year for gold. We're quite likely to see early seasonal strength this spring, but this will probably be another "Sell in May, Go Away" year. Later this year, as we begin to see more positive economic data in the US, that news will weigh heavily on gold. We'll probably have a decline going into June and July, but I think we'll see signs of growing price inflation ahead of rising interest rates by the fall. Essentially, I think it's a case of play the market in the spring, get ready for a soft patch in the early to mid-summer and make sure you're positioned in early August for what should be a very profitable fall.
TGR: Excellent, Brien. Thank you for your time.
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