Gold News

Gold: Seasonality Changing

Investment events now dictate the seasons for gold, with traditional jewelry demand stepping back...

UNLIKE MOST METALS MARKETS, gold used to have a clearly defined set of seasons over the year, writes Julian Phillips of the GoldForecaster.com.

The factors that dictate these seasons are well established, and are based on past demand patterns. But these seasons have now changed as I believe we will see from May 2009 onwards.

That's when gold should traditionally go into its quiet time – often referred to as the "Doldrums" after that area in the Atlantic where there are no trade winds to move sailing ships back and forth. But here's why you cannot expect such quiet times and such busy seasons to be as predictable as in the past.

The Traditional Gold Season

Taking a typical 'ordinary' gold year, one which would start its cycle at the beginning of September. This is when the developed world returns from its summer holidays and faces the end of the year festivities. On their return from holidays, jewelry manufacturers would enter the gold market to Buy Gold for manufacturing Christmas presents as well as to keep up the supply of gold jewelry to the retail market for ornaments.

This demand would be fairly heavy right through to November, when manufacturing would begin to slow and delivery to the shops would take place.

The romance of Valentine's Day would be the next important date for this trade. Thereafter the year would slow, bottoming to reflect the broader economic activity of the time.

Industrial demand for Gold Bullion would follow a similar pattern, also governed by holiday periods in the different trading blocs. Demand would again reflect overall global economic activity, but right now – as you know – that is currently dropping fast.

The uses for gold are highly specialized, however, and would tend to be less vulnerable to a slowdown than other items. Computers and other electronic applications have become more of an infrastructural set of products than during the "hard seasonality" of gold cycles during the 1980s and '90s. Now hardware must be replaced to ensure that operations can continue to run. Hence this type of demand now has a low seasonality pattern.

The Indian Gold Season

The largest gold market in the world is India, which at its peak can import over 850 tonnes a year. That's more than one third of the world's newly mined gold production each year.

India's demand during the previous three decades also had a well-defined set of seasons. Again their year started at the beginning of September, when the harvests came in and were sold. The cash proceeds from agriculture are not taxable, but the profits from rural investments are. So in order to duck the taxman's radar, these proceeds continue to be invested in property or – more usually – in gold.

Diwali, the Hindu festival of lights, follows in October, and because of the religious implications gold is bought particularly on "auspicious days" before and after these festivals. The "Marriage Season" then commences in October and lasts through until May of the next year, with intermittent breaks in line with the Hindu (as well as Muslim) calendars.

Again these strong periods for Buying Gold are governed by religiously auspicious festivals, ahead of which gold is bought in quantity. And with the bride coming to her groom covered in gold and bearing it as a dowry, gold has woven itself into the fabric of Hindu family life. As a bride cannot own assets, but does own cash, the financial liquidity she brings makes for "working capital" that helps the marriage start on a sound financial note.

This Indian gold market is so large that it adds to the entire global seasonality for gold. And at the end of the Marriage season in May, the globe's gold market moves into the "Doldrums" again. In India, May heralds the time when crops should be planted – just ahead of the Monsoon, the heavy rains that lasted through the summer. By August these are almost ready for harvesting leaving the hard work for August. The date (and strength) of the Monsoon are critical to this timetable, and consequently to gold's seasonality too.

New Changes to Gold's Seasons

Both 2008 and 2009 have now seen these long-standing patterns virtually destroyed. The jewelry market has diminished considerably due to the buoyant Gold Price, lessening its impact on the September to December period in the developed world. In India there have been virtually no imports of gold in the last six to nine months, because Indian consumers have felt that prices were just too high between 12,000 and now 16,000 Rupees per 10 grams, the standard pricing-weight locally.

Right now Indian gold imports remain virtually nil. So the idea that the gold market will quieten in May, becomes a non-event. Because Indian gold demand has already been quiet since the start of the current 'gold year' which began in September 2008.

Thus we do not expect to see any drop off in demand in the gold market this spring. What is there to drop off from?

This lack of Indian and Western jewelry demand begs the question, of course. What has kept the Gold Price up and demand for physical bullion high? It is demand from a new and growing source – non-seasonal, long-term investment demand from wealthy individuals and institutions eager to diversify into assets that will hold their value when other assets are falling in price.

So great has this demand been that it has pushed the Gold Price out of the reach of the usual seasonal factors and will continue to do so until it is satisfied.

What of jewelry and Indian demand longer-term? We believe that this demand will resuscitate in time, as higher prices are established for gold and Indian jewelry consumers (or rather, India's gold investors) can believe that after Buying Gold at these prices it will not fall back again. However, the quantities that they will be able to buy will lessen, since the rural farmer's profit won't have risen to match the new expense of purchasing gold.

As to the developed world's demand for gold jewelry, a similar transition will take place we believe. After all, gold is not only a metal that does not tarnish, it is a metal signifying both wealth and importance. If one has to pay more for a wedding ring then, it has greater impact on the wearer in both ways. It is also one of those items you must have.

Hence, once an adjustment to higher prices has been made demand will recover in the developed world for jewelry too.

Future Gold Seasonality?

The seasons have changed for gold, switching from a yearly cycle to an event pattern. As systemic decay establishes itself in the investment markets, and as investment perspectives factor in the growing uncertainties of monetary inflation and devaluation, gold as a portion of investment portfolios will grow.

The traditional gold market will find it hard to accept persistently rising prices, but that means the Gold Price must keep on rising to push out jewelers and traditional retail demand. This continues to happen even now. So from May until September expect the unexpected. Indian demand will not drop off because it was not there in the typical gold season. It still remains sidelined. The seasons have changed so much that we could well see a busy gold market, right through the 'Doldrums' from May to September.

Traditional demand drivers will remain as only a support for Gold Prices, picking up whenever they start to fall and consolidate. Investment demand will dictate the seasons now with traditional demand taking a back seat. And how long will this last? For as long as the global financial system remains faltering and unable to carry through its tasks reliably.

In other words, until confidence in money is restored once more.

JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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