Can physical demand boost gold during traditionally dour March?
Traditionally March is a bad month for gold, and while some analysts expect gold to revert to type after a strong February, some may have other ideas.
Posted: Monday , 24 Feb 2014
GRONINGEN (MINEWEB) -
Gold investors relived by the yellow metal's strong performance in February, have good reason to take the 7% rise this month as a good portend - historically, February is not a good month for gold.
According to UBS, which looked at historical data from the mid-1970s to today, February is usually a weak month for gold returns, "although percentage declines are generally modest on average."
Indeed, the bank notes, this is not the only seasonal trend that's at odds with historical norms. "On the physical side, Chinese demand remained strong in February even after the New Year holidays, defying its typical seasonal post-holiday lull."
As can be seen from the graph above, while February's historical performance hasn't been great, March's is downright worrying for those hoping that gold's strong run will continue.
And, while the metal has performed against trend in February, UBS believes it might return to typical pattern in the coming month.
"This anticipated seasonal weakness ties in with our one-month call for gold prices to reverse to $1280 from here," UBS says.
The main reason for its view is that, while the rise since the beginning of the year has been orderly, it has been a fairly sizable move and over the course of the period, gold net longs have risen 114%.
And, it says, "given that investor participation has so far been limited to those with short-term horizons, the temptation to book profits is very strong and we expect this to dominate up ahead."
But, while the temptation to book profits may be high, as the bank mentions Chinese demand has been higher than expected in February. And, as noted above, so far this year, prices has not stuck to the traditional script.
Part of the reason for this, could be a change in emphasis on the part of the demand side of the market.
As Reorient's Jeremy Gray points out in a note out last week, " What is also becoming apparent is that the physical market in gold seems to be a bigger driver of prices this month than the financial market. Last year, gold prices were effectively controlled by the bullion banks, which continued to dump more synthetic gold supply into the market by creating paper tonnes of gold. We have no idea how big that short base is right now among the bullion banks but clearly the move up in prices is going to make them think twice about adding more to their short base already.
He adds that the drawdown of gold from the Shanghai Gold Exchange in January alone was 247 tonnes.
"If January is a guide then gold consumption on an annualized basis could be closer to 3,694 tonnes from China and Hong Kong which is well ahead of our forecast....The return of the Chinese housewife as a buyer is going to be an important driver this year we think but clearly a lot of this buying must be the PBOC as they attempt to build their reserves which we think are only 2,000 – 3,000 tonnes," he says.