Heat exhaustion and holidays make July tough month for gold

Gold prices have traditionally moved lower in July and August over the past few decades and the past month has been no exception.

NEW YORK - 

July has been a difficult month for gold investors.  Holidays, heat exhaustion, and seasonality contributed to the gradual decline from late June's historic high price for the yellow metal.  Most of July was characterized not so much by physical sales . . . but simply a lack of physical buying, physical buying that had earlier propelled gold to an all-time historic high of $1265 and change on June 21st. 

But, exhaustion gave way to liquidation in the closing days of the month as selling begot selling . . . and gold fell sharply, briefly registering a decline of over $23 an ounce in New York trading on July 27th. 

From last month's historic high to its recent low, gold has suffered a peak to trough decline of over eight percent, but it remains up about six-to-seven percent year to date. 

 EURO SENTIMENT TRIGGERS SPEC SELLING

As in previous sharp declines in recent years, gold has been a victim of institutional traders and speculators who have no particular interest in gold but view it -- like they view currencies, oil and other commodities, and financial derivatives -- as just another market for short-term trading. 

More than anything else, improving euro-sentiment in recent weeks -- culminating this past week with seemingly favorable news on the health of European banks -- has prompted traders and speculators to rebuild long positions in the common European currency at the expense of both the dollar and gold.  In today's market jargon, these players were willing to move back into riskier assets, no longer seeking protection in the dollar and gold as the ultimate "safe havens." 

One indicator of trader/speculator activity is their net position on COMEX, the gold futures exchange in New York.  In July through late last week, the net long position declined by more than 25 percent -- and this week it has surely declined significantly further, triggering the latest steep price decline.  Moreover, trading in the over-the-counter market and among dealers has probably seen an even bigger reduction in net long positions. 

In contrast, investors in gold exchange-traded funds, who as a group may be characterized as long-term "buy and hold" investors, have sold much smaller quantities.  The 18 gold ETFs we monitor have seen liquidations of around 450,000 ounces in the past few weeks.  By far the largest gold ETF, the New York Stock Exchange Traded SPDR Gold Trust, held 41.85 million ounces as of Monday evening, July 26th, down from 42.25 million ounces a week early, registering a decline of only one percent -- not much of a price-influencing decline.  

Similarly, dealers and retailers of small bars and coins report a reduction in physical demand from small-scale investors in recent weeks after a period of intense buying.  Nevertheless, sales are continuing among this group . . . and will likely continue, if not build, in the face of recent price weakness.

THE SEASON FOR GOOD NEWS

The good news for gold investors is that July and August have been the seasonally weakest months for gold prices in the nearly four decades since President Nixon abandoned the last relics of an official gold standard and set the metal free to find its own price in the marketplace.  Over these years, gold prices have typically moved higher during the last four-to-five months of the year, registering an average gain of some seven to eight percent.  

Among the seasonal factors influencing gold is the jewelry manufacturing cycle as the industry gears up for late-year holiday sales in the Western world and January-February New Year sales in the Asian region -- but this doesn't kick in until September when manufacturers return from summer holidays. 

Of more immediate importance, the festival calendar in India also has a strong, often stronger, seasonal influence.  India is, after all, historically the world's biggest gold-consuming nation -- and jewelry buying is typically highest in the weeks just prior to the holidays deemed auspicious for weddings.  This year with gold-buying set to pick up in the weeks prior to the Raksha Bandhan holiday on August 24th and continuing to Diwali on November 5th, Indian gold demand could be a key factor pushing gold higher in the months ahead.

In addition to seasonal influences, price-sensitive Asian demand . . . from India, China, and elsewhere . . . can be counted on to provide support at lower price levels.  Asian gold consumers are savvy buyers. Once they sense the recent downdraft in the price of gold has stabilized, they will return as big buyers.

KEY DRIVERS

The key gold price drivers this year remain the difficult economic situations in both the United States and Europe. 

As we have discussed in these reports over and over again, renewed U.S. economic weakness, continued high or rising unemployment, along with growing Federal deficits and financing requirements will push the Fed to adopt increasingly inflationary monetary policy, undermining confidence and eroding the greenback's purchasing power both at home and abroad.

Europe, too, with more sovereign-debt problems and downgrades by the credit-rating agencies ahead, sluggish growth prospects at best, and political problems arising from the fiscal belt-tightening in some countries, is hardly out of the woods. 

As Europe's sovereign debt crisis will heat up again, we expect another wave of gold buying will push the yellow metal back to and above its recent historic high.  

Jeffrey Nichols is Senior Economic Advisor to Rosland Capital - www.roslandcapital.com and
Managing Director of American Precious Metals Advisors - www.nicholsongold.com

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