Summertime
Shake-Up
Analysts are lining up to warn about the upcoming seasonal weakness in gold.
Here’s why this summer is going to be much different than they expect. Dear John, They’re telling you to get ready for the typical summertime slow-down in gold. Don’t count on it. You see, while most investors think summertime weakness is a steadfast rule of gold investing, the record shows something very different. In fact, if we examine the 17 summers so far this century, it’s easy to see that the pattern doesn’t hold true at all.
Now, there are lots of ways to interpret the charts, including when to assume “summer” actually begins in the investing world. But if we take off on the “sell in May” adage and assume most traders return to work after Labor Day, then we can use June 1 (today, not coincidentally) through September 1 as our supposed period of doldrums.
By that measure, only four times over the past 17 summers was the gold price on September 1 decidedly lower than it was on June 1.
Interestingly, in an equal number of cases, it traded decidedly higher on September 1. And in the majority of cases — nine summers — it ended the summer at roughly the same level as it began (albeit sometimes with dramatic volatility in the interim).
So there’s no hard and fast rule that gold will be weak in the summer.
More importantly, there are plenty of reasons to think it could be very strong this year. A Win-Win Situation No matter what happens, this summer is going to veer dramatically from expectations, for a number of reasons.
First off, the Fed is poised to hike rates once again at the close of its next meeting on June 14th.
Logic would tell you that this move would be bullish for the U.S. dollar and bearish for gold. And that’s why, before each of the previous three rate hikes since the Fed began its “quantitative tightening” program, traders bought the dollar and sold gold.
So the gold price declined going into the rate hike.
But, as I’ve been reporting in these letters and as you can see in the accompanying chart, gold then confounded expectations and began powerful rallies immediately after each rate hike.
So if the same thing happens after this next rate hike, we’ll get a very nice upward move to begin this summer.
And as I’ve also noted, gold will rise even if the Fed doesn’t hike rates at its next meeting for some reason. In fact, it will actually rise much more strongly because of the dovish signal this would deliver to investors.
So we’re in an enviable, win-win situation where it’s easy to see gold rising no matter what happens with monetary policy.
Another factor that will play into this summer’s performance is geopolitical risk. Gold has been strong this spring, posting higher highs and higher lows, even as the mining stocks and silver have, generally, failed to exceed or even match gold’s performance.
This shows that political worries are driving gold rather than longer-term monetary issues.
Usually, political drivers come and go quickly for gold. But as we’ve seen, President Trump has turned this short-term factor into a longer-term, more consistent factor.
More News Tomorrow… As an example of how geopolitics has been driving gold, look no further than today.
Gold traded down by as much as $7.00 today as a big upside surprise in the ADP private sector jobs report (253,000 jobs created against expectations of 185,000) boosted hopes for economic growth.
But as the day progressed, gold regained virtually all of its losses as, once again, political worries (the U.S. withdrawal from the Paris Climate Accord and former FBI head James Comey’s upcoming testimony) sent investors running to gold.
Today also saw Deutsche Bank release a special report in which it said “we feel investors should prepare for a flight to gold” due to today’s uncertain political climate.
But the gold market will remain volatile, to be sure. And we could see a dramatic short-term move tomorrow, in reaction to the May nonfarm payrolls report.
Over the longer-term, though, the picture remains bright for gold as virtually any economic development — growth or deceleration — would benefit the yellow metal.
So while this is shaping up to be a very un-typical summer, the months ahead also hold great promise for gold and mining stocks. All the best,
Brien Lundin
Editor, Gold Newsletter
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