Gold's Seasonal Strength Period
Gold Could See $1,800/oz on Seasonal Strength and Deepening Eurozone and U.S. Debt Crisis
Gold is trading at $1,504.13/oz, €1,039.34/oz and £933.89/oz.
Gold is higher today and showing particular strength against the euro and the Japanese yen. The relief rally seen in equities since the latest Greek ‘bailout’ is under pressure as S&P have said the debt rollover proposal would be a “selective default”. The ECB may selectively reject the S&P Greek downgrade and arbitrarily select the best credit rating being offered.
Gold in USD – 1 Year (Daily)
The risk of contagion in Eurozone debt markets and banking systems remains. Portuguese, Spanish and Italian debt has been sold this morning. Systemic risk from contagion in the credit-default swaps market also remains a threat.
In the U.S. political squabbling over raising the $14.3 trillion debt ceiling continues. However, it is likely to be resolved as the massive liabilities incurred (not including unfunded liabilities of over $60 trillion) simply cannot be paid back. It is therefore likely that more debt monetization (creating money to buy government bonds) will occur leading to further currency debasement and the risk of stagflation and severe inflation.
Cross Currency Rates
Gold's Seasonal Strength - July to December Could See $1,800/z Challenged
Gold has been supported in the traditionally weak “summer doldrums” period due to institutional demand and strong physical demand at the $1,500/oz level, particularly from Asia.
The summer months of June and July normally see seasonal weakness and it is thus a good time to buy on the seasonal dip.
Gold is now entering its period of traditional seasonal strength which is seen between July and December.
Gold tends to take a break in October and then has a second period of seasonal strength from the end of October to the end of December.
This has been primarily due to Indian religious festival, store of wealth, demand in the autumn and western jewellery demand prior to Christmas.
Since the liberalization of the gold market in China in 2003, demand for jewelry and bullion from China for Chinese New Year (mid to late January) is also becoming an increasingly important factor.
It is likely that seasonal weakness in equity markets, with both the ‘sell in May’ factor and tendency of stock markets to be weak and occasionally to crash in October may also lead to safe haven demand during this period.
As noted in the chart above, gold rose strongly (by 22%) from July 2010 to December 2010. This trend was also seen the previous year in 2009 when gold fell in June, rose marginally in July, was flat in August and then rose strongly from September into early December.
As shown in the excellent Erste Group report on gold released yesterday, the strongest months for gold are September, August and then November (see table below).
Thackray's 2011 Investor's Guide notes that the optimal period to own gold bullion is from July 12 to October 9. During the past 25 periods, gold bullion has outperformed the S&P 500 Index by 4.7 percent.
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I think the bond market is in for trouble. Mostly because I think rates are going to have to rise. We are in a period of negative real interest rates.
Rogers Shorts the 30 year Treasury
Jim Rogers, the noted commodity bull, is shorting the 30-year U.S. government bonds and may consider shorting the 5 and 10-year bonds as well, he told CNBC on Monday.
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Getty Images Jim Rogers |
"I cannot imagine or conceive lending money to the United States government for 30-years at 3, 4, 5 or 6 percent —you pick a number — in U.S. dollars," he said.
But he acknowledges that Treasury prices could rally further, given growing uncertainties about a U.S. economic recovery. "There may be rallies, I may be forced to cover, I probably will cover somewhere along the line, but I'm short the bond and plan somewhere in the next week, month or year to short a lot of them."
Investors shorting Treasurys also run the risk of further intervention by the Federal Reserve, which as Rogers admits, may announce further quantitative easing to help the economy in the future. Such a move would push down yields.
But he says quantitative easing cannot go on forever. "Eventually, even the Fed is going to have to throw in the towel because they're turning themselves into bankruptcy as well."
Rogers also doesn’t think using credit default swaps (CDS) is a good way to bet against Treasurys because the U.S. is unlikely to default and will likely choose to inflate itself out of a debt crisis.
"If that happens, they haven't defaulted, I mean you're bankrupt if you own their bonds, but technically they haven't defaulted, so anybody buying a credit default swap hasn't gained anything," he said.
Buy Dollars Over Euros
Despite his bearish views on the U.S. economy, Rogers says he is long on both the dollar and the Euro, but for now is choosing to stock up on the dollar over the Euro.
"The U.S. dollar has been beaten down so much and there are so many bears, including me, that usually when that sort of thing happens, there's a rebound."
Rogers says he bought the Euro almost exactly a year ago at $1.20 and still owns it. The single currency currently trades at $1.45.
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Is corn giving us a sign?
The price of corn is the latest of a series of signals that remind investors about 2008, the year the financial crisis spread across the globe and Lehman Brothers collapsed, Simon Derrick, chief currency strategist at Bank of New York Mellon, wrote in a note Monday.
On June 9, the front month corn futures contract hit a high on $793 before staging a "notable reversal," down 21 percent by the close on Friday, Derrick wrote.
The front month futures contract for corn hit a high of $765 on June 23, 2008, only to plunge 34 percent by the start of August, he added.
"We are certainly not arguing is that 2011 is a carbon copy of 2008," Derrick wrote. "Nevertheless, it is apparent that a similar set of warning signals continue to emerge from a variety of different markets."
In early 2008, a clear reversal in prices of basic foodstuffs happened well before oil prices peaked in July, with a dramatic fall in wheat prices the most prominent, he reminded.
By the time that oil prices and, a week later, the dollar changed course in mid-July 2008, wheat prices were down more than 30 percent, according to Derrick.
"As we argued in early July of that year, the reason why this mattered was that it signaled a dramatic abatement in global inflationary pressures that would see investors turn from seeking out the currencies with the most hawkish central banks to, instead, favoring those with the most growth oriented monetary policy stance (or, more simply, a retreat from risk)," he wrote.
Analysts at Bank of New York Mellon have stressed the similarities between 2011 and 2008 for a few months, the most notable being the reversal in wheat prices, which have fallen about 35 percent from their peak in February.
Silver also fell 30 percent since the start of May and the Baltic Dry Index, which tracks shipping prices, is half the level it was at last September, Derrick wrote.
"While it may tell us little about what should happen this morning (it is worth recalling that the USD continued to fall all the way through until mid-July 2008), these signals only add to our view that this summer could see some telling reversals in the currency markets," he added.
© 2011 CNBC.com
URL: http://www.cnbc.com/id/43629248/
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