Analysis by USAGOLD-Centennial
20 Year Gold Price Chart; Secular
Bear Becomes Secular Bull
One of the
most intriguing patterns in the current bull market in gold has to do with
the annual buying opportunity which crops up in the depths of the summer
As depicted in the graph above, the end of a 20-yr bear market in gold was
marked in 1999, and this new bull market was birthed in 2001.
In focusing especially upon the particular trends revealed during each of
these past seven bullish years, the cyclical buying opportunity in the
traditionally quiet summer months is undeniable. Despite straddling the very
middle of the year, pricing patterns in June and July have, with near
perfect consistency, allowed investors the very latest-possible opportunity
each year to buy gold at levels still below the forthcoming average
annual price for that year (see annual graphs at right).
In three of the past seven years, seasonal lows were accessible as early as May,
typically following a pre-doldrum price surge in the earlier months of the
year (see graphs for 2003, 2004, 2005). Only in the years where the larger
gains were later in the spring (2001, 2006), were average June and July
prices actually lower than those of May. That said, since this year's
significant price gains occurred in the early months of February and March,
one might reasonably suspect that the summer doldrums could arrive a bit
earlier, as they have in previous years matching this early pattern.
Several economic factors support the possibility that the price advantages of
the summer doldrums may also be shorter lived than in years past. Recently,
economic heavyweights like Hank Paulson
(Treasury Secretary) and Jamie Dimon (JPMorganChase CEO) have come forward to
announce that the "worst is over" in the ongoing credit crisis.
This rhetoric seems a little premature, however, as more large write-downs
were announced this past week by AIG, HSBC, France's largest retail bank,
Credit Agricole, and Germany's Commerzbank. UBS cut an additional 5500 jobs
last week to make up for a 10.9 billion dollar first quarter loss. All the
while, a recovery in the U.S.
housing market isn't expected until some time next year. This does not bode
well for the banking sector, and weighs upon the growth potential of the U.S. economy.
Simultaneously, inflation has made its way back into everyday discussion as
food and energy prices have continued to skyrocket. Alan Greenspan recently
commented on the bigger picture: "We are clearly receding with economic
growth at 0 percent. It is too soon to call an end to the credit crisis
stemming from the collapse of the subprime-mortgage market. The economy is
returning to a more inflation-prone period. Import prices are rising, as are
wages overseas, adding to pressures already caused
by soaring cost of food, energy and commodities." To Greenspan's point,
money supply growth is now estimated at 16%, though M3 statistics are no
longer officially published. (Private firms such as Shadow Statistics at
www.shadowstats.com now compile these figures.) And if we were to use the
same guidelines used to derive inflation rates in 1980, the CPI today would
be closer to 12%. Adding fuel to the flame is the aura
of political uncertainty with this year's election and a continued unstable
geopolitical situation in the Middle East.
Gold's role as an inflation hedge and a safe haven is unparalleled, and will
surely draw a great deal of interest as investors look to preserve and
protect their assets against these threats.
Additionally, the gold market remains fundamentally strong. About a month
ago, we published an article called "The Golden Gut Check",
which detailed the increasingly complex and potentially explosive disparity
between physical supply and demand. An excerpt from the article: "When
you account for the dedicated Chinese and Russian production, the projected
central bank quota shortfall, the curtailment of sales from South Africa,
and the potential for accelerated producer buy backs, a different picture
emerges -- one not of copious supply but of shortages. The fundamentals lead
us to the conclusion that there has been real substance to the gold rally of
the past two years -- a rally which has taken the price 75% higher."
"The Golden Gut Check" can be accessed at this URL -- http://www.usagold.com/amk/abcs-goldengutcheck.html
Furthermore, the gold market activity over the past seven months bears a
resemblance to the approximatley eight-month period in late 2005 to early 2006, a time during which
a massive influx of investment capital helped push the price of gold to its
then highest level in 25 years. Subsequently, those same funds exited the
market in May and June of 2006, precipitating a significant correction. From
there, we saw a protracted period of consolidation that set the base from
which this latest major leg up was launched.
Beginning in August of last year and culminating in mid-March, speculative
interest combined with strong fundamentals to push gold to a new record high
of $1030 ($1023.50 on the London
fix). As was the case two years ago, though, large amounts of speculative
capital that flooded into the market were eventually drained right back out
in a profit-taking frenzy, causing
a sizeable price correction. Ultimately, however, corrections and
consolidative periods of this nature contribute to the long-term health of
In late 2006, we compiled a research essay to explain this volatile market
activity. It was entitled "Has Gold Market Volatility Changed
the Fundamental Reasons for Gold Ownership?"
In this piece, we introduced a concept called the "rolling bubble
theory", ascribing most of the volatility to fund activity -- their
large-scale infusions and eventual retraction of speculative investment
capital in short periods of time. This "flow" of funds resulted in
the gold market appreciating more sharply than it might have otherwise, and
subsequently retracing with comparable tenacity. The effective conclusion of
this study, however, was that adding gold to your portfolio in the relative
periods of calm that typically followed these speculative capital flows was a
terrific investment strategy. In November 2006, we suggested that the
post-pullback pricing range of $550-$600 might be the best buying opportunity
of that year. As it turns out, you'd be hard pressed to find a disappointed
gold owner who took on positions in those stable months. Will the same be
said of $850 - $950 range, and the period of apparent consolidation and calm
that we find ourselves in right now?
But the larger point to take from this overview of seasonal price trends is
that one need not necessarily attempt to further refine their weekly or daily
timing of action beyond that which may obtained merely by blind action --
meaning, any random assortment of purchases made throughout May, June
or July on average proves to be a fruitful maneuver by year-end. (And
it just so happens that the latest round of speculative fund flow and
resulting price action appears to be coinciding to nicely augment this seasonal opportunity for 2008.) To
emphasize the point, in the recent 35 years, over two-thirds of the average
annual gains have been registered between August and December, as
demonstrated by the nearby 35-yr summary graph.
While that graph demonstrates that the up-trend of gold's average seasonal
performance transcends both bull and bear market eras collectively, a focus
on the recent bull market reveals an even brighter picture. For the most-recent seven years, randomly made
(i.e., average) gold purchases during these summer doldrum months of
(sometimes May,) June and July, as demonstrated in the graphs above from 2001 through 2007, have subsequently benefited
from notable year-end seasonal strength. Price gains from August through
December have averaged 12.9 percent
-- representing an impressive 30.9 percent as an annualized
rate of gain.
This is certainly good news for the bargain hunter, taking that old Wall
Street adage, "to sell in May and go away," and turning it
completely on its ear.
Disclaimer: when considering any market analysis,
bear in mind that past trends do not necessarily guarantee future
(original 2006 study; 2007 update) THIS 2008 UPDATE by Jonathan
Kosares and Randal Strauss for USAGOLD
- Centennial Precious Metals, Denver; with special thanks to Dimitri Speck of
www.seasonalcharts.com for genesis of the 35-yr overview.
USAGold - Centennial
Precious Metals, Inc.