Gold And Silver Seasonality An Advantage To Seasoned Investors

August 1, 2017

Many investors rightly believe that the gold and silver markets are moved most by geopolitical events, monetary policy, shifting economic paradigms such as inflation or deflation, and a number of other factors - most of which are covered regularly in this newsletter. Few know that there is another aspect to gold and silver's price behavior and that is its seasonality, as shown in the charts immediately below. Seasoned physical precious metals investors often time their purchases during the so-called "summer doldrums" when business is quiet and prices are down. It doesn't always work out that the price trends higher in the second half of the year. (Last year, for example, gold hit its peak of the year in July – the heart of the doldrums.) Given a 20-year history, though, it happens enough to warrant attention. Here we are in August – the month, as you can see, that offers a last chance before we move into the fall and winter busy season and its traditional predisposition to higher prices.

Charts courtesy of Nick Laird/ChartsRUs

Gold and Silver Setting Up For A Major Reversal – Clive Maund

Clive Maund, a respected technical analyst who is not a perennial bull when it comes to gold and silver, now thinks the time is right for a major upside reversal:

“We’ve had to wait 18 months for an opportunity as big as the one we saw late in 2015 to appear again in the Precious Metals sector. ‘Wait a minute’, I hear you say, ‘prices were generally lower back then at that low than they are now, so how can it be as big an opportunity, as leverage is reduced?’

Here are the reasons, one technical, the other fundamental. When prices rose out of the late 2015 low, which was the Head of the Head-and-Shoulders bottom shown to advantage on the 10-year chart for GDX below, they were destined to retrace to mark out the Right Shoulder of the pattern, which is what now has most investors very negative towards the sector again. This time they don’t have to – they can now rise out of this trough and proceed to break out upside from the entire pattern to embark on a mighty bull market. The fundamental reason is this – most investors have been taken in by the specious Central Bank talk about 'normalizing interest rates' and scaling back their bloated balance sheets – but they haven’t got a cat in hell’s chance of doing this – why? – because debt (and associated derivatives) has expanded to such gargantuan levels, that any attempt to bring it under control will send interest rates skyrocketing. Because of this stark reality, they are left with only one option – to inflate the debt away by monetizing it, which means inflation.

Once investors grasp the inevitability of this – and that this process will soon get underway with a vengeance, gold and silver will soar. That is what the charts that we are going to look at today are telling us, and it means that we may never see the bargains in the Precious Metals sector that are now available ever again – or at least not for a very long time.”

Investors Pouring Money Into Silver

"There’s plenty of speculation that silver is due for a recovery," writes Bloomberg's Eddie van der Walt. "In a Bloomberg survey of 13 traders and analysts, the majority were bullish. 11 people said prices would rise and two predicted declines. Among the seven respondents that provided estimates, the median 12-month forecast was $20 -- indicating a 24 percent rally from current levels. Assets in exchange-trade funds backed by silver have risen 6.6 percent since April 24 to 21,211 tons, according to data compiled by Bloomberg."

Evidently, there are a good many who know a good thing when they see it:  Silver at current price levels.  The 21,211 tonnes in ETFs is a record high – something to file under "Major developments most people don't know about. . ."  By the way, financial institutions and funds dominate the silver and gold ETF volumes.  Private investor demand, thus far, has been strangely quiet on the silver front since prices have dropped. Mesmerized by rising stocks and the Trump effect, it would seem. . . . . .Or perhaps they've been waiting for a bottom.  According to silver experts referenced above, we may already be there.

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"Massive Additional Short Liquidation by Banks Foretell a Big Rise in All Precious Metals Prices"

"Look at what they do, not what they say," advises Avery Goodman with reference to the big bullion banks. "They are fleeing from long-standing downside bets they’ve rolled over, year after year, for many years. Some clueless hedge funds (the so-called 'managed money') are taking them over. They will pay an enormous price for doing that. Come mid to late August, for example, some of them are going to be forced to deliver real gold they don’t have. By October, some will be scrambling to source gold bars for delivery. Others will get out sooner than that, but they will pay a very heavy paper money price to do it."

Goodman's analysis of the Commitment of Traders reports tells him that the bullion banks are withdrawing from the short side of the precious metals markets.  We've alluded to this potentiality in previous newsletters. The banks are ahead of the game.  Hedge funds and the like will follow suit once it registers with them that the game has changed.  Then the fun begins. . . . .We could be in the early stages of a quantum shift in the way gold and silver (and by the way, the USD) are viewed among big money players.

Top Analysts See Gold As Important Long-Term Portfolio Holding

By Michael Kosares - July 5, 2017

"There is nothing to prevent an investor from using gold as a tactical or short-term investment purely driven by price performance," says the World Gold Council. "However, research has consistently shown that the true value of gold is linked to a modest, strategic allocation that serves as a core part of a portfolio – a foundation. This has not been demonstrated by the World Gold Council alone (see www.gold.org/investment/ research). Examples abound of other well respected organisations that have arrived at the same conclusion. These include New Frontier Advisors, Oxford Economics, J.P. Morgan, Mercer, and The University of Virginia Darden School of Business, among others.

Indeed, gold’s benefits should not be solely linked to its price. The key lies in gold’s ability to diversify and, thus, lower volatility; reduce losses in periods of financial turmoil, in part due to its role as a high-quality, liquid asset; and preserve purchasing power. Even under the assumption that gold’s average annual return is a modest 2%-4% over the long run – lower than its historical return and akin to the global rate of inflation (see Table 2 in the previous section) – gold’s benefits mean that holding 2%-10% in gold can greatly benefit investors seeking a well-balanced, diversified portfolio. Interestingly, this range also applies to international investors' portfolios."

The point made in the sentence italicized above is something we have always advised at USAGOLD.  Gold's primary role is the preservation of assets in uncertain times, in particular uncertain times fueled by governments' rampant issuance of unbacked paper money and official sector debt – times like the present. Although a 2% to 10% allocation for gold is a good start, those looking to truly diversify their portfolios might opt for a much stronger commitment – something more along the lines of a 10% to 30% diversification geared to your own assessment of the current economic situation. Investopedia, the well-known investor website, offers a similar guideline: "An investor who fears that the U.S.' trillions of dollars in debt and penchant for economic bubbles point to a long-term downward trend for stocks and the U.S. dollar may devote 25% or more of his or her portfolio to metals and mining**. However, most traditional investors with more optimistic outlooks keep their exposure to this sector at less than 10%."

It wasn't that long ago that we were receiving inquiries from clients who had established a 10% to 30% portfolio position in the early 2000s between $270 and $600 per ounce. They wanted to know what I would recommend now that gold constituted 50% of their portfolios, and in some notable cases as much as 70% of their portfolios.  Gold was trading then near the $2000 per ounce level.  At the time, when we did not know if things were going to be worse or better, most opted to simply leave things as they were.  The common refrain, in keeping with the point made by the World Gold Council above, was "I didn't buy it to speculate. I bought it to protect what I have." And, at the time (2009-2013) that is precisely what gold was doing for them.

** Gold stocks should not be viewed as a substitute for real gold ownership in the form of coins and bars. Instead, stocks should be viewed as an addition to the portfolio after one has truly diversified with gold coins and bullion.

Notable Quotables

You and I can’t control whether banks are ready, but we can control whether we are ready. I am working on a number of fronts to help you. My brief time away convinced me beyond any doubt that a crisis of historic proportions is once again bearing down on us. We may have little time to prepare. We definitely have no time to waste. –– John Mauldin

Note:  Mauldin says a major financial crisis will ensue if not by "later this year, then by the end of 2018 at the latest."  He counsels to prepare for turbulence.

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"We think gold may edge higher, but with little fanfare and expect the market to face headwinds."  –– HSBC

Note:  HSBC predicts gold will average $1282 in 2017 and that the USD will decline in 2nd half.  Historically, gold rallies often begin and gain momentum quietly.

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"The Fed’s intrusions since 2007 built on the false premise of a fanciful wealth effect concocted using models that have no place in the real world, have accomplished the opposite. Income inequality has not only grown in the aftermath of The Great Financial Crisis and throughout The Greater Moderation; it has long since smashed through its former 1927 record and kept rising. The Fed’s actions have not saved the little guy; they’ve skewered him." –– DiMartino Booth

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"The debt ceiling will start to dominate headlines as we move through the northern hemisphere summer." –– Standard Bank

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"During the first half of 2017, gold bullion rose 7.75% while the XAU (Philadelphia Index of Gold and Silver Stocks) rose 2.79% (including dividends). Among the notable developments of the first half were the pronounced weakness of the trade-weighted US Dollar (down 6.44%) and the continuing sluggishness of the US economy, both of which call into question the wisdom, feasibility, and credibility of the Fed’s push to tighten credit." –– Tocqueville Gold Strategy Investor Letter

Note:  Nice synopsis. . . .

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"The physical precious metals bid will go infinite — that is, big players holding useless cash will buy up all the gold and silver that’s available, at pretty much any price that’s demanded."  –– John Rubino

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"The West will strive until its last breath to keep the price down, while the East will strive with its every ounce of energy to produce an honest price. The gold price will make movements to the $2500 level, then $5000 level, then $8000 level, then $12,000 level. It is inevitable, like the dawn after a long stormy night, like the rising tide."  –– Jim Wille

Note: Not sure we agree with those price levels, but the sentiment is worth passing along.

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"Silver prices have risen erratically but inevitably, along with debt and most consumer prices, for decades. As of July 2017 silver prices, compared to the national debt, are too low and will rise. The next rally in silver should be huge based on the prospects for expanded war, financial chaos, and central bank 'printing' that will devalue all currencies." ––  Gary Christiansen

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"Stated another way, and in far less erudite terms, the Fed owns the stock market. The institution’s credibility has in our opinion become inseparable and indistinguishable from financial-market stability. This less-than-'candid' institution cannot afford a major downdraft in financial-asset values. It is caught in the lie that the institution’s supposedly superior and privileged knowledge hold the key to future prosperity, economic growth, and policy normalization. The price of an honest reassessment would risk calling into question the extreme policy measures undertaken since 2008." –– Tocqueville Gold Strategy Investor Letter

Note:  Toto, it seems, is tugging at the curtain. . . .

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"It's almost an embarrassment be an American citizen traveling around the world and listening to the stupid shit we have to deal with in this country and at one point we have to get our act together. We won't do what were supposed to for the average American." –– Jamie Dimon

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"Our global investment strategists believe that central banks will act to pop the bubble later this year." –– Bank of America Merrill Lynch

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More recently we’ve seen Fed Chair Janet Yellen note in June that she does not expect another crisis in our lifetime. The reality is that completely ignores how fundamentally distorted money and markets actually are.” –– Nomi Prins

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"The latest figures for gold exports from Switzerland just further emphasise that physical gold is continuing to move eastwards in a big way.  The country’s gold refineries sent 74% of their gold exports to Greater China (the Chinese mainland and Hong Kong) and India alone, while if we add in other south and east Asian nations – Malaysia, Singapore, Taiwan, Thailand and South Korea – and the Middle East – Turkey, the UAE, Lebanon and Jordan – fully 90% of Swiss gold exports that month moved to this region." –– Lawrie Williams

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"The Lone Star state isn’t exactly known for taking the conventional route: so when Texas announces plans to ‘repatriate’ $861 million worth of gold from a bank vault in Manhattan, it’s easy to wonder if they’re up to something. Your suspicions will no doubt then be confirmed when you hear that this will all be housed in the first state-administered bullion depository to be opened in Austin in December 2018. Once up and running, the depository will serve as an alternative stash for gold and other precious metals in place of federally regulated banks or smaller unregulated storage facilities. The hope is for it to then expand into a larger commodities exchange, which would aim to challenge the existing commodities markets places in Chicago and New York, according to reports." –– Wealth Management

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Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years of experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.

Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset-preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.

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Michael J. Kosares has over 40 years’ experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News, Commentary & Analysis," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings. Visit his website at www.usagold.com.

A sheet of gold can be made thin enough to be transparent