Sunday, June 28, 2009

>Gold market enters seasonally soft summer period

Gold prices could retreat during the summer as a still sluggish economy keeps inflation down and seasonal reductions occur in fabrication and investment demand.

Still, some analysts said any summer weakness may be more limited than normal, since financial-sector problems persist and destocking may have already occurred in the jewelry industry.

August gold on the Comex division of the New York Mercantile Exchange fell from a three-month high of $992.10 an ounce on June 3 to a low of $926.50 this week before stabilizing, largely on currency-related factors.

"We expect prices to head lower, possibly to $860 or $840," said Carlos Sanchez, associate director of research with CPM Group. "Weakness would be due to fabrication demand being reduced. Usually, gold-gift-giving holidays occur at the beginning of the year and latter part of the year, not only in developed countries but developing countries like India and Pakistan."

He also said investor activity tends to wane in the summer as many players focus more on vacations than markets.

Sanchez said some of the economic data lately have not been as bleak as in past months. Further improvement could take away some of the impetus to buy gold over the summer, he said.

James Moore, analyst with, expects gold to be "vulnerable" over the summer, perhaps trading sideways to lower. He cited the large net long position of speculators as one reason, which means potential for liquidation. As of June 9, the noncommercials were net long by 201,359 lots for Comex futures and options combined.

Moore said longer term, the potential for inflation should be supportive, but gold could be at risk of a test back below $900.

"Certainly, we're finding good support around the $930 level for now, he said. "But given the fact we haven't seen a step-up in buying interest, maybe we have to go back to the $880 area and maybe even back to the $850 before we can pick up fresh buying."

Bart Melek, commodity strategist with BMO Capital Markets, said subdued jewelry demand and a run-up in longer-term Treasury yields could hold gold back in the next couple of months. There also may be less demand for gold as a hedge since central bankers have indicated the dollar is likely to remain the world's reserve currency. This week's round of U.S. data showed tame inflation.

"A combination of these factors makes gold range-bound for the next quarter or two," Melek said, but added, "There is some risk to the downside."

Seasonal Weakness May Be Limited

Others acknowledge gold's tendency for summer seasonal weakness, but nevertheless look for the market to draw support anyway.

Gold fell with other commodities from mid-July last summer, but soon recovered due to troubles at institutions such as Lehman Brothers, Fannie Mae (FNM) and Freddie Mac (FRE).

"Things don't seem to be quite as dire as they were last summer, in terms of major financial and government institutions on the verge of collapse," said Peter Grant, senior metals analyst with USAGOLD - Centennial Precious Metals. Still, he said, systemic risks have not gone away.

Grant said there is the normal cyclical reduction in jewelry demand, but also a parallel of continued safe-haven interest in gold.

"They are kind of offsetting to some degree, which makes range-trading probably the greater likelihood," Grant said. "But the overall trend is up, and any major surprise with respect to systemic risks could have a very bullish impact on gold."

Jeffrey Nichols, managing director of American Precious Metals Advisors and publisher of, suspects any seasonal influence will be less than most summers. Large jewelry manufacturers have already reduced inventories of raw materials, he said. Like other industries, they didn't want to finance the cost during an economic slowdown.

"There shouldn't be any additional destocking over the summer months," Nichols said.

Otherwise, he said, movements in the dollar could be the dominant theme over the summer, as the metal tends to move inversely to the greenback.

"It's still vulnerable technically speaking, but I think it's likely to hold up at $900 or over," Nichols said. "And after we have a period of retrenchment - which we may have already seen - gold should start rebuilding itself."