Transitional periods in investor sentiment are the times when the bulls battle the bears to determine the trend, with neither immediately winning the day.
These periods bring the greatest risk, and opportunity, in the metals markets, and we find ourselves in just such a period right now.
On the one hand, we have the typical seasonal slowdown, in which a withdrawal of Western speculative demand and Indian buying during the summer results in a period of price weakness that, historically, has lasted through late July to mid-August.
On the other hand, we have a seriously slumping U.S. economy that is attracting many investors back to gold, in anticipation of some new sort of monetary stimulus by the Fed — if not QE3, then perhaps a “QE2a.”
Also on this side of the ledger, we see extremely robust demand from China, where investors and savers are buying gold based on relatively high inflation rates in that nation, as well as growing per capita incomes and a cultural affinity for the metal. Importantly, this type of buying is not based on seasonal factors, and has the potential to overwhelm the seasonal tendency for gold-price weakness during the early summer.
But the fact remains, the single most dominant factor now determining the fate of gold and every investment market is U.S. monetary policy. And no one knows at this point whether that will turn out to be bullish or bearish.
The question is whether the current economic “slow patch” will devolve into a more significant and lasting slowdown, or even a double-dip recession. And this question raises the next one: What will the Fed do if that happens?
There seems to be little political will to support a QE3 effort, both within the Fed and on Capitol Hill. But Bernanke and Co. have demonstrated that they won’t hesitate to hit the monetary gas pedal if the situation is serious enough, and this slowdown could get dangerous very quickly. So both equities and gold are looking to monetary policy for direction.
While any Fed initiative toward further easing would immediately send gold sharply higher, I still expect gold’s seasonality to keep it drifting lower over the next six to eight weeks. Coincidentally, that would be about the time you might expect the Fed to announce some form of additional stimulus, if the economic data continues along the current downward course.
Throughout the spring, I told my Gold Newsletter readers to take profits off the table, because I expected the typical May-to-mid-Summer swoon in gold. We wanted to not only preserve profits, but have some cash on hand to take advantage of bargains in late July.
That strategy has proven correct so far. And while gold and silver have had some nice bounces to the upside over the past few weeks, it seems that the summertime slide may have already begun.
Meanwhile, junior resource stocks are continuing a slump that began in early April, and some interesting bargains are beginning to emerge. However, given my expectations of additional weakness, I’m going to wait a bit longer before making any recommendations. My trigger finger is beginning to get itchy, however.
So...we’ll sit tight for now, secure in the notion that summertime clearance sales for the metals and the junior resource equities are on the way, and that the long-term trend remains very bullish.
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