Summer May Prove Hot for Gold Prices Despite Seasonal Tendencies

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". . .anyone holding gold right now should sleep rather well."

I am often asked whether it is a good idea to be in the precious metals market during the summer period known as the Summer Doldrums, in which demand for gold dries up temporarily.

After looking at the seasonal effects on gold, some think it prudent to wait through the summer in hopes of entering the market at lower prices. However, after considering important fundamental factors, such as the increase in the money supply, it is not a good idea to wait until summer's end to enter a market that sooner than later is heading higher. Naturally, there will be pullbacks along the way, but the potential cost of being completely out of the market is too steep.

The June downleg in the precious metals is visible also in other currencies, but the price reversed very quickly once it briefly broke below the multi-month support level and touched its 200-day moving average. The very temporary breakdown and rapid comeback above the support level is a bullish development.

Buying pressure was very strong indicating potent demand will prevent gold from going much lower right now. Additionally, since the breakout above previous highs has been verified twice and took several months, it seems that we are now ready to advance further.

Using the GLD ETF as a proxy, medium-term gold looks bullish. The local bottom I predicted in past updates has materialized, and both visible indicators (Relative Strength Index and the Stochastic Indicator) suggest higher prices are likely. The Stochastic Indicator has put in a bottom and the RSI is at levels that do not suggest a plunge. Therefore, anyone holding gold right now should sleep rather well.

Summing up, the historical tendencies favoring the summer doldrums scenario may not play out this year, as many significant developments, such as the tremendous increase in the money supply, suggest higher prices ahead. The traditional negative correlation between the dollar and precious metals has become barely visible in the past two weeks, but that matters little, as gold, silver, and mining stocks are likely to rise even without significant influence from the USD Index.

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