Gold Oversold at Seasonal Lows

By: Mark_OByrne

Gold finished trading in New York on Friday at $809.70, down $11.80 and silver was down 3 cents to $14.44. Gold rose in Asian and early European trading and is trading at $821.10/821.60 per ounce (1000 GMT).

Gold's recent merciless sell off continued yesterday. But, the dollar's incredible five day surge appeared to come to an end yesterday, with a sell off on Wall Street (on concerns about financials and slowing global growth) stopping it in its tracks.

The euro pushed back through the $1.49 level and this was supportive of gold. Asian and European stock markets are weaker this morning on concerns regarding the global economy. The Japanese economy shrank 2.4%  (gross domestic product shrank an annualized 2.4 percent in the three months ended June 30) signaling a likely recession and in the UK, inflation rose above the BoE's interest rate for the first time since 1981. The UK now joins the US in suffering from inflationary negative real interest rates.

Gold has fallen from a high of $988 to below $810 in less than a month.  The 20% sell off in less than 30 days has led to significant technical damage to gold. However, gold's fundamentals remain as sound as ever as investment demand will remain more than resilient on geopolitical risk, creeping stagflation and macroeconomic risk.

The vicious sell off has resulted in gold now being massively oversold. While bottom calling is a dangerous pursuit and the old market adage to ‘never catch a falling knife' remains appropriate, value investors and bargain hunters with longer term horizons are likely to be strong buyers at these very depressed levels.

Gold is Oversold and Likely at Seasonal Lows
Gold's deep and lengthy consolidation since March should see a very sharp rally in gold's favoured Autumn months (as was seen last year and in nearly all years since 2000 – see charts below).

Correction and consolidation in any market is healthy and normal. This looks likely to be the last such sell off prior to a strong rally into the autumn as is typical.

Gold seasonal patterns often result in lows in July or August prior to strong rallies into year end. Previous years may be instructive in this regard. Last summer, gold fell some 7% from $687 on July 16th to $641 on August 13th. The $641 reached on August 13th marked the seasonal low and subsequently gold rallied strongly in August, September, October and early November. It reached $845 less than 3 months later for a return of nearly 32%. Gold subsequently had a shallow and brief correction in November and early December prior to rallying from mid December low of $787 to its highs in March of $1003 or a return of 27%.

A similar performance can be seen in previous years in this current secular gold bull market as seen in the excellent charts below which featured at the James Joyce Table in Lemetropolecafe.com.

2001

2002



2003

2004

2005



2006

2007



Adam Hamilton of Zeal LLC recently completed another excellent research piece on gold's seasonal price movements and why they take place. His chart shows the strongest months of the year for gold are the autumn months.

September is the best month for gold, followed closely by November, December and January.

As Hamilton astutely writes, “So of the six months between early August and early February, gold's massive seasonal autumn rally, fully four are gold's biggest months of the calendar year.  You absolutely want to be long gold, and indeed the entire PM-complex since everything PM-related ultimately follows gold's lead, in September, November, December, and January.  Seasonal-demand-driven price increases are very compelling then.

Obviously this is really exciting today since we are now on the verge of gold's biggest seasonal rally of the year.  But remember that seasonals are a tailwind, a secondary indicator.  So if gold was overbought today and greed abounded, the bullish seasonals could easily be overridden.  But thankfully it is not, indeed just the opposite has occurred.  Gold is deeply oversold today and sentiment is horrendous.  Excessive levels of both fear and frustration have conspired to create an explosively-bullish sentiment mixture.”

Today's Data and Influences
The focus will be on the US consumer today, with retail sales for July due for release.

Gold and Silver
Gold is trading at $820.10/820.60 per ounce (1000 GMT).
Silver is trading at $14.80/14.84 per ounce (1000 GMT).

PGMs
Platinum is trading at $1503/1510 per ounce (1000GMT).
Palladium is trading at $313/318 per ounce (1000 GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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