August and January are traditionally strong times seasons for gold, but the World Gold Council (WGC) says the factors which usually drive a strong August are absent this year.
“There are good reasons why we may not experience a strong August this time round and they appear to outweigh the supportive factors,” the WGC said.
High local gold prices and a soft underlying economic environment in India and China suggest a lower appetite for physical gold buying during August. In China, gold was selling at its highest ever price, while average daily trading volumes declined.
“This suggests a lower appetite for physical gold buying,” the WGC said.
The WGC also pointed to the equity market as a possible soft spot for gold.
“Equity markets have managed to deflect weakening fundamentals, poor internals and high (retail) sentiment in H1 (first half of the year), so they might arguably weather weak seasonals too, helped by a strong second quarter earnings season,” WGC said. “This may reduce the demand for hedges, partly explaining low implied volatility.”
“But, if investors do want to hedge, the low equity volatility environment has enabled them to acquire out-of- the-money puts at prices not seen since the Global Financial Crisis, with a possible knock-on effect on hedging demand for gold.”
Longer-term US Treasury yields as inflation drops may also curtail investment demand for gold, without triggering large scale disinvestment.
“The Bank of Japan’s decision to relax its Yield Curve Control policy could ignite yield volatility and push down the US dollar,” the WGC said.
“A weaker US dollar and higher volatility are likely to support gold returns.”
The WGC also points to the risk of a second wave of inflation in the US economy as a factor in support of the price of gold. Gold, a safe-haven investment, traditionally does well in an unstable market.
“August may not be as gold-friendly as it has been in the past, but there are good reasons as to why support for gold will establish itself later in the year,” the WGC said.