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We have argued for some time that gold was due for a longer term cyclical revival.  Gold was severely oversold and prices far below average cost of production while demand was actually at record levels. Global equity prices that are negatively correlated to gold were higher for longer than normal because money was so cheap, that people were investing in equities to get a return, despite little genuine growth, and cheap debt was being used not for growth but for share buy backs further pushing up the share price bubble. It was a combination of the market and financial engineering that caused the pendulum to swing well past the mean and kept gold in an extended bear market.  This recent bear market was said to be the worst for miners in 90 years and the worst for gold in 30 years.

The long awaited bull market has returned, based on some fairly mundane fundamentals that have been ignored for some time. Equity market valuations were high and not based on real growth and bubbles always pop. The decline in Asian growth served to be a wake-up call to the market. There is long-term correlation of gold to negative and low real rates as well as a negative correlation to general equity markets, when gold becomes a safe haven asset.  The geopolitical backdrop only serves to support that cyclical rebalancing, as gold is both a safe haven in uncertain times, and part of the tool box that some developing countryies are using in a currency war with the US.

 

UK asset classes returns 1996-2015

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While we do believe this is a longer term bull market for gold that should have between three and five years to play out, that doesn’t mean it will move up in a straight line. The price of gold fluctuates in fairly consistent ways over the course of the year. Seasonal tendencies are like a tailwind that that supports the direction of the market whichever way it is going. The pattern is borne out by decades of data and has obvious implications for gold investors.

 

Gold prices by market conditions 1975-2013

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A rise in prices from November until early February is sparked usually by an increase in buying in the Christmas and New Year holiday season, followed by a price fall to a low in March. It is important to note that the closing price of gold on December 31st is often in the sand that the market will decide it want to be an indication of where gold was at during the year.

 

Gold prices seasonally 1975-2013

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Another upswing from March through late May is then followed by a drop in prices that often leads to the yearly low being made sometime in late July, while a less dramatic upward cycle tends to occur in August and September then a price decline into late October, before prices begin rising again in November.

This year is following the seasonal trend rather neatly, and if it continues we are likely to see steady improvements in the gold price into May. Interestingly the low seasonal price movement towards June will also coincide with the next Fed meeting where the promised second 25 basis point rise will likely occur, with the second rise likely to be announced in the September meeting.  While interest rate guidance has been very clear, and should be priced into gold the weeks before the announcements, gold always trends down, and this year is likely to generally coincide with a seasonal low point in gold generally.  These will be buying opportunities for gold stocks in our view.

It should be noted that a 0.5 percent Fed rate rise does not fundamentally change the low and negative real returns in the world, and other than short term price movements, rates are extremely low in historical terms.  Many are forecasting that fundamentally US growth is not that strong and much of the world is likely to move into a slowdown. Interestingly, research on negative rates has shown recently that rather than encourage people to spend out of a recession, low and negative rates actually push people to save more and top up their pension pots, as well as go to perceived safe havens such as gold.  Of course higher saving, particularly in the context of a period of lack lustre capex trends, cannot be expected to drive faster rates of economic growth in the short to medium term, suggesting we are not going to be able to turn around growth and equity markets in the medium term.

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