Sunday, August 29, 2010

Buy Gold in August, expect good returns in next two months

By Renisha Chainani
Believe it or not seasonal factors do affect Gold price levels! This probably sounds counter intuitive initially. Investors and speculators can buy and sell Gold anytime regardless of the passing of the calendar year, so why does the time of year matter? The answer is quite logical. It matters because calendar seasons greatly affect gold investment demand.

These monthly seasonal tendencies reinforce the annual analysis. Summers, especially June and July, tend to be weak during the summer doldrums. August looks strong above in monthly terms, but realizes most of these gains merely offset July’s big losses. But once summer passes, gold tend to rally on balance in most months except October. While they can drift lower other times, these non-summer pullbacks tend to be trivial.

August is the perfect time to stock up and prepare for the highly-probable large autumn (September) gold rally. Gold tends to rally sharply in autumn because of big Asian buying. After harvest, farmers can invest in gold once they know how big their profits are. And gold demand in India in particular, the world’s largest consumer, rockets higher during autumn’s festival season and marriages.

The bottom line is precious-metals stocks have exhibited very definite seasonal tendencies over the course of their secular bull. This is largely the result of gold demand spikes driven by income-cycle and cultural factors that are tied to the calendar year. While stock seasonal are often secondary drivers that can be temporarily overridden by short-term technical and sentimental extremes, prudent traders still pay close attention to these headwinds and tailwinds

Moreover, World Gold Council published report on Gold Demand Trends for Q2-2010, which suggests demand for gold will remain robust during 2010 as a result of accelerating demand from India and China, as well as increasing global investment demand driven by continuing uncertainty over public debt and economic recovery.

Demand Statistics for Q2-2010
Total gold demand in Q2 2010 rose by 36% to 1,050 tonnes, largely reflecting strong gold investment demand compared to the second quarter of 2009. In US$ value terms, demand increased 77% to $40.4 billion.

Investment demand was the strongest performing segment during the second quarter, posting a rise of 118% to 534.4 tonnes compared with 245.4 tonnes in Q2 2009.

The largest contribution to this rise came from the ETF segment of investment demand, which grew by 414% to 291.3 tonnes, the second highest quarter on record.

Physical gold bar demand, which largely covers the non-western markets, rose 29% from Q2 2009 to 96.3 tonnes.

Global jewellery demand remained robust in Q2 2010. In the face of surging price levels, consumption totalled 408.7 tonnes during the second quarter of 2010, just 5% below year-earlier levels.

Gold jewellery demand in India, the largest jewellery market, was little changed from year-earlier levels, down just 2% at 123.0 tonnes. In local currency terms, this translates to a 20% increase in the value of demand to ` 216 billion.

China saw demand for gold jewellery increase by 5% to 75.4 tonnes. While growth in demand in tonnage terms was hindered by extreme weather conditions, the growth in the local currency value measure of demand was 35% to RMB 19.8 billion.

With the return of demand for consumer electronics, industrial demand grew by 14% to 107.2 tonnes, compared to Q2 2009.

Demand for gold for the rest of 2010 will be underpinned by the following market forces:

India and China will continue to provide the main thrust of overall growth in demand, particularly for gold jewellery, for the remainder of 2010.

Retail investment will continue to be a substantial source of gold demand in Europe.

Over the longer-term, demand for gold in China is expected to grow considerably. A report recently published by The People’s Bank of China and five other organizations to foster the development of the domestic gold market will add impetus to the growth in gold ownership among Chinese consumers.

Electronics demand is likely to return to higher historic levels after the sector exhibited further signs of recovery, especially in the US and Japan.

In the coming period, gold may rise further with more expected physical demand from India, the world's largest gold buyer, where festival season begins next week and ends in November.

Renisha Chainani is Deputy Manager (Research) with Anagram Capital Ltd. Ahmedabad.

No comments:

Post a Comment