The Summertime Blues
Summertime is a period of seasonal price weakness for gold, silver, and several other metals. Many fabricators reduce their demand for metals during the summer. Jewelry manufacturers, electronic component makers, auto producers and their original equipment manufacturer suppliers join the summer break, retooling for the traditional new model releases of the third quarter. Investors also often reduce their buying, taking a vacation and reflecting on what the first half of the year has taught them. “Sell in May and go away” does not solely apply to equity markets.
In the past two years gold and silver have risen sharply in late June and through July, into early August, as current market conditions over-rode that seasonal pattern of weaker fabrication and investment demand. This may happen again, in July, but on 16 and 17 June the strength of seasonal weakness showed its power.
Gold and silver both sold off sharply, beginning on the afternoon of 16 June following the Fed’s Open Market Committee statement. The statement suggested that yes, the U.S. economy is looking stronger. The Fed stated that it expected interest rates would remain low for at least the next two years, but that by the second half of 2023 it could see possibly higher interest rates. That statement triggered heavy selling across markets, coupled by a six-basis point increase in the 10-year Treasury interest rate (which remained within recent ranges).
It should be noted that the decline in gold prices really began at the start of June, when gold touched $1,920. By 16 June it had dropped to around $1,862.
The selling that began Wednesday afternoon 16 June intensified in overnight trading. Gold dropped from that intraday high around $1,862 to as low as $1,775.50 Thursday morning in New York.
Silver had held up somewhat better during June than had gold, partly reflecting the roll of the July Comex silver futures contracts into September. On 16 – 17 June silver broke below the $27.20 support that had held for more than a month, dropping to $26.02.
Platinum fell to $1,080, while palladium dropped to $2,569 and copper to $4.2475 per pound.
Causes and Occasions
The FOMC statement and higher Treasury rates on 16 June were the occasion for the sell off. The cause was a complex set of financial market opinions that the economic recovery after the lock-down was proceeding apace and gathering strength, that the pandemic was being brought under control in the developed economies of the United States and Europe, China would continue to build on its strength from the second half of 2020, and that overall economic and political conditions were strengthening.
Whither Next
CPM had been suggesting that the prices of all four major precious metals might weaken in the June – August period, before rising again in the final quarter of 2021. Our projection of weaker gold prices during this period was predicated in part on seasonal weakness in investor and fabricator demand for gold during this time, but with a heavy emphasis on the idea that by now the U.S. and Europe would be coming out of the lockdown, the pandemic would look better under control in the developed nations, there would be stronger optimism about economic growth going forward, and investors would move away from gold and silver for a time as hedges against bad things. All of this is emerging.
The question is where prices head next, both on a short term and a longer term basis. CPM issued new short-term gold and silver Trade Recommendations today, as well as advising our investor and other clients who adopt an intermediate term investment posture (one to four years) and/or a longer term (10 years, open ended) horizon as to our thinking.
For gold our view is that prices remain vulnerable to another sharp leg down in the next few weeks. We expect gold prices to consolidate for a couple of days. If prices bounce higher, they could move toward $1,820 – $1,850. However, it is quite possible that another $125 per ounce decline could occur, which could take gold down to around $1,680 – the low touched twice in March.
Our recommendation to investors who have been waiting to buy on an intermediate term basis is to either start scaling in purchases around current levels. Bolder investors might wait to see lower prices in August or early September.
Open interest in the August Comex gold futures contract as of 16 June remained high, at 38.3 million ounces. The roll of these contracts into October or December contracts over the course of July could push gold prices higher again as it has the past two years, before prices subside in August.
Options oriented investors could buy physical gold now along with puts, or buy straddles involving purchasing both puts and calls.
With silver CPM has a slightly different take. July is the active futures contract for silver on the Comex, and open interest remains high with only 10 trading days remaining before first delivery day. This could take silver prices back up in the near term, with an initial target around $27. 25 – the support level that had held since the middle of May until 16 June. Prices could remain somewhat stronger for silver during the remainder of June, and then accompany gold in July as they have over the past two years.
