China, Russia see golds seasonal pullback as buying opportunity
To be honest, gold hadnt done much since flirting with the $1,270 level a couple of weeks go. But investors with any sense of golds seasonal patterns will know that March historically has never been a strong month for the yellow metal.
Why? Because the Asian holiday buying that traditionally propels gold higher in January and early February tends to wane after the Lunar New Year holiday, which the Chinese celebrate by purchasing huge quantities of gold jewelry, bars, and coins. This years Lunar New Year peaked on Feb. 8, around the same time that the U.S. stock market hit its lows for the year.
Strong spring rally ahead?: Lunar New Year gold buying is what U.S. Global Investors CEO Frank Holmes has described as The Love Trade, in which gold is accumulated for its festive attributes. Other Love Trade periods include the end of Ramadan in Muslim cultures; Indias Diwali festival; and Judeo-Christianitys Christmas and Hanukkah traditions.
With the Lunar New Years Love Trade over for 2016, accompanied by some renewed momentum in U.S. stocks, its no surprise that gold has eased back from its highs. And yet it remains up about 17% and is still one of this years best-performing assets.
March usually vies with June for the worst month in terms of gold-price performance. Writing about mining equities, Adam Hamilton of Zeal Research might just as well have been speaking of gold bullion when he noted, The red-hot gold stocks have spent most of March in consolidation mode, grinding sideways near their 2016 highs.Interestingly this months rally pause is par for the course seasonally in gold-stock bull markets.Like gold itself, this sector tends to slump to a seasonal low in mid-March before embarking on a strong spring rally in April and May.
Strongest February on record: This correction should not be unexpected, therefore. There are certainly reasons to think that gold could correct, wrote noted gold expert Adrian Day. After all, we have seen a very strong rally, with the strongest February on record; it would be foolhardy to expect that to continue without a pause. The first quarter is seasonally strong, with the April to June period typically soft. Moreover, the speculative net-long positions on the COMEX have increased vastly in recent months, and thus are vulnerable to profit taking.
In fact, current bearish commercial positioning on the gold futures market suggests that further weakness could lie ahead.
Given golds huge bull-market resurgence in 2016 and its well-known seasonal pullback pattern, what should investors do now? Buy the dips, of course. Low interest rates, a dovish Federal Reserve, a peaking dollar, stock-market volatility, and ongoing inflows into precious-metals ETFs all suggest that gold could be set to resume its run higher on any number of catalysts.
I suspect there will be a pullback in the weeks ahead, but it is likely to be shallower and shorter than normal seasonal corrections, certainly than those of the past couple of years, Day added. And after this pullback, gold will recover to move higher this year. We have seen the lows in the long gold bear-market (or super-cycle bull correction, which is how I prefer to view it).
China, Russia seize the dip: Investors around the globe with a longer-term view are indeed buying the pullbacks. The Wall Street Journal just published a March 28 story titled Chinese investors see golden opportunity.
Chinese investors have been snapping up gold bars and coins, overshadowing the usual purchases of gold jewelry and contributing to the metals price rise of 16% from six-year lows in December, it reported. The uncertainty confronting global economies has driven up demand from a different sort of buyer the hard-nosed investor.
Moreover, mainland Chinas bullion imports from Hong Kong are showing signs of recovery.
Russia also is buying on the sovereign level, with the IMF reporting that Moscows central bank bought 356,000 ounces of gold in February to become the largest buyer of the precious metal among the world's central banks, according to RT.
Silver ETF inflows at 2-year highs: Silver ETF inflows also remain strong despite the slowdown in the metals sector. Investors are buying silver through funds at the fastest pace in more than two years even as prices drop to the lowest in almost a month, Bloomberg reported.
Holdings in silver-backed exchange-traded products jumped 845.6 metric tons in March, heading for the biggest monthly increase since August 2013.
Longer-horizon investors might do well to stick with the same philosophy of buying low now to bank on higher returns later. Though no guarantee of future price performance, golds past seasonal patterns confirm that we shouldnt be surprised by its current pullback nor by more moves higher as the year progresses.