Gold’s Headwinds Now Starting To Fade – Look For Higher Prices Ahead

Gold and silver prices rose together for the first time in seven weeks, but the metals stayed within well-defined ranges during quiet, end-of-summer trading, setting the stage for positive seasonal factors and possibly rising prices in the period ahead. The strengthening dollar continues to be a major impediment to higher metal prices and dollar bearish developments are sorely needed for any sustained gold rally this fall.

Safe haven demand remains strong due to developments in both Ukraine and Iraq while gold buying in Asia has stayed soft, as is usually the case at this time of the year. With stock markets reaching fresh record highs and investors bidding bond prices higher as well ahead of an important Federal Reserve meeting in September, look for volatility to return and for gold and silver prices to soon break free from their recent trading ranges.

For the week, the gold price rose 0.5 percent, from $1,280.80 an ounce to $1,287.20, and silver gained six cents to $19.46 an ounce. Spot gold is now up 6.8 percent for the year, still one-third lower than its record high of over $1,920 an ounce three years ago, and silver moved back into positive territory for 2014, now up 0.1 percent for the year but still 61 percent below its all-time high of about $50 an ounce reached in early 2011.

After a June surge (a month during which prices normally move lower), it’s been a difficult summer for the monetary metals that always seem to run into some sort of trouble between March and August. Seasonal trends are clear to see in the chart below and recent months have been marked by an ever-narrowing trading range that is ripe for a break-out. The good news for gold bulls is that the best six months of the year are about to begin.

Of course, there are no guarantees that late-2014 will be kind to gold and silver, though an end-of-the-year rally is long overdue, the last one occurring four years ago in 2010.

Prior to the miniscule 50 cent gain during what is normally the fourth best month of the year for gold in August as shown in the chart, metal prices had moved opposite the seasonal trend for four straight months. Perhaps a return to following seasonal trends is in store for the months ahead, a development that would put the gold price on a solid path back toward $1,400 an ounce, a level it has not visited in over a year.

One thing that could stand in the way of this development is the surging trade-weighted dollar that has certainly not been making it easy for the metals to advance of late.

Last week, after more reports of lower inflation prompted more warnings of outright deflation in Europe, it became more likely that the European Central Bank will embark on their own money printing effort. This comes as the Federal Reserve here in the U.S. winds down its asset purchase program this fall and this combination is likely to see the euro weaken further.

Recall that precious metals and the U.S. dollar usually move in opposite directions and a stronger dollar also hurts commodities markets. It’s difficult for gold and silver to mount a sustained rally when the rest of the commodities sector is seeing prices move lower and many traders no doubt took note last week when major commodity indexes moved into negative territory for the year as U.S. stocks notched new record highs.

The inverse correlation between stocks and gold is not nearly as strong as the one between the dollar and gold, however, it will be virtually impossible for precious metals to gain much ground as long as both the dollar and U.S. equity markets continue to rally. Inflation remains tame and, with pressure seeming to build on the Federal Reserve to acknowledge an improving U.S. economy and signal its rate raising plans as soon at their September policy meeting, it’s not clear what might cause a dollar reversal. But some catalyst is clearly needed.

Safe haven demand remains a key support for gold and silver as geopolitical concerns over Ukraine and Iraq increase by the day. Reports of the Russian military invading Ukraine boosted demand for precious metals in recent days as did the latest news from Iraq where Sunni insurgents are weathering U.S. air strikes while expanding their territorial gains in Syria.

A major escalation of either of these conflicts could take some of the steam out of the U.S. stock market rally and negate much of the impact of a stronger dollar, leading to higher metal prices, particularly with higher volume trading that comes in September when vacations end and financial markets once again are in focus. Source

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» Read our article: Why Silver is Going Up Today?

» Read our article: Why Gold is Going Up Today?

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