With just under five months to go, 2013 is shaping up to be the first losing year for gold in a dozen years. Few think that, with less than five months to go, the gold price will mount a comeback sufficient to avert a loss this year. That would take a move back up to about $1,675 an ounce, almost 30 percent higher than today's sub-$1,300 level.
But, with outflows from such exchange traded funds as the SPDR Gold Shares ETF (GLD) slowing to a trickle and with prices appearing to stabilize, sharply higher prices could be in store this fall.
As shown below, two of the best months of the year for the gold price lie ahead and it's worth remembering that August has marked many cyclical lows during this ongoing bull market.
Here are some factors that could drive the gold price higher this fall:
1. Another U.S. Debt Crisis
Having been so successful at "kicking the can down the road" since the late-2011 debt ceiling debacle that was a key factor behind gold's all-time high above $1,900 an ounce, most think that the late-2013 budget negotiations will be a non-event. This is probably a good bet, but lawmakers in Washington could still manage to create a crisis of some sort and this would be decidedly negative for the U.S. dollar and good for gold.
Few Americans realize that the statutory debt limit of $16.7 trillion was reached in the spring and that extraordinary measures are now being taken to continue paying the nation's bills. Along with elected officials in Washington, we may have been lulled into a false sense of security since these "extraordinary" measures have become so routine.
2. Higher Inflation
The absence of higher inflation in the wake of trillions of dollars in Federal Reserve money printing has been one of the proximate causes of gold's difficulty this year and it's possible that inflation could move higher in the months ahead. The oil price remains stubbornly high and any more trouble in the Middle East could see crude oil prices rise back toward $120 a barrel, pushing up many other prices.
Though the U.S. economy remains weak, lending standards are beginning to loosen up again and banks could soon start lending out some of the roughly $2 trillion that now sits idle as excess reserves with the Federal Reserve. This would pull money velocity out of its long nose-dive and, all of a sudden, broader measures of the money supply would expand, the key missing ingredient for higher inflation.
3. Gold Imports in China
China has been importing a record amount of gold and deliveries from the Shanghai Gold Exchange have reached unheard of levels as part of the ongoing movement of physical gold from the West to the East. Another 100+ tonnes of the yellow metal were shipped from Hong Kong to mainland China in June and, since gold exports from China are illegal, this metal has been taken off the global market permanently.
If this trend continues, someday the rest of the world will find itself short of gold to ship to China, however, when that day might come is anyone's guess. The Chinese people and the Chinese government are clearly up to something as their accumulation of physical gold at lower prices is unprecedented. So far, this hasn't mattered to traders in the West who set the price, but, it might matter this fall.
4. A New Financial Crisis
It's been five years now since the 2008 financial crisis blossomed and an increasing number of analysts think we're due for another one. Little has been fixed in the world's financial system and the global economy. Big banks are taking on new and different sorts of risks as regulators remain two or three steps behind and asset prices being artificially inflated by central bank largess is now accepted as "normal".
It increasingly looks like the Fed will begin "tapering" its $85 billion per month money printing effort next month and markets are already reacting badly - apparently this news really isn't "already priced in". It's important to remember that September and October are the two worst months of the year for equities and a long overdue correction could lead to a renewed flight to safety to gold.
5. A Black Swan
There are many possibilities for some "black swan" type of development radically changing the way traders and investors see the gold price and the gold market certainly seems to be in need of some kind of a change. These things have happened in the past, giving the gold price a real boost, and they will surely happen again. Whether anything develops before year end remains to be seen.
Comex inventories, central bank gold leasing, developments in the world's biggest gold importers of China and India, and a myriad of financial crisis related events could quickly sneak up on us all and, suddenly, the merits of owning what has served as money for thousands of years might suddenly be popular amongst U.S. investors in a world full of paper money.
I'm not counting on any of these developing, all of them are possible before year-end.
Additional disclosure: I own gold and silver coins and bars.