Whether the 40 Year Pattern of Lower Gold Prices in August Will Hold True

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 |  Includes: AGOL, AGQ, DBS, DGL, DGP, DGZ, DZZ, GLD, GLL, IAU, PHYS, SGOL, SIVR, SLV, UBG, UGL, USV, ZSL
by: Doug Eberhardt

The bickering by Congress over the U.S. debt ceiling has caused the price of gold and silver to bounce a little higher for the month of July. I had expected Congress to come to a conclusion and a return to normalcy but the bickering between both sides has only caused consumers to lose faith in their efforts and thus the price of gold and silver has moved higher.

But this pattern of higher prices in July is normal. In fact, it is a 40 year pattern that I first reference in June when I wrote "Dollar Cost Average Into Physical Gold And Silver On Pullbacks." I have copied the 40 year charts revealing the patterns for gold and silver again below. Please note the rise in prices in July and subsequent fall in prices into August-September.


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What The Experts Continue to Say

Kitco.com is a website I frequent to see what the so-called experts have to say about gold (sans Jon Nadler). They have a pattern of printing articles that fall in line with the normal, gold up, dollar down pattern. But when the price of gold is down and the dollar down, they don't have a real reason for it, so they look for other economic data or simply call it "profit taking" to explain what's going on in the precious metals market. Like yesterday, for example. At the time of this writing, gold was down $4.90, the dollar Index broke below 74, and below were the Kitco headlines at that time.


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With the gold price bouncing back to even, the Kitco headlines changed to the normal gold up on dollar weakness.


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It's easy to fit whatever is going on with gold to whatever data you want. Trying to predict what will happen in the short term for gold isn't easy. But the set up for the August decline in price is one that investors should take note of.

Signs of Life Coming for the Economy?

Congress has a week to get some sort of a deal made and they will. While I am surprised it has taken them this long, they have to get something done or the U.S. will get its first lowered credit rating ever and the U.S. voters won't let any congressman off the hook come election time if that's the case. Their careers are at stake here and they will come to an agreement.

Consumer confidence is up. You won't see an article like that on Kitco. For that matter, most every other gold site talks about inflation as the main reason to own gold. Most don't realize that the purchasing power of gold rises in deflation, not inflation. While there has been inflation in certain sectors (food and energy), the biggest of them all, housing, has been deflating for five years.

Despite the inflation caused by Bernanke's bouts of quantitative easing, it is definitely still deflation he is worried about. Japan has struggled with deflation for 15 years with government spending and a close to zero interest rates resulting in a debt to GDP ratio that leads the world. This was before their disasters. They haven't been able to stimulate anything. Japanese real estate is down 75%. The Nikkei is down 75% and yet the Yen is still hanging in there but this won't last.

In fact, the U.S. dollar is due for a bounce despite what all the gold bugs say. Here's why ... it is priced in other currencies that have bigger problems at present (once the U.S. balances its budget and things return to normal).

  • The euro has all of the PIIGS deciding who stinks more. Greece leads the way with this smelly bunch, and they, along with Spain, Portugal, Italy and Ireland can only be supported so long by the IMF, France, Germany and private investors and possibly, of course, our own Federal Reserve - to save the world financial system of course.
  • There is no growth in the United Kingdom despite alleged austerity measures. Unlike the PIIGS, at least they can print their own money.
  • This leaves Japan. I've written quite a bit on Japan, starting with "Is the U.S. following in Japan's Deflationary Footsteps?" The U.S. is simply following Japan's example of government spending to replace business spending and it only prolongs the inevitable. Japan's situation will implode soon enough with their earthquake/tsunami/nuclear disaster. The yen has stayed stronger only because of Japan being a net exporter and being a net creditor. But the system of government paying for things just won't last. Regarding their most recent disasters, you don't see too many Americans planning their vacations to Japan right now. I've even cut back on my sushi intake!

Why the Dollar Could Move Higher Short Term

The eurozone makes up over 57% of the dollar Index. The U.K. and yen about another 25%. These countries alone dictate the future of the dollar as combined, they make up 82% of the U.S. dollar's direction.


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Looking at the GDP of the major countries that make up the U.S. Dollar Index shows the U.S. is still number one according to the World Bank.


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Bringing up the fact that the U.S. still has a healthy GDP only solidifies the fact that while other countries that make up the Dollar Index begin to slide further into financial difficulties, the U.S. dollar would be the natural beneficiary. The Dollar Index has NOT broken to an all-time low as it seems to be hanging in there (although short term it could test this low). But come August, look for the dollar to bounce along with gold and silver to follow a 40 year pattern that has been quite consistent.

While we get the pullback in August/September for gold and silver, keep one thing in mind. This will more than likely be the last buying opportunity at these prices. When this pullback bottoms out, look for the buying opportunity of a lifetime. For those who are thinking of buying gold and silver, dollar cost averaging into a position is the best way to play it. Take the allocation you want to invest into precious metals and periodically buy over the next few months. You actually hope the price falls lower so you can achieve a better overall price.

For those who think gold and silver's days are numbered, please read the following articles;

Lastly, Bob Pisani, Morningstar, Dave Ramsey, NY Times, Money Magazine, etc., etc., etc. - Your 2011 gold "bubble" forecasts didn't turn out so well ... there's always next year ... at least that's what us Cubs fans say ...

Disclosure: Long Physical Gold and Silver