Seeking Alpha
Newsletter provider, dividend investing, ETF investing, long/short equity
Profile| Send Message|
( followers)  

By Justin Dove

Last week David Fessler explained how the weather in India affects gold investing.

Since 52 percent of India’s workforce is employed in agriculture, the harvest is a big deal. Unlike their American counterparts, Indian farmers don’t use banks and investments to secure their earnings. They only trust cash and property. And the most valuable asset is gold.

As David discussed, Indians load up on gold after harvest, and then again between October and May – wedding season. But India isn’t the only country to load up on the yellow metal at the end of the year.

  • Tuesday marked the first day of the Muslim holiday of Eid. This is a celebration of the end of Ramadan and is traditionally a period of strong gold consumption in the Middle East.
  • This leads up to Diwali and the Indian wedding season.
  • Then, China usually consumes the metal leading up to its New Year in February.
  • Even western civilizations see increased consumption through holidays such as Christmas and Hanukkah.

In the last ten years, gold prices have averaged an increase of more than 10 percent between August 1 and December 31.

The Price of Gold Between Aug. 1 – Dec. 31
1-Aug 31-Dec Diff. % change
2010 $1,178.00 $1,410.25 232.25 16.47%
2009 $954.25 $1,104.00 149.75 13.56%
2008 $909.50 $865.00 -44.5 -5.14%
2007 $660.25 $836.50 176.25 21.07%
2006 $635.50 $635.70 0.2 0.03%
2005 $431.35 $513.00 81.65 15.92%
2004 $393.25 $435.15 41.9 9.63%
2003 $353.05 $417.25 64.2 15.39%
2002 $300.65 $342.75 42.1 12.28%
2001 $267.70 $276.50 8.8 3.18%
Total Avg. 10.24%

2008: The Only Negative Swing in Gold

As you can see 2008 was the only year since 2001 in which gold prices in August were higher than in December.

We all know what happened that year… Gold and oil prices shot up in July and August as the country saw the early effects of The Great Recession. By December, the gold market cooled down because of the bailouts.

It could be argued that 2008 is the most like our current year. Turmoil has kept prices at levels they will probably not be able to maintain. But can they?

Second Quarter Report

The World Gold Council reported that global demand for gold reached $44.5 billion in Q2 of 2011 – the second highest ever.

Leading the charge was none other than China and India.

Despite higher prices, demand in India grew 38 percent over Q2 of 2010. Demand in China grew 25 percent over the same period. The WGC believes growth will continue over the second half in these regions because of:

  • Increasing levels of economic prosperity
  • High levels of inflation
  • Forthcoming key gold purchasing festivals

Physical demand grew in China and India, but overall it fell 17 percent due to the high prices. Monetarily demand grew by five percent. But ETF consumption was down, offsetting growth in jewelry and technology demand.

What Does It Mean?

Alexander Green seems right on that this gold bubble is bound to burst at some point. Just look at the prices from 10 years ago in the table above. That appreciation in such a short amount of time is reminiscent of the housing bubble. The question is “When?”

It’s concerning that big wigs such as George Soros and Eric Mindich have already liquidated holdings in SPDR Gold Trust (NYSE: GLD). There’s also the Bloomberg report of Wells Fargo warning of a bubble burst.

But bullish reports such as the WGC’s and the history of the traditional gold season offer a contrary viewpoint. Not to mention that the economies of the west continue to inspire fear in the hearts of investors.

It appears this bubble may continue to hold its form for now, but proceed with caution.

Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.

Source: Looking At This Year's 'Gold Season'