Financial PostSell gold or hold till February
Gold bullion entered into a period of seasonal strength in the second week in July. Gains since then have been significant, thanks mainly to weakness in the U.S. dollar. Where does gold bullion go from here?
Seasonal Influences According to Thackray's 2010 Investor's Guide, gold bullion has a period of seasonal strength from July 12 to October 9. The trade has been profitable in seven of the past 10 periods for an average gain per period of 4.8%.
This year, short-term momentum indicators recorded a buy signal on July 10 at US$907.30 per ounce. Short-term momentum indicators remained positive after Oct. 9, the average optimal exit date. Profit-taking for the current period of seasonal strength is pending. The likely timing of a technical sell signal is this week. Gold also has a second period of seasonal strength from the end of November to the beginning of February.
Technical Influences Gold's breakout above its high at US$1,033.90 per ounce at the beginning of October implies a significantly higher technical target. Gold completed a two-year reversal pattern with an intermediate-term technical target of US$1,300.
However, its US$80 gain since the beginning of October has been excessive and a period of consolidation is likely. Short-term momentum indicators (Moving Average Convergence Divergence, Relative Strength Index and Stochastics) are overbought.
The end of the current seasonal trade will occur when short-term momentum indicators roll over and record sell signals. Intermediate downside risk is to $941 U.S. per ounce, its 200-day moving average.
Fundamental influences Most of the strength in gold bullion is due to weakness in the U.S. dollar, which fell to a 13-month low last week and has yet to show technical signs of bottoming.
The annual US$1.4-trillion government deficit announced last week encouraged international investors to accelerate their efforts to diversify their holdings out of U.S. dollars. On the charts, the U.S. dollar is deeply oversold and due for a short-term recovery.
However, fundamental reasons for the weak U.S. dollar have not been resolved. Government spending continues to accelerate and deficits continue to grow. A brief recovery in the U.S. dollar and subsequent weakness in gold will be followed to a reversion to current trends.
Gold faces a barrier to significant short-term gains. The International Monetary Fund (IMF) plans to sell 403 tonnes of gold into the market in an orderly manner in unison with sales by European central banks. However, negotiations with the Chinese government to purchase at least part of the block are rumoured.
The IMF has an incentive to liquidate at least part of the block before the end of this year to support emerging nations that have suffered unduly from the world financial crisis. A deal to distribute proceeds of the sale could become part of an international agreement on climate change scheduled for negotiation in mid-December in Copenhagen.
Completion of an agreement to sell the block is the likely trigger for the next major upside move in the price of gold.
What to do Investors holding gold bullion are in an enviable position. Should they take profits during the current period of seasonal strength that started in July or should they wait until the end of the next period of seasonal strength from the end of November to the beginning of February?
Holding between now and the end of November implies downside risk of about 10%. On the other hand, holding until next February offers intriguing upside potential. Investors will make the decision this week based on their personal investment circumstances and ability to take risk.