The gold market has a saying — “sell in May and go away” – for a good reason: Asians like to give gold jewelry as wedding gifts and tend to hold most of their weddings in the Spring. Asian jewelers therefore have to load up on inventory – in the form of gold bullion – in winter. This demand cycle puts upward pressure on prices in January and downward pressure in late Spring when Asian buying dries up.
But not this year. Starting in May, when history says gold should be weak and gold bugs who know what’s good for them should be off doing other things, gold jumped from $1,250 to $1,500, where it currently sits.
Now the question becomes: Is the “buy in December” part of the cycle still valid or did the unusual Summer action invalidate the thesis? This matters because a typical January spike from current levels would take gold to within shouting distance of its all-time high of $1,900 – putting the US in the (large and growing) club of countries where gold is at record highs. Which is the same thing as asking whether the dollar will fall relative to gold as the euro, pound and C$ did recently.
The other big question is why seasonality didn’t dominate the action this year. What other factor or factors are at work to send gold higher when Asians aren’t buying? One possible answer is that central banks, rightly losing faith in their own ability to manage their currencies, are shifting their reserves to gold. This widely-circulated chart shows German central bank gold rising for the first time in this century.
Which means a couple of things. First, Germany’s central bank, the Bundesbank, is widely seen as an island of sanity in a sea of monetary crazy, which makes it influential. News that it is now a buyer of gold rather than a seller might influence the dimmer bulbs running other central banks, making government buying a feature of the gold market for years to come. Second, since the source of the Summer action had nothing to do with Asian jewelry demand, there’s no reason to expect Asia’s typical January buying to depart from past patterns.
Taken together, rising central bank gold buying and typically-strong Asian demand could make January just as much fun as this Summer was.