Gold is higher today and showing particular strength against the euro and the Japanese yen. The relief rally seen in equities since the latest Greek ‘bailout’ is under pressure as S&P have said the debt rollover proposal would be a “selective default”. The ECB may selectively reject the S&P Greek downgrade and arbitrarily select the best credit rating being offered.

Gold in USD – 1 Year (Daily)

The risk of contagion in Eurozone debt markets and banking systems remains. Portuguese, Spanish and Italian debt has been sold this morning. Systemic risk from contagion in the credit-default swaps market also remains a threat.

In the U.S. political squabbling over raising the $14.3 trillion debt ceiling continues. However, it is likely to be resolved as the massive liabilities incurred (not including unfunded liabilities of over $60 trillion) simply cannot be paid back. It is therefore likely that more debt monetization (creating money to buy government bonds) will occur leading to further currency debasement and the risk of stagflation and severe inflation.

Cross Currency Rates

Gold’s Seasonal Strength – July to December Could See $1,800/z Challenged

Gold has been supported in the traditionally weak “summer doldrums” period due to institutional demand and strong physical demand at the $1,500/oz level, particularly from Asia.

The summer months of June and July normally see seasonal weakness and it is thus a good time to buy on the seasonal dip.

Gold is now entering its period of traditional seasonal strength which is seen between July and December.

Gold tends to take a break in October and then has a second period of seasonal strength from the end of October to the end of December.

This has been primarily due to Indian religious festival, store of wealth, demand in the autumn and western jewellery demand prior to Christmas.

Since the liberalization of the gold market in China in 2003, demand for jewelry and bullion from China for Chinese New Year (mid to late January) is also becoming an increasingly important factor.

It is likely that seasonal weakness in equity markets, with both the ‘sell in May’ factor and tendency of stock markets to be weak and occasionally to crash in October may also lead to safe haven demand during this period.

As noted in the chart above, gold rose strongly (by 22%) from July 2010 to December 2010. This trend was also seen the previous year in 2009 when gold fell in June, rose marginally in July, was flat in August and then rose strongly from September into early December.

As shown in the excellent Erste Group report on gold released yesterday, the strongest months for gold are September, August and then November (see table below).

Thackray’s 2011 Investor’s Guide notes that the optimal period to own gold bullion is from July 12 to October 9. During the past 25 periods, gold bullion has outperformed the S&P 500 Index by 4.7 percent.

“In GOLD we TRUST” – 5th Annual Special Report by Ronald-Peter Stöferle of Erste Group

While meeting clients and industry associates in Austria last week, I had the pleasure of meeting Ronald-Peter Stöferle. We had a great conversation about gold and silver bullion, the markets and the challenges facing us today. He is very astute, knows his history and understands monetary…

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