Last week I gave you the potential bearish case for gold over the summer, and this week I flip the script and give you the summer bull case. I do this because summertime tends to be weak for American investment markets including stocks, bonds, real estate, and commodities. The phrase ‘sell in May and go away’ gets bandied about in the financial media as investors position for liquidity and safety while they take their summer vacations.
Typically gold, silver, and commodities indexes will tend to fade a bit during summer as traders have their attention elsewhere. But this summer may be shaping up a bit differently for gold, and that is what we talk about next.
Gold and Silver Analysis
On the following chart, I graphed out the last 5 summers of gold and whether the price rose or fell. The chart shows it is a mixed bag, which is a reversal from the longer-term trend in the gold markets.
In 2019 and 2020, gold did well during the summer, and those could be considered anomalies. Truth be told, there is no prescription for gold in the summer though conventional wisdom has the market softening in the warmer months. It may have something to do with the euphoria summer brings while only the most die-hard investors are thinking about needing the safety and security that gold provides.
2019 was a tumultuous year on the political front. China and the US seemed to be flirting with a political cold war while sanctions and trade policy changes came down from the Whitehouse. In addition, there were early concerns about the fragile global supply chain and whether the economy was truly strong.
While GDP grew almost 3% in 2019, some financial pundits had questioned the stability of the economy. But summer is for ebullience and outdoor pleasure, and most American investors ignored the warning signs that would eventually come to fruition in 2020 during the pandemic.
The rest of the world; however, was witnessing a big shift in global relations between the two largest economies. The US had become much more aggressive towards China, largely to no avail, due to the deficit in trade between the nations. The deficit, from a current account perspective, was not favorable to the US. Meaning, we spent much more on what we bought than what we sold, and the administration was beginning to pay that shortfall some serious attention.
I believe while 2019 was very positive for investors overall, it was a warning for economists who began to finally question whether this decade-long bull market in stocks was due for a correction. Hence, investors bid up gold during the summer at over $200 an ounce and the gold market became quite excited.
Unfortunately, gold faded until the first quarter of 2020, when the pandemic became a real thing and the world began to shut down for fear of a health crisis. Fortunately, we avoided the worst potential outcome of the crisis, but gold once again did its job as a safe-haven and asset of last resort. Gold catapulted over $300 an ounce in 2020 and reached a new all-time high.
Outside of 2019 and 2020, the general trend is for gold to fade down during the summer. We see these phenomena in 2018, 2021, and in 2022. Even though gold ended 2022 slightly up for the year, the metal took a round trip in price down to nearly $1600 before rebounding to end the year. It was last year that I believe the world became convinced of the true staying power of gold.
What were supposed to be the robust alternatives of private crypto currencies, the dollar, and bonds were all experiencing issues as the same time. The chart below is one I have discussed many times, and it bears repeating again. In 2022, gold did not crash when Bitcoin and the stock market were doing just that.
Instead, gold held serve after a brutal summer, and ended the year on a very positive note. I believe this momentum is fresh momentum dating all the way back to 2019 with the geopolitical and supply chain issues, and 2020 in the pandemic. In both situations during different potential crises, gold proved its worth. And given the bank failures we have had so far this year; I believe it will do so in 2023 once again. That is why I am still bullish in gold heading into summer, despite history not being completely favorable for the metal while kids are splashing around in swimming pools and parents are working on their tans while they sleep poolside.
The Macro View
The last few weeks have been schizophrenic in the markets. One month we have a fading housing market, only to be followed up by uncharacteristically strong home resales. Then the next month, that same index crashes down again. I have seen similar behavior in the stock, crypto, and energy markets.
This volatility can be seen in more markets including the dollar, global sovereign bonds, and the stock markets. It is this volatility that is characteristic of what we are facing in the oncoming recession.
The trend towards volatility has been consistent as we head into the end of this bull economic market. All economic bull markets end; we know this as precious metals investors because that is when gold and silver tend to take center stage.
When bull markets are ready to turn bearish, we have periods best described as a market tug-o-war. Bulls want to continue the upside momentum as it is built into their assumptions and modelling. Alas, no one really ever wants a bull market to end even though it happens every time.
The following chart on US recessions can help us understand where we may be headed. It shows that during periods of high inflation, recessions increase. For example, during the 1970s an in to 1980, the US had been dealing with persistent double-digit inflation maxing out around 17%. To quell this, the Fed raised interest rates to nearly 19% and slowed down the creation of money.
With less money being created, prices began to stabilize and the economy set off on a long-term bull market with less frequent recessions. After all, the US removed itself from the gold standard in 1971 and the fiat dollar became the premier trading currency. What followed were several decades of intermittent recessions followed by strong economic and market performance. It was not until 2009 when economists began to worry about the economy, the stock markets, and the stability of US bonds and the dollar. We all know what happened then.
It is therefore no surprise that the pessimism of the economy during the last 14 years led to the biggest moves in gold in history, with several new highs being met along the way if only for a few moments. It is this reason, the long-term macro picture, that I believe gold has reversed its aversion to shining during the slow months.
While gold could fade this summer, I doubt seriously it stays down. There are just too many problems in a fading dollar-based global economy to believe that gold is going to move anywhere but up over the next several years. Any pullbacks I would consider buying opportunities, without exception, until the economic issues are finally resolved not only here in the US, but everywhere. Gold is a global market.
Story of the Week
China’s property market is back in the news. You may remember the issues with China lenders. In 2021 Evergrande, the second largest Chinese developer, filed bankruptcy. Several other lenders either followed suit or expressed serious doubts about their own solvency. Well in 2023, we are back to similar issues in the Chinese housing market.
We can see that investment in Chinese housing is crashing again, which is not a good sign for investors nor the bond ratings of the Chinese real estate market. Investment in Chinese real estate did not recover in 2022, and unfortunately it looks like the real estate market is about to roll over again.
CNBC highlighted the issues as far back as February this year when a piece entitled “China’s real estate crisis isn’t over yet, IMF says” was published. Thomas Helbling, deputy director in the IMF’s Asia Pacific Department, said in a briefing:
“Authorities’ recent policy measures are welcome, but in our view additional action will be needed in order to end the real estate crisis.”
The article goes on to note:
“The property market contributes to about a quarter of China’s GDP and has been a drag on growth, especially since Beijing cracked down on developers’ high reliance on debt in 2020. Chinese authorities started to ease restrictions on financing for the sector over the last several months.” [emphasis mine]
The quote illustrates two key points. First, real estate is a huge portion of China’s economy. Second, authorities are easing lending standards to boost growth. Where have we seen this setup before? Could it be 2005-2007 easy lending policies that led to the crash of Lehman and a near system-wide implosion of the world banking system?
Executive Summary
Gold typically fades over the summer, with exceptions when the world still needs it as a safe-haven. While we have no immediate financial crisis on the horizon, the recent rash of bank failures in the US has investors on their toes and looking fervently towards the horizon for signs of trouble. I suspect gold will do just fine this summer given the overall climate of economic uncertainty and subsequent market volatility.
We discussed a long-term picture of the macro economy and the direction this is likely going. We cannot stay in a stock and bond bull market forever; these things tend to correct from time to time. I expect the next correction to be deep and bullish for the precious metals.
China’s property market is in trouble again. It is about ¼ of their economy, and the largest single property market in the world. If that market goes bust, the world will forget Lehman and the Great Recession quickly. We don’t want that to happen, because it will echo across the world and hit the US markets hard.
Coin of the Week
While gold is in a bit of an early summer lull, I will recommend a gorgeous one-ounce bar by the Asahi mint. Based in Japan, the Asahi mint is a newer entry on the gold stage. However, the company has been refining since 1952 and they also bought the former Johnson Matthey refineries in North America as the British multinational company exited the precious metals industry after more than 150 years of operation. This bar is sure to become another in a line of beautiful private mint products that allow us to have engaging collections of different designs from around the world.
