Gold Often Consolidates In Summer, But This Year Could Be Exception With Unresolved Issues

(Kitco News) -Gold often undergoes a period of summer doldrums in which the metal meanders sideways, and in fact it has been in a roughly $35 range for the last two weeks.

Analysts said this summer could be different, however, as gold could make a bolder move due to some unresolved issues such as U.S. and Greek deficits.

Gold for August delivery has not been below $1,520 an ounce on the Comex division of the New York Mercantile Exchange since May 26. However, it also has been unable to make a sustained push above $1,550, although it did get as high as $1,555 on Monday.

“It’s a tug-of-war between the bulls and the bears,” said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures.

The metal might be sideways lately, yet “range-bound is a good performance” considering a number of other commodities have given up some of their strength from earlier in the year, hurt as stocks sagged  on worries about the economy, said Mike Zarembski, senior commodities analyst with optionsXpress.

Gold has held up better than other commodities due to some of the ongoing uncertainty about European sovereign debt, especially Greece, as well as rising deficits in the U.S. and worries about when Congress will raise the debt ceiling, Zarembski said. A weak U.S. dollar has also played a role.

“A lot of traders and investors are looking for some kind of safe-haven hedge, keeping gold supported,” he said.

Further, some of the agricultural commodities remain lofty, adding to inflation concerns, Gero said. Also, he continued, expectations for continued low interest rates in the U.S. are supportive for gold since this reduces the carry cost.

Yet, analysts also cited some factors limiting the upside.

“When the market does rally a little bit, traders seem quicker than normal to take profits,” said Mike Daly, gold and silver specialist with PFGBEST. Some of this is concern about more rate hikes in nations other than the U.S., such as China, he said.

On the one hand, gold remains underpinned by still-high crude prices and economic worries due to the weak U.S. jobs market, Daly said. Still, he said, gold might still be “technically overbought,” and a pullback to the $1,500-$1,450 area might be help attract fresh buying.

Zarembski suggested some market participants might have sold some of their gold to raise cash and offset losses in other markets lately.

He also cited conjecture on the part of some that sales from the International Monetary Fund or central banks could come about to help nations like Greece with their debt problems. “We haven’t seen any evidence of this so far, but that could be in the back of some active traders’ minds,” he said.

Some bears are also concerned about “too many late-comers” to the rally, Gero said. This creates potential for a bout of selling in the form long liquidation, should the market suddenly move against them.

“I think this tug-of-war is going to keep us range-bound for at least the next month or so,” Gero said. Still, he has raised his expectations for a summer range of mostly $1,525 to $1,585 an ounce.

Analysts: This Summer Has Potential For Movement Beyond Usual Consolidation

Gold activity tends to slow down over the summer in part due to the absence of major gift-giving holidays until autumn, as well as summer vacations by traders and investors in the Northern Hemisphere.

Gold will typically “drift around” during the summer months before picking up again in autumn, said Ira Epstein, director of the Ira Epstein division of the Linn Group. He backed this up in a Wednesday research report by running charts showing this pattern for each year since 2001, with 2008 being the notable exception.

“I don’t see anything abnormal going on right now that should impact the ‘norm,’” he said. “The markets already know about the U.S. hitting its debt ceiling, sovereign debt issues in Europe, war in Libya, Yemen being out of control, Iran, Venezuela and Saudi Arabia splitting on oil output issues and so on. In other words while there can always be an unknown force coming into play, the above plays are known.”

Nevertheless, Epstein said, “this is not a typical trading year” with the U.S. economy on weak footing.

UBS pointed out that CME Group trading activity already confirms a quieter environment, with an average daily turnover of just 144,000 contracts so far in June compared to an average 286,000 from January to the end of May.

“Given the event risk surrounding Greece, the end of QE2 (second round of U.S. quantitative easing) and the potential for an extended economic soft spot, however, these range-bound conditions are unlikely to last,” UBS said.

Others say gold could break out of its range due to any escalation one of the many simmering issues. Conversely, should any of these matters be put to rest, this could mean liquidation and an abatement of safe-haven buying.

The normally lighter summer liquidity could exacerbate any big move that occurs, should there be one, said Afshin Nabavi, head of trading with MKS Finance. “We may have a surprising summer,” he said, suggesting that direction of the U.S. dollar could be one key influence.

“We are probably due for a little sideways action,” Zarembski said. “Trading volume has been kind of light so far as the summer season starts in the Northern Hemisphere. But given the political situations, I don’t think the short-term consolidation is going to last.

He suggested gold could threaten $1,600 if the U.S. and European debt situations worsen. “That could be the impetus to get at least one more rally before the end of the summer,” he said.