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Five Reasons Why This Could be a Hot Summer for Gold, Silver

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Seasonal slump in demand should have negligble impact on price.

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Editor's Note: Przemyslaw Radomski is founder and editor of Sunshine Profits. We welcome him to Minyanville.

I'm often asked whether it's a good idea to be in the precious-metals market during what's known as the summer doldrums, when demand for gold temporarily dries up.

After looking at the seasonal aspects of gold demand, one might think it prudent to wait out the summer in hopes of entering the market at lower prices. However, after considering important fundamental factors -- such as increase in money supply -- it's clear that it isn't a good idea to wait until summer's end to enter a market that will be heading higher sooner than later. Naturally, there will be pullbacks along the way, but the potential cost of being completely out of the market is too steep.

The technical side of the market helps us estimate the most probable direction and range of the next move. This week, we begin with gold.

Gold

I believe an update on this topic will be helpful -- especially for those who cover their living expenses in currencies other than the dollar.


Click to enlarge.


This chart features the gold/UDN ratio. The latter is the symbol for PowerShares DB US Dollar Index Bearish Fund, which moves in the exact opposite direction of the USD Index. Since the USD Index is a weighted average of the dollar's currency-exchange rates with the world's most important currencies, we may use the gold:UDN ratio to estimate the value of gold prices in "other currencies."

1. The June downleg in precious metals is also visible in other currencies, but the price reversed very quickly after briefly breaking below the multi-month support level (ratio below 35) and touching its 200-day moving average. The very temporary breakdown and rapid comeback above the support level is a bullish development.

This means that the buying pressure was very strong, indicating potent demand that will prevent gold from going much lower right now. Additionally, since the breakout above the previous highs (corresponds to the 35 level mentioned previously) has been verified twice and took several months, it seems that we're now ready to advance further. (In the USD, the price of gold didn't break though its previous highs earlier this year.)

We need to zoom in to see more details.


Click to enlarge.

Using the GLD ETF as a proxy, gold looks bullish in the medium term. The local bottom that I predicted in past updates has materialized, and both visible indicators -- the relative strength index (or RSI) and the stochastic indicator -- suggest that higher prices are likely. The stochastic indicator has put in a bottom, and the RSI is at levels that don't suggest a plunge. Therefore, anyone holding gold right now should sleep rather well.
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No positions in stocks mentioned.
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