Since December 2015, gold has turned the corner. I track the gold price in many currencies and it is currently above its 200 day moving average in 30 out of the top 31 cases. The missing one is Japan, where the Yen has been strong. As for the 30 day moving average, things are less compelling. It is only rising when measured in the Indian Rupee – a rare example of an emerging market currency that has failed to rally in recent weeks. Silver is much perkier and is trading above its 30 and 200 day moving averages in every one of those 31 currencies. For that reason, we’ll take a closer look at silver later in this issue.
Atlas Pulse readers know about the 20% test. Every gold bear market has ended with a 20% move from the low. Lesser rallies are not to be trusted. Gold just has just had it’s strongest quarter since 1986, yet that 20% level remains illusive. We need to see a sustained break out above $1,260. So far, gold has met heavy resistance at this level.
Not only was the price move in Q1 record breaking, but so were the investor in flows. We’ve seen an almighty 29 million ounces (Moz) bought this year. That’s 10 Moz into the ETFs, 12 Moz in fresh longs in futures and 7 Moz of short futures positions bought back. If the market had been tighter, you might expect that level of buying power to drive the price much higher. According to Atlas Pulse, 29 million ounces of inflows ought to lead to a $517 rise in price. That would have propelled gold back into the $1500s. Gold has only managed a $200 rally, which tells us that the market isn’t as tight as many believe. Either those mines are spewing out too much gold, or Dr No is a big seller.
This, and other evidence, reassures me that Atlas Pulse’s neutral call is correct for the time being. The low is in place for gold. Equities are rallying again and the pick up in the inflation data remains muted. From a valuation perspective, the price is about right according to the Atlas Pulse bond model. I won’t elaborate on that this month but will do if and when interesting things happen in the bond market. The dollar is also oversold and I can’t bring myself to be a euro bull. The gold bull will come, just not quite yet.
Q2 is hopeless – don’t ignore BOSEQ
Chart note: It’s BOSEQ season. That stands for buy odd, sell even quarters. Thank you James Ferguson for pointing out last time I published this chart, that I had mixed BOSEQ and BESOQ (buy even, sell odd quarters). The seasonality in gold is strong and historically, gold makes no money during Q2. When we sell our equities in the early summer (sell in May), perhaps that’s the time to add to gold.
The BOSEQ concept is one of Atlas Pulse’s more ridiculous ideas, but it’s uncanny how the even quarters, Q2 and Q4, have historically been weak. Q4 has been better than Q2, but only during bull markets. BOSEQ gave the same returns as buy and hold with a fraction of the volatility. What’s more, just to avoid Q2 has been a winning strategy.
I am only too aware that this idea will be proven wrong one year, but I bet that it works over the long term. Given the explosive move in Q1, and the high speculative interest, it wouldn’t be a great surprise if gold does little over the coming quarter.
Seasonality is apparent in many commodity markets. For energy it’s obvious that we consume more during the northern hemisphere’s winter. In grains, it’s also quite obvious as the timing of the harvests are predictable. It’s perhaps harder to comprehend why there would be seasonality in precious metals, but your thoughts would be appreciated as to why. As I have said before, Q2 comes after Christmas, Diwali and Chinese New Year. Perhaps the market just needs a rest following peak demand.