Three reasons why gold is going to have a big summer - Embry
As concerns grow once more about the health of the global economy and the nature of gold demand shifts, so the yellow metal is likely to shrug off its traditional summer funk.
Posted: Wednesday , 08 Jun 2011
Traditionally, gold tends to take a bit of a breather during the Northern Hemisphere summer. But, there are some, like Sprott Asset Management chief investment strategist, John Embry, who believe this year might be a little different.
Speaking to Mineweb.com's Gold Weekly podcast, Embry said, because of what is going on at a big picture level geopolitically, gold is likely to have a big summer.
"I don't like putting numbers and dates in the same sentence because you always make yourself look bad - but I would be very surprised if it doesn't take out $1,650 this summer and maybe headed towards $1,800 over the next three months," he said.
To back up the statements, Embry points to a number of macroeconomic factors that are likely to have a bearing on gold prices over the next few months.
Firstly, much of the seasonality that is traditionally associated with the metal comes from Asia where gold purchasing is strongly related to the wedding season and, in India because much of the demand traditioanlly comes from rural areas, the sowing cycle.
"People forget," Embry said, "that the gold market is changing fairly significantly from traditional sources of demand into investment demand as an alternative to currencies... investment demand doesn't know seasons - it buys gold because it is fearful of other assets."
Fear is a dominant theme in another of this summer's big economic events - the end of quantitative easing in the U.S and worries about the country reaching its constitutionally mandated debt ceiling.
Embry says, these two events are likely to have a significant impact on the gold price, especially given the recent data that suggests, the U.S. economy could begin to recede once more.
"If you want to withdraw enormous amounts of stimulus by cutting the deficit dramatically at this point, or if QE2 actually marks the end of quantitative easing there's no question that the United States' interests rates are going to go up dramatically because from the numbers I look at, the Federal Reserve has been buying the vast majority of the all the treasuries that have been coming into the market."
"In my opinion we have reached the point of no return. We are either going to take a collapse in the dollar or a collapse in the economy depending on which direction they take. The idea that they can return to normalcy in my opinion is out of the question at this point. They are way too far off line."
The third reason for gold's likely strong performance comes from Europe. "There are an enormous number of problems in Europe, just as there are in United States and to me the conclusion one should arrive at is neither of these currencies are attractive and that to me is one of the underlying factors why I am so bullish on the gold price," he says.
" I look at the Greece situation and I see absolutely no way out that's palatable to the euro and the European banks or what have you that hold a lot of this paper. In some way the Greeks cannot afford to carry the debt load they've have got and somehow that's going to have to be addressed."
Beyond the summer, Embry continues to remain positive on the outlook for precious metals, but he does caution that it can never be only way traffic.
"You are always going to have corrections and there are people who are in this market who are using leverage that had better be careful because the corrections can be quick and violent. But having said that, for you to say that the bull market in gold is over is essentially by saying that we are going to re-establish paper currency as viable and I don't think that's going to happen - I am of the mind that before this whole mess is ended we are going to have a new monetary system and as we make our way towards that, gold and silver will be refuges."