Gold And Silver Defy Seasonal Trends

Historically, March through June is the worst seasonal period for gold and silver prices. From 2004 to 2023, the average month-on-month rate of return on gold priced in U.S. dollars is as follows: March -0.03%, April -0.2% and June -0.25%. 

This year, however, the price of gold rose 13.8% from $2,054 at the end of February to $2,338 at the end of June over those three months. The silver price rose 29% over the same three-month time period.

Gold & Silver Defy Seasonal Price Patterns

Two key factors could have enabled gold and silver prices to defy the monthly seasonal pattern established over the last 20 years. Firstly, the enormous physical demand from the East has spread to several countries beyond China, India and Russia. The second factor is what I call “stealth QE” from the Fed.

Although China claims that the PBoC has not bought any gold for the last two months, anyone who has researched the issue of the amount of gold China buys and holds may take a different view. 

Andy Schectman (of Miles Franklin Precious Metals) commented: 

“Why would it be in the vested interest of a country like China to tell us the truth? They tell us they only have 2600 metric tonnes of gold…and in my entire career everyone would always say that the Chinese are very much not forthright with how much gold they accumulate…and I think it would be in their vested interest to keep that close to the vest.”

The Financial Post reported on July 8th that gold exports to China continue to rise and now represent Ontario’s largest exported product to China. The PBoC likely adds to its gold stack constantly.

But it’s not just China. India recently announced that it was repatriating 100 tonnes of gold from custodial vaults in London and that it may bring home even more. This puts upward pressure on the gold price because it reduces the amount of gold that can be leased to bullion banks who turn around and sell it. 

Global Central Banks Begin Gold Buying Initiatives

Aside from China, Russia and India’s large gold buying, The Central Banks of Tanzania and Uganda have started large gold-buying initiatives to bolster their currency and support the expansion of the mining industry. Nigeria and Vietnam made similar announcements a few months ago. Also, the World Gold Council announced that Singapore is becoming a leading global gold hub to service gold-buying countries as “gold consumption in major emerging economies is rising”. But this also includes established economies in countries like Japan and South Korea, both of which have increased the amount of gold they import this year.

Given the large increase in the amount of gold that is flowing to the East, I think it’s easy to make the case that this massive demand for physical gold is a major factor in pushing the price of gold higher. A similar argument can be made for silver, particularly with India and China, which require a lot of silver for their implementation of national solar energy grids.  The breadth of countries with Central Banks now accumulating gold was much of a factor until the last couple of years and I believe it has offset the seasonal weakness that historically has affected the March through June period.

Fed’s Eases with Monetary Policy Despite Hawkish Rhetoric

Secondarily, despite the rhetoric about the Fed’s hawkish monetary policy, take a look at the Fed’s actions vs its words. Despite the maintenance of the Fed funds range at 5.25-5.50% and the monthly QT operations, financial system liquidity has been rising. The M2 money supply measure has been rising since October 2023. 

The Fed’s reverse repo facility has been drained of $1.4 trillion over the last twelve months. This is money that returns to the financial system, primarily in the form of banking and financial system liquidity. The Fed could keep that money in the facility with just a small increase in the rate it pays. But for some reason it wants that liquidity to flow into the financial system. In addition, the Chicago Fed’s National Financial Conditions Index shows that the Fed has set the easiest systemic financial conditions since the end of January 2022, one month before the Fed began hiking rates.

The Fed’s key liquidity indicators reflect the reality of an easy monetary policy. I would argue that the Fed has created this systemic liquidity to offset the deteriorating quality of large and small bank balance sheets – primarily CRE and consumer loans but also leveraged corporate loans. Regardless, the rise in financial system liquidity, in addition to the massive demand in the physical market, is the reason gold and silver prices have been rising steadily since November 2022:

I expect gold to be over $2500 and silver to be in the high-$30s before year-end.