Gold Prices Poised for Better Q3 After Tepid Q2

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As far as gold prices are concerned, the second quarter of 2015 so far has been the least volatile quarter the commodity has seen since mid-2007… before gold dished out an eye-popping three-year, 150% gain and a subsequent 38% tumble in the meantime.

quarterly review and outlookIn fact, as of today the price of the SPDR Gold Trust ETF (GLD) is within 30 cents of where it ended the first quarter of the year.

And yet, traders can still sense there’s something brewing on the gold price front. The question is, which direction is that undertow pointed?

That depends on a handful of factors, the least of which — ironically — is the current momentum (or lack thereof) in gold prices.

Gold Prices Trapped in Q2

Gold price handicapping is an art as much as it is a science. The art, however, is in making sense of the science.

Four key factors do most of the driving for changes in gold prices. In the short run, the value of the U.S. dollar and geopolitical turmoil push gold prices around. In the long run, inflation and actual, physical demand (relative to supply) for the metal are behind gold price ebbs and flows. And of course, sheer speculation regarding its future value has become a market-moving force for gold in and of itself. That speculation, however, tend to ultimately be driven by one, some, or all of the other four factors in question.

With those four premises in mind, the Q2 gold price stagnation actually starts to make a lot of sense.

In retrospect, it’s surprising gold prices haven’t been hit even harder since July of last year. That’s when the greenback’s rally went into high gear, reaching multi-year record values.

As for calendar Q2, though, the unprogressive gyration of the world’s most popular metal simply mirrored an equally unimpressive sideways period for the U.S. Dollar Index. The chart below compares GLD to the U.S. Dollar Index.

61515-gold-dollar

Simultaneously, with the exception of the ongoing Greece debacle, international political tensions were relatively mild during the second quarter of the year. Not too many missiles have been lobbed to or from Israel in recent weeks, and North Korea’s leader Kim Jong-un has been content to (mostly) stay out of the headlines for a while.

With no threats on the horizon that would suggest a significant need for a value-holding de facto international currency — gold — investors have simply not bothered.

As for bigger-picture drivers of gold prices, real demand has remained muted, and inflation has remained tame.

While we only have the data as of the end of the first quarter, the World Gold Council’s quarterly demand/consumption figures tell us physical purchases of gold are still stagnant; last quarter’s usage of 1,079.3 tonnes is right in line with the consumption levels that materialized in the latter half of 2013. At the same time, with no inflation to speak of in months [we’re actually in a deflationary phase], gold’s best and brightest selling point simply doesn’t resonate.

61515-gold-inflation-consumption

Gold Price Outlook

So with all these factors in view, and knowing what we know about how these four factors are shifting, where are gold prices apt to move next?

The undertow is modestly bullish, although the gold price trend itself is modestly bullish and will first need to clear some key technical hurdles if it’s to rally the way it appears it should.

As tepid as the annualized inflation rate appears, know that it’s been on the mend in recent months. Indeed, inflation is a big enough risk that the Federal Reserve isn’t asking if it should ratchet interest rates. It’s simply asking when. If the Fed’s governors are right, inflation is waiting in the wings.

At the same time, while the dollar is sure to remain volatile, its downtrend has already started. We’ve logged two lower highs since March’s peak, and the U.S. Dollar Index is testing the waters of another lower low.

Between the two, gold prices are finding a nice tailwind.

The problem is that the gold bugs aren’t apt to be interested until gold prices clear a horizontal ceiling around $1,230 per ounce as well as clear a falling resistance line that will soon be at that level. But, gold can’t clear that level until the gold bugs are interested again. It’s a nagging catch-22.

61515-gold-futures

 

Whatever the case, after a lethargic second quarter, look for at least a slightly higher gold price by the end of Q3.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/gold-prices-poised-better-q3-tepid-q2/.

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