Gold Outlook for Q3 – Don’t Trust the Rise in Gold Prices, GLD

Advertisement

Anyone who owns gold, gold futures or the SPDR Gold Shares (GLD) can thank the Federal Reserve — and only the Federal Reserve — for pulling your fat out of the fire in mid-June.

quarterly review and outlookHad it not been for Janet Yellen’s surprisingly dovish comments back on June 18, gold prices (not to mention silver prices) would have ended deep in the red for Q2. Instead, GLD ended the quarter up 2.6% after the Fed’s chairperson made it clear she intends to keep interest rates low for much longer than first presumed.

Silver prices and the iShares Silver Trust (SLV) fared even better, even if all of their 6.4% gain in Q2 came in the last week-and-a-half of the quarter.

The major reversals and the big gains that caused them, of course, raise two key questions: Why, and will it last? As always, it depends.

Why Gold Prices Slumped, Then Surged in Q2

Just as a refresher, gold prices and GLD didn’t exactly hit the ground running at the beginning of the second quarter. Although the world’s most sought-after metal posted gains of 6.4% in Q1, it was up as much as 14% for the quarter in mid-March; it simply spent the last two weeks of Q1 pulling back.

Gold prices saw a modest bullish pop during the first two weeks of April, too, rallying from $1,284 per ounce at the end of March to a peak of $1,331 by mid-April. But again, it was strength that wasn’t meant to last. Certain that the Federal Reserve was in a hurry to do anything to put the brakes on what looked like an overheating economy at the time, traders let gold prices slide all the way to a low of $1,240 by early June.

It wasn’t an entirely bad bet, either.

With the first hints of inflation popping up in mid-May when the annualized inflation rate for April surged to 1.95%, surely Janet Yellen would recognize that the era of cheap money and low interest rates would have to come to a close soon.

Nope. She didn’t. Though the Federal Reserve is still tapering its bond-buyback efforts, the Fed chairwoman has made it clear money is going to remain cheap into 2015 despite more hints of firming inflation unveiled in mid-June. May’s annualized consumer inflation rate rolled in at a multimonth high of 2.13%, yet Yellen seemed largely unfazed.

If Yellen isn’t worried about inflation, maybe the gold bugs shouldn’t be either.

The chart of gold prices, 10-year Treasury yields and the U.S. dollar index below makes clear how it all shook out. Although the usual relationship between the three was a little fuzzy for most of the second quarter, the last two weeks of Q2 made perfect sense — the U.S. dollar as well as interest rates slumped, making gold a (relatively) desirable asset again.

gold prices treasury yields u.s. dollar

Ditto for silver prices, as seen on the chart of SLV. For the third times since mid-2013, silver prices have found a floor around $18.60 per ounce, and for a third time pushed up and off of that level. But, we saw a similar thrust in January, and that surge fell apart rather quickly.

silver prices

What’s Next for Gold Prices?

The sharp rise in gold prices on June 19 following the modest rally between early in the month and June 18 immediately rekindled gold’s bullish rhetoric … though that’s not a tough thing to do these days. More than enough market participants remain enamored by gold and/or soured on stocks, and will choose to drink the gold-colored Kool-Aid even on the flimsiest of reasons.

Throw in the fact that Treasury yields and the sawbuck are both back in downtrends, and the bullish case for gold seems plenty plausible.

Yet, one can’t ignore the fact that neither gold prices nor GLD have actually made any progress since that overdone knee-jerk reaction two weeks ago. It’s also tough to imagine the greenback and yields making any dramatically large downward moves from here, even if both continue to drift lower into the early part of Q3.

Moreover, even if it’s on the distant horizon, Yellen has already mentioned more than a handful of times that rates could be ratcheted up in 2015.

Point being, even if gold does manage to squeeze out a little more upside here, it’s going to remain muted upside, spurred not so much by fundamentals but instead driven by emotional speculation… generally a short-lived effort. The same goes for silver prices and SLV, though their outsized gains since mid-June have left them both even more vulnerable to a pullback than gold prices or GLD are right now.

The reality is, for gold prices to truly get back into a long-term uptrend, it can’t be driven by speculation on the dollar’s and interest rates’ near-term future. It’s going to have to be driven the old-fashioned way: with real demand that outstrips supply. It’s going to have to do it for more than one quarter, too.

And although total gold consumption was a little better in Q2 than it was in Q1, it still was just mediocre overall…

gold consumption

….and the big buyers that need to pour billions into the commodity (central banks, funds and those who just want to build a board of gold bars and coins) are still nowhere as interested in buying gold as the media is interested in talking about it.

Gold Consumption by CategoryAlthough we won’t get the World Gold Council’s Q2 supply/demand report until mid-August, there has been no real indication that gold is once again a major must-have. Indeed, Chinese demand for gold dropped in April as well as in May, while gold funds and ETFs are still broadly seeing net outflows.

It’s possible that something has changed in just the past few days with gold’s recent surge, but the professionals don’t usually jump on a trend that hasn’t been validated yet.

The odds and math here say gold’s not due for any long-lived rally in Q3, but instead is positioned for a struggle.

Gold prices are apt to reach $1,240 again before they reach $1,400.

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


Article printed from InvestorPlace Media, https://investorplace.com/2014/06/q3-gold-prices-gld-slv/.

©2024 InvestorPlace Media, LLC