Will the Gold Market Slow Down for the Summer?

By Marko Puustinen


Traditionally the gold market slows down for the summer along with other commodities as the holiday season approaches. Last year was an exception as the European sovereign debt crises hit the market hard in early June. Gold price went to record highs and stayed there until half way through July. The same could happen again as despite the 110bn Euro bailout Greece received from the EU, it has run out of money again and is asking for more.

If the EU and the IMF decide to give Greece more money or to restructure its debts, gold should benefit from this as uncertainty in markets should be gold supportive.

This, combined with high inflation in the Euro zone, is likely to support gold as both the Euro and the Dollar are likely to keep falling. Falling fiat currencies have been the main reason for the latest gold run and when QE2 runs out in the U.S in June, its economy might start slowing down again. This would force the FED to start a third round of quantitative easing and push the Dollar even lower. This normally has an inverse effect on the Euro but with the current issues in several of the Euro zone economies, gold would be the biggest winner in this situation.

Another important factor supporting gold is the central banks, which have carried on purchasing gold bullions in the first quarter of 2011. Mexico announced that it has bought 93.3 tonnes during February and March, which is a clear sign that faith in the Dollar is fading amongst most of the developing nations. As Russia and China are practically buying their whole domestic production, the amount of new bullion coming into the free markets is relatively limited compared to the current demand.

The most important event over the summer will be the end of QE2 and how the U.S economy will react to it. If the FED decides to start supporting the economy with another round, gold is likely to carry on its upward trend throughout the summer. If the economy manages to stand on its own feet, gold is likely to consolidate lower until autumn when the demand for commodities in general picks up.

Whether people should still invest in gold or not, one has to think the reasons why the value has increased so much and have any of the issues in the global economy been solved.

The Dollar is still falling and with a possibility of another QE round it is likely to keep doing so. Sovereign debt issues in Europe are still ongoing and there has not been a clear solution how to cope with them in the future. Economic power is shifting east where people are used to buying gold as a preserver of wealth, which should keep the global demand for bullion high. Taking into account all these factors and the rising oil prices, it is still advisable to keep a portion of gold in your investment portfolio.

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