Two major narrative structures dominate human thinking. One is linearity, the other – cyclicality.
Linearity derives from the common human experience of life which begins, continues and ends. This is the way we conceive of history, literature, art and indeed any form of human creation limited by the boundaries of space and time. To increase the comforting sense of familiarity, we seek dominating plots and tend to focus our attention on them. This is what gestalt psychologists dubbed “figure/ground” perception. It is simply too demanding to conjure up multiple indicators, factors, aspects and plots into a web of complexity. We leave such tasks to computers. It is true that Gabriel Garcia Marquez and Roger Altman proved that innovative, non-linear narratives can be hugely alluring, but we still look at the markets and the economy by singling out all-encompassing themes: recession or recovery, double dip, expansion, austerity, stimulus, etc, etc. Presenting such themes in terms of binary outcomes tempts our simplistic minds even further.
The second dominating narrative structure is the belief in cycles. As most humans evolve in a climate characterized by regular changes – four seasons in temperate climates, dry and wet seasons in the tropics, near permanent darkness and midnight sun in the Arctic – all of us expect some form of recurrent patterns. Some traditions even injected such hopes into religious thinking, thus avoiding the eschatological destiny of much Western heritage. Markets lend themselves frequently to seasonal thinking. There are some good reasons for this: the construction season in much of the northern hemispheres, the January lending bulge by calendar year-obsessed Chinese state banks, lengthy summer holidays in Europe and in South Africa, the return to activity (and to football) after the Labor Day in the US.
As discussed on these pages before, gold is not immune to inherently seasonal thinking. Gold investors are painfully aware of these rules these days. The massive liquidation of Comex positions over the last three weeks and the wave of redemptions on the most CTA-exposed gold ETF product in the US have conspired against the hopes of those who had expected the summer of 2010 to turn out differently. It was not to be. In USD terms, gold is down 7.5% since it peaked on June 21. In EUR terms, it has now collapsed by 14% since the peak on June 8. Such losses pale in comparison to equity losses among many of the mining and exploration companies. The likes of Jaguar, New Gold, Allied Nevada, Central Rand Gold have each lost a quarter of their market value over the last month and trade at levels last seen when gold itself was 20% below the current prices.
Euro’s strong rebound in the midst of this summer’s hekatombe adds insult to injury for European investors. Despite all the criticism surrounding the broadly un-stressful bank “tests”, Euro has shot up over the last several weeks against most currencies.
But moving away from the linear story of Euro’s hopeful happy ending – to the cyclical considerations of the northern summer, it is interesting to gauge the relevance of the previously discussed monsoon seasonality for Euro-denominated investors.
Over the last 10 years, we find that between July 1 and August 31, gold in dollar terms averaged 2.5% returns, with the exception of 2008, when it lost 16% during the period. By comparison, in Euro terms, the average summer returns have been negative (-1.6%). Is Euro strength also seasonal? But why? Through the summertime influx of the pound, dollar, yen, rouble, lira, zloty, won and renminbi-wielding tourists, maybe? Remarkably, the current pullback in Euro-denominated gold prices positions 2010 as potentially the worst year yet – worse even than 2008, when European gold lost 11% over the summer (courtesy massive inflows into USD).
The underlying theme of this seasonality is, of course, India’s physical demand and so the overview would be incomplete without any comparison to Rupee’s performance. In fact, we note that during this seasons the Indian currency usually remained fairly stable against the dollar (with minor losses in 2004, 2006 and 2009), but the range of outcomes for Euro – Rupee exchange rate has been much wider, with large losses in 2001, 2005 and again this year. This Rupee weakness is an unwelcome sign for gold investors globally. Although Indian buyers seem to be increasing purchased volumes after significant price pullbacks in Rupee terms (as they did on July 2nd and again this week), this support will remain fragile for as long as Rupee remains under pressure.
I leave it to sharper minds to figure out how to square the European tall tale of a continued economic bliss with Rupee’s eternal recurrence between strengths (2005, 2007 and until June 2010) and weaknesses (2006, 2008-09). Longer term market forecast is of not much use, whether our attention is directed to structural changes or to cyclical phenomena. But in short term, timing the market bottom will require much skill. Slovaks, now a Euro-land, have an apt adage for such circumstances “gold without wisdom is but clay”.
Tags: euro, gold cyclicality, gold seasonality, Rupee