Gold returns to safe-haven status

Given the strong performance of the US dollar during the past two weeks, and the relentless selling in everything else than the dollar, it may be a time for market scenario to change.

Major lows in September 2011, December 2011, and in May 2012 for both gold and silver have all the makings of the kind of threefold correction. Such development often anticipates a significant reversal to the upside, especially with the last May correction failing to take out the December lows in either ETF.

In addition to the significant retracements seen in both gold and silver, so far a full 50% and more, precious metals are nearing bullish seasonality. Before outperformance, precious metals have historically suffered weakness. Trading had been lower  somewhat traditionally in the early start of the summer, particularly,  from the middle of May into the beginning of June. This seasonal weakness has not been as strong to the downside historically as the subsequent period has been strong to the upside.

 Traders considering to take advantage of what has been bullish seasonality in the second half of the year should be aware of some of the potential challenges in the immediate term. Much of the latest buying in gold  looks like  short-covering, at this point.

However, the current deflation trade may be nearing at least a temporary pause soon, with nothing else right now able to glitter like gold.

Continuos uncertainty about the Eurozone developments and the Greek situation, combined may only support the uprise of precious metals’ prices. Further global macro environment deteriorating would help gold’s upside. A general economic slowdown globally  hurts demand for everything. Crude oil prices are falling, which is another side of economic weakness. Central banks are expected to be more aggressive in terms of quantitative easing laying fertile ground for a more sustained advance in gold.

Reassuringly, in the Kitco gold survey out of 23 responding participants, 21 see prices up, while two see prices down, and zero are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Looking toward the next week, gold may add to its gains, with the market topping out around $1,630-$1,640.  Nevertheless, if it breaks on the downside’s to around $1,520, there’s nothing to stop it until $1,470 and then maybe even $1,420.