The U.S. holiday season effectively gets into full swing on the Independence Day weekend around July 4^th, and comes to an end after Labor Day, which was on July 5th.  These holidays can represent major turning points in investment sentiment.  Gold investors will have Labor Day 2011 writ on their hearts as that was effectively the day the gold bull market ended, and a four and a half year bear market in the precious metal began.  This year saw the big SPDR Gold Shares (GLD) gold ETF reach its interim peak at 982.72 tonnes immediately following Independence Day.  Currently its holdings stand at 937.89 tonnes – a fall of 44.83 tonnes in only two months.  Gold investors will thus be nervous at what the post-holiday period will bring this year and sentiment indicators, like the GLD holdings, will thus be followed with particular interest for the next few days to see where the market is possibly headed.

Initial indications on European markets look positive with gold putting on a few dollars in morning trading today (July 6th), but it is the opening of the U.S. markets later on (this is being written at 6.24 am EST) which will be watched with particular interest as it is still very much the U.S. gold futures markets which call the tune on the gold price.

But the GLD figures, which tend to be a strong indicator of North American gold investment sentiment, particularly from the institutional viewpoint, will not be the only indicators being viewed with huge interest by gold investors.  As we have pointed out here beforehand there have been some hugely relevant reversals in gold supply and demand patterns this year.  Asian demand has been seen as weak with the two largest markets, China and India, taking in less gold that previous years, while Swiss gold import and export statistics have reversed with respect to some key nations which usually export gold to Switzerland for re-refining, becoming significant gold importers from the Alpine nation – notably the UK and the US – while on the other hand some key nations which had been significant importers of Swiss gold to meet their own trading needs have in turn become the largest exporters of gold back to Switzerland – notably the United Arab Emirates (UAE) and Hong Kong.

We have speculated here that this remarkable change in gold flows has been for two main reasons.  The first is that physical gold availability in the West has been becoming tight – particularly due to the big first half of the year needs of the major gold ETFs to maintain their gold balances in the light of big money flows into them by gold-focused investors.  The second reason, we have suggested, is that the big gold fabricators and traders in nations/states like the UAE and Hong Kong have been suffering from a severe downturn in gold demand from their traditional purchasers, mostly in Asia, and have been liquidating excessive inventories built up in the expectation of continuing high Asian demand levels.  With the substantial rise in the gold price so far this year this has been a profitable trade.

But is all this about to change and will Labor Day be the trigger?  The return of fund managers and traders to their desks may prompt a serious rethink in terms of gold investment policy and this could take the gold price in either direction depending on consensus.  This makes the past two months’ gold price mostly range-bound movements perhaps the calm before the storm.

So what is changing which could affect the price scenario?  By all accounts Indian and Chinese demand is beginning to pick up again, while on the other hand gold ETF inflows have been replaced by outflows, but this could change rapidly with any improvement in sentiment towards gold investment.  Net central bank gold buying appears to have fallen off, although as we pointed out in our recent article: Central bank gold buying – what the media reports don’t really tell you , perhaps not too much should be read into this yet given there are only three significant central bank gold buyers – Russia, China and, to a lesser extent, Kazakhstan and month by month announced reserve increases by the first two of these can be somewhat variable.

On the gold production front, we may, or may not, have reached peak gold, although evidence suggests we are now there or thereabouts.  The Australians may be bucking the trend and increasing production to maximise returns (See: Australian Gold Output Hits 15-Year High, but in other nations undoubtedly new mined gold output is beginning to slip.

So gold fundamentals are somewhat mixed in outlook, but close to balance and the markets could move it in either direction.  We remain gold positive as even when price weakness has appeared with some big technical sales on the COMEX futures market driving the price down, such raids have tended to prove shortlived in duration and effect suggesting there are plenty of buyers out there in the $1,300 – $1,340 range where gold is currently trading.  But it could be a whole new world for gold from today when the traders and fund managers are fully back on track.  With the U.S. futures market still effectively setting the gold price, although Shanghai seems to be having an increasing mitigating influence, this is all vitally impotrtant for the gold price direction from here on.  We shall see.

The above is an edited and updated version of one which I had previously posted on info.sharpspixley.com