Will gold now take a summer break from its bull run?

The basic annual pattern for the gold price over the past five years, up to 2006, has been weakness in the first half, a consolidation over summer, and then all the big gains come in the autumn.

This year has been different with a big price gain in the first quarter and a retreat in the second quarter. But there is plenty to reason to believe that gold is just going to have its traditional summer break and then come back with a vengeance, unless Iranian geopolitics hot up and then gold prices could surge over the summer this year, continuing in the atypical pattern.

For the fundamentals that this column identified as supporting the gold price in December 2005 have not changed, indeed every factor has got stronger not weaker. The US dollar is now in decline, inflation is rising, interest rates are still going up, the US twin deficits continue, stock markets have turned down, and alternative assets are less attractive.

Gold is still cheap

Besides gold still looks under priced! Gold has yet to reach its former peak of $850 an ounce last seen 25 years ago, whereas almost every other commodity exceeded that level long ago. Gold is still playing catch up, and to exceed the 1980 price in real terms means $1650 an ounce in today's money.

And yet the gold bears think $700 or $800 an ounce is some kind of magic number beyond which gold can not go. Moreover, the manipulation of the gold market by central banks over the past two decades has left a huge short position overhanging the gold market.

It is impossible to estimate the exact size of this short position, but the suppression of the gold price has been going on for so long that the short position could well be equivalent to most of the gold held by central banks around the world. This short position is like a pressure cap on an oil well, and once it blows the gold price could sprint to a factor 10 times its current level.

Gold short position

For more information about this short position visit the popular website: www.lemetropolecafe.com. It is the unwinding of this trading position in the gold market that makes some professional traders hugely confident about the outlook for gold. For the market is structured in such a way as to make a rise almost inevitable if this argument is correct.

So perhaps gold will take the summer off like last year. But any weakness in this market should perhaps be seen as an opportunity to buy into the market. Gold is going to go a great deal higher, and could rise well beyond the figures discussed by cautious analysts on CNBC and Bloomberg.