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New gold investors are often
surprised to learn that gold prices have a heavy seasonal component. Seasonality
makes intuitive sense for commodities inexorably tied to orbital mechanics,
like wheat. Their annual late-summer harvest really increases
supply. But why should gold, which is mined evenly and continuously
throughout the year, have big price swings governed by the solar calendar?
Unlike the supply-driven
seasonality in soft commodities, gold’s seasonality is
demand-driven. Across the globe, surges in gold demand tend to clump
around end-of-financial-year cash surpluses and festival seasons. This
is not just an Asian phenomenon, it is even true in the modern West. Gold’s
well-established seasonality creates tailwinds that make certain times of the
year exceptionally bullish.
And today we are entering
gold’s strongest seasonal period. Autumn is a very exciting time
for investors and speculators long anything in the precious-metals
complex. Gold strength doesn’t only benefit the Ancient Metal of
Kings, but the whole PM ecosystem which mirrors (and amplifies) gold’s
every move. This includes gold stocks, silver, and silver stocks.
Autumn is the best time of the year to be long PMs.
So each year heading into
autumn, I revisit and update my gold-seasonality research thread. I
want to know if anything has changed, if the past year’s events
conspired to make gold’s seasonality stronger or weaker. Now this
is more important than ever given this past year’s wild gold
volatility. Through its impact on the US dollar, the stock panic
drove extreme gold swings unlike anything yet seen in this gold bull.
But as always, before we delve into
gold seasonality an important caveat is in order. While seasonal
influences are quite tradable, seasonality is always merely a secondary
driver. Technical extremes that spawn sentiment extremes (excessive
greed or fear) can easily override seasonals. I think of seasonals like
prevailing winds. While you don’t need a tailwind to drive your
car down the highway, it is certainly nice to have one.
Most futures analysts, when they
study seasonals, choose a super-long period of time like the past 15 or 30
years to crunch the numbers. I prefer an alternate approach.
Prices behave quite differently in secular bulls than in secular bears.
So I’m interested in pure gold-bull seasonals undiluted by the
preceding gold bear. It is today’s secular gold bull I’m
trading, and I do this research to help me make superior trades.
My methodology is simple.
Since 2000, each calendar year’s gold action is individually
indexed. The first close in January of each year is assigned a value of
100, with the percentage changes in the rest of the year moving the index
accordingly. Indexing makes all years’ percentage changes
perfectly comparable regardless of gold’s rising general price levels
over time. Then all these annual indexes are averaged together.
The resulting averages are
plotted over a generic calendar year. Since the actual daily datapoints
are more important than the lines connecting them, I rendered them with large
dots. In addition, standard-deviation bands are included. The
larger the standard deviation, the more dispersed the underlying data is so
the less predictive value it has. Averaging 10 and 90 or 45 and 55 both
yield 50, but as a speculator I have much more confidence the tighter second
group will have better odds of being relevant to my trades.
And since the stock
panic’s impact on gold created such an epic discontinuity over the past
year, I’m including two sets of charts in this essay. The first,
marked “Last Year”, is from Gold Bull Seasonals 3 with data running until July
2008. They are the pre-panic control group. The second set is the
new charts current to July 2009, including the crazy panic period. The
insane panic volatility altered seasonals like nothing else could.
Let’s first examine the
panic year’s influence on gold-bull seasonality. While the
general seasonal uptrend is still very much intact, some months’
tendencies were stretched and distorted by the panic. The February
seasonal rally grew considerably larger, extended by the strong hedge-fund
GLD buying this past February. May’s rally was also
extended, starting off a slightly lower base and rallying to a higher average
apex.
The lackluster summer doldrums
remained intact of course, but the September rally was altered considerably
by last September’s wild gold volatility. Now gold moves into
September a bit lower, its September spike starts a bit later, but then it
rockets up to its late-September interim high much faster. And the
subsequent October pullback before the big seasonal buying in November and
December is also much more pronounced.
These changes may seem subtle as
you study both charts, but they are really quite striking. Adding an
additional 12 months to 103 months of past data would hardly change anything
normally. Its influence is usually just too minor to affect the long
averages. But gold’s giant panic swings, both its anomalous plunge with the stock
markets and its subsequent quick recovery to pre-panic levels, altered the
averages considerably over the past year.
Still, gold’s evolving
seasonality curve didn’t affect the resulting trading tactics much at
all. Every seasonal trend we’ve played with much success in past years
still exists today, albeit in altered shapes. In particular, the best
times of the year to add new long positions in precious metals only changed
by a week or two if at all. There are still 5 seasonally-optimal times
to buy gold, silver, and PM stocks noted above.
The summer
doldrums are still the weakest time of the year for gold, when
it tends to consolidate sideways. And autumn is still the strongest
time of the year for gold, when major buying coalesces all over the world
which tends to drive big gold price gains. One key tactical change I
did make thanks to this past year’s impact on seasonality is to break
gold’s big autumn rally into two components instead of a single
extended one.
In past years, both gold’s
September rally and October pullback were less extreme. And
they’ll probably be less extreme again in the future too, since the
panic’s impact on gold volatility in September and October of last year
was so anomalously atypical. But for now, the October seasonal pullback
has grown into an October seasonal correction. So I am breaking out the
September rally into a third seasonal gold rally.
Between mid-August and late September,
gold has tended to rally 5.0% on average over this secular gold bull. This
is an exceptionally large rally for such a short span of time and is well
worth playing. Its major demand-side driver is the Asian harvest.
All of continental Asia sits in the northern hemisphere, so it enjoys the
same crop seasons as we do in the States. After Asian farmers sell
their harvests and figure out how much surplus income they generated in the
year, they often plow some of their savings into gold bullion.
Provocatively, a typical
seasonal rally this year would be far more bullish than normal. Why?
Hovering around $950 today, a 5% September run would boost gold to just under
$1000. And once gold breaks decisively above $1000, a huge
psychological milestone in the West, major mainstream investment
buying should flood in. It’s pretty amazing to consider that
small-scale yet widespread harvest-surplus gold buying half a world away
could drive the long-awaited $1000 breakout this autumn.
By the end of September, most of
this post-harvest investment buying is tapering off. Prior to the
panic, the early-October falloff in gold prices wasn’t anything
exciting. And last year’s brutal 20% gold plunge in under 4 weeks
in October that skewed this seasonality curve had nothing to do with Asian
harvest. Gold was plunging simply because the extreme stock-market fear
was driving major safe-haven dollar
buying. So in future years this newly-deepened early-October
correction will probably gradually moderate again.
The biggest seasonal gold rally
of the year by far ignites in mid-October and runs without respite until
mid-February. It is the global festival season, a time when gold has
soared 11.9% higher on average since 2000. Statistically at least, you
could capture most of gold’s gains for an entire year solely by being
deployed over this impressively bullish span. This year, with $1000
hanging in the balance, could be one heck of a festival season.
Festival season kicks off in India, the world’s largest gold consumer. Weddings in India are a huge deal, and most marriages are arranged by the families. Couples
typically get married during the autumn festivals like Diwali. Indians
believe getting married in festival season increases marriages’ odds of
success, longevity, happiness, and good luck. The families of Indian
brides give them wedding gold in the form of intricate 22-karat
jewelry. This dowry is not only beautiful adornment, but gold’s
intrinsic value helps secure the bride’s financial future and
independence within her husband’s family.
Now it is certainly true Indian
gold demand has been down considerably this year. Indians are very
price-sensitive and like to buy on pullbacks, yet gold has held pretty solid
in the $900s since February. Some analysts argue that Indian gold
demand will continue to fall, but I really doubt it. If you know any
Indians, or have traveled to India in the autumn, you know how important
weddings are. And with 1.2b people, there will never be a shortage of
families buying gold for their beloved daughters’ weddings.
In normal years, something like
40% of India’s entire annual gold demand occurs during the short autumn
wedding season! And this year, since Indian gold buying has been light
and last year’s extreme market chaos certainly delayed some wedding
plans a year, I expect to see a giant surge in catch-up buying. It
never ceases to amaze me that Indian brides’ dowries are the biggest seasonal
driver of gold investment in the world!
Many Western investors marvel at
Indian-wedding gold buying, seeing it as a quaint anachronism out of place in
the modern world. But this perception couldn’t be farther from
the truth. Festivals are just as important here in the West. As
Indian wedding season fades in late November, the holiday season spins up in
the States and Europe. A big portion, if not the majority, of annual
discretionary spending in the West occurs between Thanksgiving and
Christmas. It’s our festival season!
There is a huge surge in gold
demand as holiday dollars flow into jewelry gifts for wives, girlfriends,
daughters, and mothers. A large chunk of Western jewelry demand is
concentrated into this intense frenzy of buying that essentially encompasses
December. There is also an investment component. Near the end of
the year, bonuses are paid and like Asian farmers we all figure out how much
surplus income we are likely to have. A small, yet growing, fraction of
Westerners then buy some gold with their surplus.
But this seasonal rally
doesn’t die after Christmas in January, its driver just shifts. Unlike
our Western calendar solely driven by solar cycles, the Chinese calendar is
heavily influenced by lunar cycles. So Chinese New Year typically falls
between late January and mid-February on our Western calendar. And
since gold is such a big part of Chinese New Year celebrations, the mighty
seasonal gold rally continues into February. Gold is given as gifts and
gold trinkets are used to decorate homes for the festivities.
All these fascinating cultural
forces aggregated together, essentially financial-year-end surpluses and
festivals, drive the biggest seasonal gold rally of the year. If gold
retreats to merely $950 (on the low side) in its October pullback this year,
the usual 11.9% average rally would carry it to $1065 or so by
February! And you can bet your last ounce that there will be a surge in
Western investment demand as soon as gold breaks decisively
over $1000, so this year’s autumn seasonal rally could very
well be one of the best ever.
There is another seasonal gold
rally between early April and late May. While this doesn’t have a
clear cultural driver like the autumn one, in observing it and trading it
over the years I think it is usually Western investment demand that drives
it. As spring dawns after a long winter, traders tend to get more
optimistic on the markets so they start buying and drive everything higher
including gold. Its 3.9% average rally is nothing like autumn’s,
but it is still definitely worth trading.
My gold-bull seasonality
research also continues into individual calendar months. While slicing
gold action into calendar months is somewhat arbitrary since trends seldom
begin or end on month-end, it still provides another perspective. So
all calendar months since 2000 are individually indexed and then averaged
across years, and the resulting charts help further illuminate intra-month
tendencies.
Despite the wild panic-driven
gold volatility, September, November, and December still retained the top
three spots for the best calendar months for gold. These seasonal
monthly rallies actually all grew significantly larger thanks to the
panic’s influence. And the mid-autumn-rally October pullback,
distorted by the panic, grew much deeper as a seasonal average. Interestingly
May usurped January as the 4th best seasonal month.
Each of the optimum seasonal
times to go long gold from the first chart are also rendered here on this
monthly chart. The monthly seasonals certainly corroborate the annual
ones. If you want to add new PM long positions, your best bets on
timing are to buy in early January, early April, mid-June, mid-August (now!),
or mid-October. On balance, investors and speculators have been richly
rewarded in this bull by heeding these seasonals.
Before I built these new charts
this week, I wasn’t sure what to expect regarding the panic
year’s impact on gold seasonals. It definitely affected them far
more than any other year I’ve ever seen. But I was pleased to see
the panic year didn’t alter the seasonally-optimal trading times by
more than a week or two at most. Gold’s seasonals remain an
important secondary force, a helpful tailwind that all PM investors and
speculators need to consider.
And today’s seasonals are
just the icing on the cake right now. Gold
fundamentals remain very bullish, with global mined supply continuing to decline
despite high sustained gold prices. And central banks, long the
bogeymen of the gold world, just agreed to reduce their aggregate gold sales over the next 5
years. Thanks to Washington’s reckless profligacy, big inflation is coming which will
spark a surge in mainstream gold-investment demand. And the
popular psychological
impact of a decisive $1000 breakout can’t be overstated. Investors
love to buy momentum.
If gold supply was rising and
demand falling, I would not be bullish on the PM complex today no
matter what the seasonals suggest. But with gold supply falling and
demand rising, the strong seasonal tendencies should only amplify
gold’s already-bullish outlook in the coming months. We are
blessed to be witnessing an exceptional confluence of bullish drivers, of
which seasonals are a welcome secondary tailwind.
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The bottom line is the gold-bull
seasonals remain intact despite the wild stock-panic-driven gold volatility
over the past year. While the shapes of the big seasonal rallies were
altered a bit, none of the core tactics of trading these seasonal influences
changed. There are times of the year when gold (and hence silver and
the PM stocks) tend to languish and other times when they tend to
thrive. We can ride these forces.
And today we happen to be
heading into the most bullish seasonal time of the year for precious
metals. Big gold buying all over the world from September to February
has driven gold up about 14% on average over this span during this secular
bull. Even if we only get half that this year for some reason, it will
still drive gold decisively over $1000 unleashing all kinds of mainstream
investment demand.
Adam Hamilton, CPA
Zealllc.com
August 28, 2009
Also
by Adam Hamilton
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