Seasonality is observable in a wide variety of
variables. In business, sales, production, inventory, man hours and the best
time to discount can be at least partially predicted by seasonal effects.
Gold is no different. In different months price swings occur somewhat
predictably year after year. What causes this, to what magnitude does it
occur and most importantly – how can we profit?
As we all know, two things affect the price of all
things tangible and intangible – supply and demand.
On the supply side, Gold stays remarkably fixed. It
is mined at a very consistent rate year round with factors such as weather
and temperature having much less influence than other markets such as soft
commodities. In addition to this, supply can only vary rather gradually from
a mining standpoint, given that it takes around a decade to bring a new find
into production. However, any seasonality in the gold price must be
attributed to variations in supply and demand during different times of the
year, since supply could also be increased by non-mining entities, such as
investors selling their holdings.
Below is the average monthly trend in gold prices
since 1969. To find this, we simply add the returns for each month in every
year since 1969 and divide them by the number of observed years – 43.
To construct this graph we create an index for gold
prices. Day one of each year is set as the base of 1.00. Each successive day
is compared to the previous; if day 2 is higher than day 1, the index rises
by the percentage increase over the two days, and
The trend is clear – on average, gold has
risen every month over the last 43 years. This conclusion is of no use to us
in terms of
playing the seasonal shifts. According to the chart there is no
“best” time of year to buy or sell, any time is good as the
returns are linearly positive. Hence, further analysis is required.
This next chart overcomes the limitations of the
original. Firstly, we have increased our observations from 12 (monthly
averages) to 250 (number of days gold is traded each year – generally).
As the number of data points increases so too does the detail of the line.
One can analyse trends not just over months but
weeks and even days and a clearer pattern emerges. Secondly, we have narrowed
down our data range from 43 years to 11, giving us more timely information.
Needless to say, the early post float gold market was quite different than
what it has developed into over the last decade or so, hence removing that
less relevant data paints a clearer picture.
Between late April and early July, gold has been
very flat over the last 11 years, as shown by the graph with an average rise
of only 1.4 index points – or just under 1.3%
for the period, which corresponds to an annualized return of 6.1%, paling in
comparison to the average return annually between 2001 – 2011 of around
These slow months are known as the summer doldrums.
People love to speculate what the reason behind the summer slowdown is. Who
knows what the actual reason is, but it could simply correspond with
traders/investors taking vacation and demand slowing for that reason. You
would imagine that demand for gold will correlate somewhat with global
economic activity and with that activity slowing in summer, so too does the
demand for gold. A key part may also be simply the perception of the summer
doldrums, investors expect things to be quiet around this time of year and
therefore refrain from taking large positions, which results in the market
being more subdued in a self fulfilling prophecy.
The August/September bull period is a little easier
to explain. This time of year coincides with the end of harvest in
Asia/India. Agricultural producers and farmers in these relatively poor
nations aren’t likely to deposit their profits in the local MegaFinCorp Enhanced Leveraged Credit Opportunities Fund
IV. Instead they traditionally store their wealth in gold and with huge
numbers of producers doing the same the gold prices rise. India is also the
largest importer of newly mined gold in the world. There are various cultural
reasons behind this, but suffice to say gold holds an important place in
Indian culture, especially in the wedding season which commences in October
and gold is often given as a wedding gift. Jewellers
in the developed world also contribute to the September rush. In order to
have sufficient quantities of jewellery
manufactured and ready for delivery in November prior to the Christmas boom, jewellers traditionally acquire the gold they need in
All of the above are contributing factors to the
seasonal variation observed and should be included for consideration when
formulating a trading strategy.
As with the 1969-2011 graph but to a lesser extent,
the chart above isn’t as timely as we’d like. So once again we
reduce the time horizon, this time from 11 to 5 years.
Interpolating the graph above on current gold
prices, we can find what seasonality suggests gold prices could be, at any
future day in the coming year(s). Here is what our seasonality models predict
future prices to be relative to the February 8th price of $1746:
March 8 2012
May 8 2012
July 8 2012
September 8 2012
November 8 2012
Interestingly there are 3 values over the magic
$2000/oz mark that some are picking will eventuate
Below is the chart that speaks a thousand words.
Gold seasonality is compared over four different time frames giving us some
very interesting results.
The peaks and troughs closely correspond in each
time frame. From this we can deduce, gold definitively follows seasonal
patterns and has done for some time, as the curve that plots prices since
1969 closely follows the other more recent trend lines.
The next chart provides a little scepticism
to the seasonality debate. Rather than showing the average daily price trend
over the last 11 years, we have the daily prices of each of the 11 years
separately. A clear pattern is much harder to pick and is a good reminder
that anything can and will happen in any given year. With the removal of
2008, the trend looks better. Remember in 2008 during the GFC, investors
scrambled for liquidity and cash based assets, even avoiding a renowned safe
haven asset that is gold, hence we saw a large drop in the price. One can
also note the early start to the end of year rally in 2011 and 2006.
In summary, gold definitely follows seasonal
patterns. In the long run, one can likely profit from these patterns, but
they are not a hard and fast rule and can be flipped upside down in any given
We believe 2012 will be a historic year for the
global economy and there is significant upside in gold prices. Investing or
trading based on seasonal patterns alone is a little unwise, considering the
fragile state of the global economy and the variation that can occur within
the model. Seasonality is easily dominated by other events such as the GFC,
QE or further developments in the Euro crisis. If QE3 were to transpire early
in this year one can almost guarantee seasonal trends will fly out the
In conclusion we suggest that seasonality is not a
strategy in itself, however, as a responsible trading operation we do factor
it into our analysis and make recommendations accordingly, along with the
utilization of our other propitiatory models for trading gold and gold options.
Regarding www.skoptionstrading.com. We are off to a
good start this year closing two trades in January, the first gave us a
profit of 71.58% and the second gave us a profit of 33.97%.
It was nice to bag a couple of winners before
January ended and hopefully 2012 will continue in a successful manner. We do
have a number of ideas on the drawing board which we are looking to execute
shortly, but only when the risk/reward environment is firmly in our favour.
Please be aware that discussions are taking place
regarding an increase in the price for this service for new members, so if
you are thinking about joining us, then do it sooner rather later in order to
avoid this additional expense.
This price increase will not affect the current subscribers whose
subscription will remain unchanged.
Our performance statistics have now been updated as
Our model portfolio is up 446.55% since inception
An annualized return of 98.38%
Average return per trade of 36.68%
96 completed trades, 88 closed at a profit
A success rate of 91.67%
Average trade open for 50.48 days
Also many thanks to those of you who have already
joined us and for the very kind words that you sent us regarding the
service so far, we hope that we can continue to put a smile on your faces.