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Normally winter is a good time for gold, with men buying their
significant others jewelry for Christmas and lots of New Years Day
marriage proposals. Here’s an overview of the dynamic from
Adam Hamilton of Zeal Intelligence:
Seasonality is the tendency for prices to exhibit
recurring patterns at certain times during the calendar year. While
seasonality doesn’t drive price action, it quantifies annually-repeating
behavior driven by sentiment, technicals, and fundamentals. We humans
are creatures of habit and herd, which naturally colors our trading
decisions. The calendar year’s passage affects the timing and intensity
of buying and selling.
Gold stocks exhibit strong seasonality because their price action
mirrors that of their dominant primary driver, gold. Gold’s seasonality
generally isn’t driven by supply fluctuations like grown commodities
experience, as its mined supply remains fairly steady all year long.
Instead gold’s major seasonality is demand-driven, with global
investment demand varying dramatically depending on the time within the
calendar year.
This gold seasonality is fueled by well-known income-cycle and
cultural drivers of outsized gold demand from around the world. And the
biggest seasonal surge of all is just now getting underway heading into
winter. As the Indian-wedding-season gold-jewelry buying that drives
this metal’s big autumn rally winds down, the Western holiday season is
ramping up. The holiday spirit puts everyone in the mood to spend
money.
Men splurge on vast amounts of gold jewelry for Christmas gifts for
their wives, girlfriends, daughters, and mothers. The holidays are also
a big engagement season, with Christmas Eve and New Year’s Eve being
two of the biggest proposal nights of the year. Between a quarter to a
third of the entire annual sales of jewelry stores come in November and
December! And jewelry historically dominates overall gold demand.
According to the World Gold Council, between 2010 to 2016 jewelry
accounted for 49%, 44%, 45%, 60%, 58%, 57%, and 47% of total annual
global gold demand. That averages out to just over half, which is much
larger than investment demand. During those same past 7 years, that ran
39%, 37%, 34%, 18%, 20%, 22%, and 36% for a 29% average. Jewelry
demand remains the single-largest global gold demand category.
That frenzied Western jewelry buying heading into winter shifts to
pure investment demand after year-end. That’s when Western investors
figure out how much surplus income they earned during the prior year
after bonuses and taxes. Some of this is plowed into gold in January,
driving it higher. Finally the big winter gold rally climaxes in late
February on major Chinese New Year gold buying flaring up in Asia.
So during its bull-market years, gold has always tended to enjoy
major winter rallies driven by these sequential episodes of outsized
demand. Naturally the gold stocks follow gold higher, amplifying its
gains due to their great profits leverage to the gold price. Today gold
stocks are once again now heading into their strongest seasonal rally
of the year driven by this robust winter gold demand. That’s
super-bullish!
Since it’s gold’s own demand-driven seasonality that fuels the gold
stocks’ seasonality, that’s logically the best place to start to
understand what’s likely coming. Price action is very different between
bull and bear years, and gold is absolutely in a young bull market.
After being crushed to a 6.1-year secular low in mid-December 2015 on
the Fed’s first rate hike of this cycle, gold powered 29.9% higher over
the next 6.7 months.
This is pleasant reading for anyone long gold or gold mining shares.
But the futures markets continue to tell a different and less
encouraging story. See
Strange Things Happening In The Paper Gold Market,
which noted that last month speculators were overly long and were as a
result losing their shirts in the ongoing price correction — but were
for some reason refusing to throw in the towel. The conclusion was that
they’d need more convincing via another big price decline.
That decline happened — yet nothing has changed in the futures
market. The speculators remain dangerously long and the commercials
remain aggressively short, a structure which over the past decade has
always preceded a price drop.
 
Here’s the same data presented visually. Note the trend flattening lately at bearish levels.
Now we’ll see whether favorable seasonal factors trump an unfavorable futures structure.
As always, this kind of analysis is fun and useful only for people
looking for entry points. For stackers and other dollar cost averagers,
monthly squiggles are meaningless on the long ride to $5,000.
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John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
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