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The April 2006 issue of the International Speculator leads with the article below on the
seasonality of gold. (To sign up for your copy, click here.)
Included in the article are
charts by analyst extraordinaire Bud Conrad, showing the monthly average
annualized increase in gold since 1975.
Given the current gold
trend, I urge you to give gold and gold stocks an appropriate place in your
portfolio.
Doug Casey
Seasons of Gold
Long-term subscribers are
already aware of a resource market phenomenon broadly referred to as the
"quiet season," which we here at Casey Research tend to view as the
"Shopping Season."
You also might call it summer.
As you can see in Chart A, which summarizes gold's monthly price moves over
the past 30 years, the yellow metal typically shows weakness from February to
April, rallies in May, then heads down for summer. In August, gold typically
begins to rebound and moves up pretty much for the rest of the year. Of
course, this is an average pattern, not an invariable one. In 10 years out of
the last 30, gold dropped in the fourth quarter.
Even so, the long-term data suggests the average pattern is worth paying
attention to.
But will the pattern hold
up in the current bull market? The historical data is sparse, in that gold
has traded freely only since Nixon closed the gold window on August 15, 1971.
That triggered gold's only secular bull market so far, from $35 in August
1971 to $850 in January 1980. For the moment, let's discount that market's
first big leg, to Dec 1974 (when gold reached $200), as catch-up for decades
of currency inflation. The best analogy to our current circumstance is the
period from August 1976, when the metal bottomed at $103, to gold's peak in
1980. The chart for that 5-year bull market fits the long-term pattern quite
well.
But Why?
Why should gold bullion have a seasonal pattern? There are several reasons,
among the more important being the jewelry market, which accounts for about
three quarters of the gold sold each year.
What we see for the fourth quarter of each is the impact of the gift-giving
tradition associated with the druid Winter Solstice, now known as Christmas.
Layered on top of that is the Indian festival season of Diwali, which kicks
off in November and continues through the first leg of the traditional
wedding season in December.
In Chart A, you'll see noticeable spikes in both January and September,
months when Indian manufacturers typically restock inventories to meet the
demands of the two Indian wedding seasons. The first, mentioned above, starts
in November and ends in December. The second starts in late March and runs
through into early May.
Can Indian jewelry buying be a major driver of gold market seasonality?
Probably. Don't forget that gold, viewed as an industrial commodity, has been
in a primary supply deficit since 1990; more has been used than produced, and
the world has been living out of inventory. Now Western central banks are
slowing their illadvised selling, and people in China,
Russia, the Mideast and India will be
buying in size. Further, in 2005, investment in gold ETFs and similar
financial products showed a 53% increase, to 203 tonnes. And things are
barely starting to warm up.
Given the tight supply and growing demand, this is a market where prices are
very much set on the margin, which is where India plays a role. As you are no
doubt aware, India
traditionally has an affinity for gold, expressed most emphatically in
wedding rituals.
The propensity to lavish gold on blushing brides has kept pace with the
country's rapidly rising wealth (its GDP growth has been better than 6%
annually since the early nineties and is expected to top 8.1% in 2006).
Economic success has fostered an entire new Indian middle class and
middle-class wannabes with new-found wealth to be stashed and neighbors to be
impressed. That adds an important new dimension to the gold market, helped
along by a trend for Indian banks to aggressively market loans specifically
for the purpose of buying gold during the wedding season.
In fact, in 2005 Indian gold jewelry sales rose by 25%, and now that country
takes credit for about 23% of the world's consumer gold sales. The U.S., at #2,
takes down just 12%.
Jewelry buying is nice and certainly contributes to gold's seasonality. But
remember, what's really going to supercharge the market is buying by central
banks and the public, as they increasingly realize that the dollars they're
sitting on are melting.
The Gold Stocks
The summer dip in gold, needless to say, doesn't help gold stocks. And it's
amplified by the habits of Canadian brokers, who deal with their relatively
short northern summer by taking relatively long summer vacations. That means
fewer stories being breathlessly told to listeners with cash.
Even worse, the brokers--wanting to keep their clients safe while they
themselves lounge at lakeside cabins--begin telling clients in March to sell
and sit aside during the summer months, which sucks more air out of the
market. Of course it's not just the gold stocks; there's a lot of wisdom to the
old saw "Sell in May, go away". It's worth noting, however, that
here we are in April and we see little sign of gold stock
weakness--suggesting that there is either less selling going on or more
buying from new-to-sector investors... or, likely, both.
And the people who do the actual exploration generally are busiest in the
summer, typically working in remote areas of the Northern Hemisphere largely
inaccessible in the winter. The absence of explorers from their offices
translates into a dearth of news, made worse by the fact that even if there
were new, the companies would want to hold on to it until it would do them
some good--i.e. when there are brokers actually sitting at their desks.
To recap, in the summer gold bullion prices soften, resource brokers stop
working the phones, and explorers head out to kick rocks and go
incommunicado. There's a news slowdown, low trading volumes and a flat to
declining market for resource equities from about April 1 to about August 1,
give or take a month.
And it is during that quiet period that we happily focus on shopping for our
favorite stocks.
Or at least, that's the way it is supposed to work.
The Crystal Ball
I'm not going to tell you that things are going to be different this year.
But only because the person who tells you "this time is different"
is usually wrong and often walks into a disaster.
However, when pondering gold's seasonality, it's better not to focus on just
the long-term pattern shown in Chart A or even the five-year average pattern
in Chart B. They show what's normal--not what's inevitable.
Instead, focus more on Chart C below, which paints a straightforward portrait
of gold's daily price action from January 1975 through January 1980. While
the seasonal pattern generally holds up, the trend is clearly for higher lows
and higher highs throughout.
That is, in our view, the track we are currently on. While gold's price
reflects the long-term seasonal pattern, the pattern is overlaid on a strong
upward trend.
And lest you have any
doubt, I am convinced we are now in the gold (and silver) bull market for the
record books, a bull market that will surprise even me with its strength. And
that's saying something.
In the way of evidence that this year is going to surprise and delight,
simply look at gold's price action so far. Instead of the seasonal slump
following January, gold has powered ahead and partied on in 2006 and is now
trading at over $620, a 17% increase since the first of the year.
Based on traditional patterns alone, Bud Conrad, who assembled Chart D,
projects that gold could be headed to $700 this year. He calculates how fast
gold was rising over the 1976 to 1979 period and applies that to the price at
the start of this year to see how high gold might rise. The dotted line shows
the projection from history, and the solid line shows the actual so far this
year. Needless to say, we are off to a great start.
I think this could be conservative, and breaking even $750 by year-end
wouldn't surprise me. As bad as things were in the late 1970s, the last
secular bull market for gold, they are much, much worse now, by pretty much
every measure. Whether the level of debt, the size of the entrenched and philosophically
unsound bureaucracy, the Current Account Deficit, the Forever War raging on a
nearly global basis, the entrenched and worsening problems with entitlement
programs, the trillions of perilously perched derivatives... The list,
unfortunately, goes on.
Chart D shows how the market could behave if the price replays the trend of
the bull market of the late 1970s. You can use it as a baseline, something to
watch as a way of gauging just how wild things are getting in gold and--by
extension--gold stocks, over the coming year.
How We Play It
I doubt we'll see much of the traditional pullback this summer. But if it
occurs, don't hesitate to use it to back up the truck for your favorite
stocks. To help in that regard, we publish a quarterly Buy, Sell and Hold
issue of the International Speculator, with updated recommendations on
all the stocks we are following--now enhanced with our indications of
"Best Buys" and analysis of company press releases on the Casey
Research web site. And don't neglect adding to your hoard of physical gold
coins.
Looking over our stocks, I have to say that there has never been, in my
experience at least, a better slate of junior explorers to choose from.
That's thanks to many factors, including improvements in technology, the
general lack of exploration over the last 30 years and the opening up of the
ex-communist block to foreign investment. Toss in strong metals prices and
talented management teams, and you have all the ingredients for significant
discoveries.
While it's too early to tell whether we'll get a mega-discovery--of 10
million ounces or more—this year, the odds hugely favor a number of 1-
to 3-million-ounce discoveries being made. As discussed at some length in IS
XXVI, No. 12, December 2005, "How High Will Your Gold Shares Go?",
the combination of much higher gold and silver prices, big discoveries and
the near certainty of a collapsing dollar, will create an uber-bull... a
once-in-a lifetime chance to make life-changing profits quickly.
I know you may find it hard to believe, but by the time this thing is over,
your $.50 cent stocks will be trading for $5.00, and your $2.00 stocks, for
$20. Or more. It's going to be at least as wild as the Internet market was in
the late '90s.
Given that view, it's hard to see a summer pullback for gold, should there be
one, in anything other than a positive light.
You can keep your powder dry for the next little while and look to pick
stocks for less during dips. Or you can just keep buying, riding the tides
and ignoring the dips altogether. That's the approach I'll be taking... show
me a good company, run by good people, working a good project and selling at
the right price, and I'm a buyer... though at this time of year, being
patient to let the market come to you probably makes the most sense.
If there was one misstep you could make at this point, it would be to get
scared off by the inevitable volatility and step aside until it gets
"safe" to come back in. Too often that results in missing major
up-moves. Trying to pick the tops or bottoms of any market is a fool's game.
A final thought: This market trend is solidly in motion. While it may
periodically scare you as much as it thrills you, at no point doubt that it
is your friend. Treat it accordingly and it will treat you well. In fact,
even better than you likely imagine.
Editor’s Note: While
buying physical gold and silver is definitely a good idea, following
Doug’s recommendations for gold and silver stocks is an even better
one. With a fairly low level of risk, those stocks are known to bring quick
double and triple returns—and sometimes much, much more than that. Subscribe to the International
Speculator to get Doug’s monthly stock picks.
Doug Casey
www.caseyresearch.com
DOUG CASEY is the author of Crisis Investing which
spent 26 weeks as #1 on the New York Times Best-Seller list. He is also
editor and publisher of the International Speculator, one of the nation's
most established and highly respected publications on gold, silver and other
natural resource investments.
Editor’s Note: While buying
physical gold and silver is definitely a good idea, following Doug’s
recommendations for gold and silver stocks is an even better one. With a
fairly low level of risk, those stocks are known to bring quick double and
triple returns—and sometimes much, much more than that. Subscribe to the International
Speculator to get Doug’s monthly stock picks.
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