Following gold’s sharp retreat over the past week or so, traders are wondering how low it will go. Is this metal in a pullback or a correction? The former is a minor and healthy mid-upleg event, a great buying opportunity. But a full-blown correction is a major upleg-ending selloff, meaning the worst is yet to come. Interestingly, today’s gold seasonals are one argument in favor of the milder pullback scenario.
Somewhat counterintuitively, gold prices are indeed heavily influenced by the passing of the calendar year. Seasonality certainly makes sense for soft commodities like wheat that are tied to a strict orbital-mechanics-driven growing season. But gold? Unlike grown commodities, this metal is produced at an exceedingly steady pace year-round, regardless of sunlight, temperature, or weather.
But prices aren’t determined by supply alone, demand is equally if not more important. There are times in the calendar year when gold demand ramps up dramatically, like clockwork. Since the steady trickle of newly-mined gold can’t suddenly swell to meet these large marginal-demand spikes, this metal’s price is quickly bid higher. This demand-driven seasonality is an influential and powerful force in the gold world.
Investors and speculators who understand gold’s seasonality really increase their odds of buying precious-metals positions relatively low and selling them relatively high within any given calendar year. As it has been 15 months since I last updated this thread of research, and it is particularly relevant today given the anxiety gold’s recent pullback generated, this is a great time to revisit gold seasonals.
Before we dig in, realize seasonality is merely a secondary driver. Seasonals are like prevailing winds. When driving your car down the highway, a tailwind is far preferable to a headwind. Sentiment, or collective greed and fear, is the primary short-term driver of all prices. If gold gets excessively overbought (too much greed) or oversold (too much fear), it will react accordingly and easily override seasonals if necessary. Thankfully gold did not get overbought before its latest pullback, so this isn’t an issue today.
Not surprisingly, prices react very differently in secular bulls and bears. And since we are applying gold’s seasonals to trading today’s secular bull, it makes sense to limit our analysis to bull-to-date history. Since I first built the complex spreadsheets necessary to generate these charts many years ago, I’ve considered gold’s behavior since 2000. This span encompasses this past decade’s entire secular gold bull.
But of course as this bull marched on, prevailing price levels changed dramatically. In 2001 when I first recommended physical-gold investments to our newsletter subscribers, gold averaged $272! But so far in 2010, it has averaged $1206 (343% higher). While a $15 move in gold today is trivial, back in 2001 such a then-epic move never even happened! Obviously we can’t consider price alone to make any trans-bull comparisons.
The solution is simple, indexing. Every calendar year is individually indexed, making gains across years perfectly comparable in percentage terms. Gold’s close on the first trading day of each year is recast as 100, with the rest of that year’s price action based off this. If gold rallied 10%, no matter where it was in the bull or what its absolute levels were, that year’s index rises to 110. If it fell 5%, the index reads 95. Averaging each calendar year’s individual index between 2000 and October 2010 yields this blue line.
Over the past decade or so, gold’s seasonals have been incredibly strong. The average annual gain this metal achieved was an astounding 14.5% (index level of 114.5) over nearly 11 years! I say astounding because this occurred during the wicked secular bear in general stocks. In early 2000 the flagship S&P 500 traded over 1500, and today over a decade later it is struggling to hold on to 1200. Gold has been one of the greatest investments of the decade, and our subscribers have already made fortunes in its bull.
Gold’s seasonality forms a definite uptrend, rendered above. Its peak seasonal strength occurs between September and February, obviously a stretch we aren’t even halfway through yet today. Its worst seasonal weakness occurs during the summer doldrums, truly a sentiment wasteland for the Ancient Metal of Kings. And throughout the calendar year, gold tends to have three large seasonal rallies. Shown in red above, these are the highest-probability-for-success times for traders to be long gold.
I’ve traditionally labeled these big seasonal rallies chronologically in this thread of research, as discussing calendar-year order is most natural for all of us. But a better line of demarcation for the gold seasonal year begins near the end of summer, around mid-August. It is then when the large demand spikes begin, driving gold’s powerful seasonality despite the nearly-constant flow of newly-mined supply.
As a whole, the mostly-strong period between September and May is the Festival Season for gold. A steady parade of income-cycle-driven and culturally-driven events from around the world combine to drive big increases in gold investment demand. Even a cursory understanding of these really helps investors and speculators understand why gold seasonality is so strong, and how they can profitably trade it.
This expanded Festival Season starts with Asian-harvest buying, which is actually an income-cycle-driven phenomenon. As all of Asia is in the Northern Hemisphere, its farmers share the same growing season we do. After their entire year’s labor of heavy capital investment and hard work, these farmers start harvesting in late August and September. Once their crops are sold, they finally know for the first time that year just how much surplus income their labors generated beyond operating and living expenses.
Once they figure it out they go invest some fraction of this annual surplus in physical gold bullion, the best store of wealth for six millennia of human history. This practice may seem quaint to us in the West, but we do the same thing. Unlike Asian farmers, we usually don’t know for sure how much surplus income we’ve generated each year until late December or January (once bonuses are paid and taxes are figured). After this we too invest some fraction of our annual surplus in the financial markets.
Asian post-harvest gold buying gradually yields to the Festival Season proper in India, the world’s largest gold consumer. The core of the Indian festivities is this country’s famous wedding season. If you know any Indians, ask them about Indian wedding season. The way weddings are done in India is utterly fascinating, and it drives what is usually the world’s biggest gold-demand spike of the entire year.
Weddings are such a huge deal in India that most marriages are arranged by families, the groom and bride sometimes never even knowing each other until their parents introduce them. The timing of weddings is exceedingly important in India, which is why most couples get married around the autumn festivals like Diwali. Indians firmly believe that getting married during festival season increases marriages’ odds for success, longevity, happiness, and good luck. Who wouldn’t want such blessings in their marriage?
The families of Indian brides pay fortunes to outfit them with extensive gold dowries. Much of this is in the form of incredibly-intricate 22-karat jewelry the bride can wear on the most important day of her life. Not only is this gold dowry a beautiful adornment, the metal’s intrinsic value helps secure the bride’s financial independence and future within her husband’s family. Parents offering brides spare no expense buying these gold dowries, which is why Indian gold demand soars in the autumn.
Incidentally India’s total gold demand in Q3 2010, which only covers the very beginning of wedding season, was up 28% year-over-year! The global recession weighed heavily on Indians too, and they are making up for lost time by marrying off their kids at a frenetic pace. In normal years, something like 40% of India’s entire annual gold demand occurs during the short autumn wedding season! It tapers off in late November, so we are probably almost through it this year.
The word “festival” often sounds almost medieval to Western investors, but once again we play a similar game. The holidays of Thanksgiving and Christmas are simply our festival season. The Western festival-season gold buying kicks off this time of year just as Indian wedding season is winding down. A big portion, if not the majority, of annual discretionary spending in the West occurs in the 6 weeks leading up to Christmas. This is why I try to avoid the malls like the Black Death between now and year-end!
There is a mammoth surge in gold-jewelry demand as holiday dollars flow into gifts for wives, girlfriends, daughters, and mothers. I don’t have any hard industry-wide numbers, but I’ve read that some jewelers do half of their entire year’s sales between Thanksgiving and Christmas! The holiday festivities, probably family time far more than shopping, also create a buoyant and positive psychological boost for investors. This combines with income-cycle factors like year-end bonuses to drive big gold investment demand.
Much like those Asian farmers, here in the West we figure out how much surplus income we’ve earned for the year beyond expenses and taxes in December and January. And rather than let it languish in zero-yielding cash for the profligate Fed to destroy through inflation, we invest our annual surpluses. Invariably as more mainstream investors learn about gold’s secular bull, more of this capital flows into gold. Western investors are almost never as interested in the markets as they are in December and January.
After these big Western demand spikes, a similar festival season emerges in China. Unlike our Western calendar driven by solar cycles, the Chinese calendar is also heavily-influenced by lunar cycles. So the Chinese New Year typically falls between late January and mid-February on our Western calendar. The Chinese, with their deep cultural affinity for gold, buy this metal for festival-season gifts as well as end-of-year-surplus investments. Gold has a central role in Chinese New Year festivities on a variety of fronts.
Back in the West, professional money managers often make new allocations of capital in January. And with gold being one of the strongest and most-consistent performers every year for a decade, it is gaining favor among mutual-fund and hedge-fund managers. This new-year fund buying boosts gold investment in the initial couple months of each calendar year. A final investment demand spike tends to stgelop in April and May, capping the greater Festival Season before the parched summer doldrums arrive.
This spring rally in gold doesn’t have a clear cultural or income-cycle driver. I suspect it is the result of the same psychological phenomenon that leads to general stock buying that time of year. After emerging from the long dreary winters, everyone tends to feel happier and more optimistic as daylight lengthens and temperatures warm. And since psychology intimately drives investment demand, when traders feel better for any reason at all they are more likely to deploy capital. Hence the strong spring gold rallies.
Lumping this parade of seasonal influences together leads to gold’s three big seasonal rallies shown above. In chronological order the first is this spring one, where gold has rallied 4.1% on average between late March and late May. Next come the barren summer doldrums, which are simply a sideways grind where gold consolidates. Why doesn’t this metal rally in the summer? Because there are no major income-cycle or cultural events to drive investment-demand spikes!
Gold’s second big seasonal rally runs from late July to early October, a span where this metal has averaged 5.6% gains over the past decade or so. After that there tends to be a minor correction, which prepares the way for the third and largest seasonal rally of all. Gold’s strongest seasonal rally runs from late October to mid-February, the period with the most big investment-demand spikes. This monstrous rally tends to catapult gold 9.8% higher on average, really a fantastic return for just 4 months!
Riding these big seasonal rallies in gold, or the related assets gold drives including silver and precious-metals stocks, is pretty easy. All investors and speculators have to do is wait for the seasonal ebbs leading into these major rallies before buying new positions. The best times of the year seasonally to go long anything precious-metals-related are late March, late July, and late October. Following this simple schedule really increases your odds of buying relatively low within any given calendar year.
Back to today, gold has suffered an atypical November selloff. While beyond the scope of this essay, I’ll explain why this happened in our newsletters for the subscribers who graciously support our research. But regardless of the recent gold weakness, note how strong this metal tends to be seasonally between mid-November and mid-February. Gold enjoys some of its fiercest tailwinds of the year over this span, a key factor which helps reduce the odds that the recent selling was anything more than a minor pullback.
Gold’s seasonal bullishness in the coming months is also readily apparent from an alternative perspective, indexing each calendar month then averaging it. Although slicing gold into short calendar-month periods is somewhat arbitrary since its major uplegs and corrections seldom begin or end on month-ends, it is still interesting. As investors we tend to think in calendar-month terms so gold’s average bull-to-date performance over each calendar month is certainly relevant.
The best calendar months of the year for gold, on average over today’s secular bull, are November, September, May, and December. And January and February aren’t far behind. Gold’s average calendar-November gain is an amazing +4.5%! And December, January, and February run +2.3%, +1.8%, and +1.5% respectively. Gold’s seasonality is definitely very favorable over the next few months, a very bullish omen as long as gold wasn’t overbought prior to this recent selloff.
And it certainly wasn’t. Back in early September before the lion’s share of gold’s current upleg, I wrote an essay explaining why gold was relatively cheap then and “looks incredibly bullish heading into autumn 2010.” Based on my Relativity Trading system, where gold is considered as a multiple of its baseline 200-day moving average, gold had lots of room to run. And it still does today. Even at its early-November peak of 1.168x its 200dma before this latest selloff, gold remained well under its historical 1.25x overbought danger zone. We haven’t seen excessive greed, so sentiment is not likely to overrule seasonals today.
The bottom line is today’s gold bull has always exhibited strong seasonal tendencies tied to the calendar year. These aren’t driven by supply fluctuations like the soft commodities, but by big investment-demand spikes. At certain times of the year in various parts of the world, income cycles and cultural festivities lead to sharp increases in gold demand. For over a decade prudent traders have leveraged gold’s seasonality into big gains.
And today we aren’t even halfway through gold’s biggest seasonal rally of the year yet. Gold ought to enjoy serious seasonal tailwinds in the coming months, big marginal investment demand. This combined with the fact that gold wasn’t overbought before this recent selling really increases the odds that it was merely a healthy mid-upleg pullback. If gold follows precedent, this upleg’s best days are yet to come.
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