Adam Hamilton November 11, 2011
Gold has just entered its strongest time of the year, embarking on a major seasonal rally. Naturally this is very bullish for not only this metal, but the companies that wrest it from the bowels of the Earth. Gold’s well-established seasonality is important for speculators and investors to understand, as it offers many great insights to help fine-tune the timing of precious-metals-related trades.
Seasonality is somewhat counterintuitive for gold. For a commodity like wheat that can only be grown and harvested in certain times of the year, seasonality is perfectly logical. Wheat supply fluctuates greatly based on celestial mechanics. But gold? Unlike the grown commodities, this metal is mined globally at a remarkably-steady pace year-round, regardless of sunlight, temperature, or weather.
But of course supply is only half of the price equation, equally if not more important is demand. And for a variety of interesting income-cycle and cultural reasons, gold demand ramps up dramatically at certain times in the calendar year. Since mined supply is essentially fixed and can’t swell to meet these big demand surges, gold’s price is quickly bid higher. Gold’s seasonality is demand-driven.
Speculators and investors who understand when gold’s seasonal demand spikes occur greatly increase their odds of buying precious-metals positions relatively low and selling them relatively high. So I always pay attention to gold’s strong seasonality in my own gold, silver, and precious-metals-stock trading. About once a year or so I update my gold-seasonality studies with the latest data to illuminate evolving trends.
As always, an important caveat is necessary up front. Realize that seasonality is merely a secondary driver. Seasonals can be temporarily overridden by gold’s primary drivers, greed and fear. A perfect example just occurred heading into autumn. Even though gold’s seasonals looked very bullish then, this metal was seriously overbought so a major correction was due as I warned at the time. Overbought gold is still likely to correct despite strong seasonals, and oversold gold is still likely to surge despite weak seasonals.
Think of seasonals like prevailing winds. When you drive your car down the highway, a tailwind is far preferable to a headwind. Though your car’s primary driver is its engine, having a tailwind still makes the trip cheaper and more pleasant. When gold’s primary drivers are positioned to support a major rally, seasonal tailwinds raise the odds this rally will be larger and faster than it would have been if faced with seasonal headwinds.
Most traditional seasonal analysis considers multi-decade timeframes, like 30 years. But prices behave very differently in bulls and bears, so I believe it is more useful for trading purposes to limit this gold-seasonality study to this metal’s current secular bull. It was stealthily born in April 2001, with gold loathed and languishing in the $250s! Less than a month later at $264, I first started recommending physical gold coins as long-term investments to our newsletter subscribers. They’ve earned fortunes since!
With gold blasting from around $250 to nearly $1900 over the past decade, it is necessary to individually index each calendar year and month to do seasonal studies. Indexing renders each year and month in perfectly-comparable percentage terms. While a $15 daily move in gold is yawn-inducing today, back in 2001 such a then-epic move never even happened! But a 2% daily rally today is perfectly comparable with a 2% daily rally back then, or anywhere in between.
My indexing methodology is simple. Every calendar year and month is individually indexed, with gold’s close on the first trading day recast at 100. The rest of that year’s or month’s price action is based off this. If gold rallied 10%, its index rises to 110 no matter where it was in its bull or what its absolute price levels happened to be. If it fell 5%, its index always slumps to 95. Averaging all these annual indexes together (first chart) and monthly indexes together (second chart) yields this fascinating gold-bull-seasonality read.
Before I delve into why gold’s seasonality exists, there are some major changes in this chart from last year’s version. Back in 2006 when I first started building these charts, I decided to include 2000 because gold had started to bottom then (and the flagship HUI gold-stock index did bottom then). But it technically wasn’t a gold-bull year so I rolled it off this latest update. And 2011 saw an ultra-rare massive summer rally in gold which really changed its seasonal uptrend in July and August.
Together rolling off 2000 and adding 2011 greatly steepened gold’s seasonal uptrend. The support line you see above used to be around 106 by year-end, but in this latest iteration it has surged up near 111! In addition the summer support approach marking the best seasonal buying opportunity of the year shifted back from late July to mid-June. And the annual data underlying the blue average line got tighter, pulling in the yellow single-standard-deviation bands significantly. Gold has sure had a fantastic year!
As this chart reveals, gold enjoys three big demand-driven seasonal rallies. While we all like to start in January when pondering calendar-year chronologies, in gold’s case a better line of demarcation arrives with the dawn of the market autumn in September. It kicks off gold’s seasonally-strong period that runs until May, the best time of the year to be long gold, silver, and precious-metals stocks. A parade of income-cycle and cultural factors drives a sequential series of demand spikes for gold all over the world.
This all starts in August and September with Asian harvest buying. With all of Asia in the northern hemisphere, its farmers share the same growing season we do. And after an entire year’s heavy capital investment and hard work, the Asian farmers start harvesting. Once their crops are sold, they finally know for the first time all year just how much surplus income beyond operating and living expenses their labors generated.
Some of these farmers, particularly in gold-crazy India where there isn’t much of a rural banking system, plow their surplus (year’s savings) into physical gold. Some Westerners view this as quaint, but we do the same thing. Most of us don’t know how much surplus income we’ve generated in a year until late December or early January (once bonuses are paid and tax burdens are figured). After this we too invest, just like Asian farmers. December and January typically see big capital inflows into the stock markets.
This Asian post-harvest buying gradually yields to India’s famous festival season. This country has long been the world’s largest gold consumer, although China is likely to overtake it sometime in the coming few years. The core of Indian festivities is this country’s famous wedding season. If you know any Indians, ask them about wedding season. Wedding traditions in India are elaborate and fascinating, and drive what is usually the world’s biggest gold-demand spike of the entire year.
Marriages in India are so important that most are arranged by families, with grooms and brides sometimes never even knowing each other before their parents introduce them. The timing of these weddings is critical too, as Indians believe getting married during festival season increases couples’ odds for success, longevity, happiness, and good luck together. Who wouldn’t want such great blessings in their marriage? The autumn festivals including Diwali are the most auspicious times to tie the knot.
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 a beautiful adornment, this metal’s intrinsic value helps secure the bride’s financial independence within her husband’s family. Parents offering brides spare no expense in buying these gold dowries, which is why Indian gold demand soars in autumn.
In normal years, something like 40% of India’s entire annual gold demand occurs during this autumn wedding season! It tapers off in late November, so we are probably almost through it this year. But gold’s strong seasonal period continues as we start our own festival season here in the West, the crazy spending frenzy that erupts during Thanksgiving week and remains strong leading into Christmas. A big portion, if not the majority, of annual discretionary spending in the West occurs in these 5 weeks. So 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. Apparently many jewelers do well over half of their entire year’s sales between Thanksgiving and Christmas! Our festival season tends to make everyone happier too, all the family time is a huge blessing. This creates a great psychological boost for consumers and investors alike, which combines with income-cycle factors like year-end bonuses to drive big gold investment demand.
Like those Asian farmers, here in the West we finally figure out how much surplus income we’ve earned in a year beyond our expenses and taxes in December and January. And since letting these new savings languish in zero-yielding cash courtesy of the Fed is foolish, we invest them. Much flows into the stock markets, but increasing amounts are pouring into gold as more mainstream investors learn about its strong secular bull. Professional money managers also contribute to and amplify this demand.
Each January, pension-fund managers see a deluge of new capital from payroll deductions swollen to include annual bonuses. They are paid to put this money to work, and gold has been one of the best and most-consistent performers every year for over a decade. Such bullish price action is very alluring for capital. Gold also offers great downside protection in exceptionally-volatile markets, which we have seen in spades since 2008’s stock panic. So this dynamic tends to keep gold prices rallying through January.
After these big Western demand spikes subside, a similar festival season emerges in China. Unlike our Western calendar driven by solar cycles, the Chinese calendar also considers lunar cycles. So the Chinese New Year typically falls between late January and mid-February on our Western calendar. The Chinese have a deep cultural affinity for gold, so they plow some of their year-end surplus-income investments into it as well as buying it for festival-season gifts. But after February’s strong Chinese gold demand, we tend to see a seasonal slump in March as the parade of festivals around the world ceases.
But interestingly gold tends to surge again in April and May, and this spring rally 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 in the spring. After emerging from a dark cold winter, everyone feels happier and more optimistic as daylight lengthens and temperatures rise. And since sentiment intimately drives investment demand, traders who feel better for any reason at all are more likely to deploy capital. Hence the strong spring gold rallies.
So as you can see, there are very good reasons behind the parade of outsized gold-demand spikes from September to May. They drive a series of major seasonal rallies in gold, which are labeled in this chart. Chronologically in a calendar year, the first starts in mid-March and runs 5.1% higher on average by mid-May. The second now starts in mid-June (it used to be late July) and climbs until early October, seeing gold surge 7.4% higher on average between 2001 and 2011. Finally the third and strongest starts powering heavenwards in late October before peaking an average of 10.4% higher in late February.
Seasonally the best times of the year to go long gold, silver, and precious-metals stocks are at the dawns of these three major rallies (mid-March, mid-June, late October). Gold is near its seasonal support then, marking great times to buy relatively low within any given calendar year. And note that late October’s major buying op, which our subscribers knew about in advance, subsequently erupted into a sharp gold rally in recent weeks. And if seasonality continues to hold true this year, this rally is just getting started. Gold’s big seasonal breakout above its resistance line is nearly upon us, a very bullish omen.
Gold’s seasonally-strong period between September and May is offset by its seasonally-weak period in the summer. Normally this is a sentiment wasteland for gold, where it drifts listlessly sideways in a morass I call the summer doldrums. Though gold soared in this latest July and August in a huge rally, it was a total anomaly driven by the psychological impact of a series of unique events we’ll never see again (primarily the first-ever USA debt downgrade). So I wouldn’t bet against the summer doldrums next year, as gold has never done anywhere near as well in any summer before 2011 in this secular bull.
While these annual seasonals are the meat of this analysis, gold’s monthly seasonals offer some additional detail. Each calendar month’s gold price action is individually indexed and then averaged across this entire bull, resulting in this chart. This perspective offers deeper insights into gold’s intra-month action, further fine-tuning the usefulness of gold bull seasonals for helping time trades.
The same three great buying points from the first chart are readily apparent in this alternate format. The best times of the year to go long gold, silver, and the PM stocks seasonally are mid-March, mid-June, and late October. Incidentally, these are really the only weak months of the year for this metal. Gold’s secular-bull ascent over the last decade has been remarkably steady, usually powering higher on balance.
Gold’s best calendar months seasonally are November, September, December, and May. Between 2001 and 2011 they saw huge average rallies of 4.6%, 3.2%, 2.5%, and 2.4% respectively. And note how November, December, January, and February all tend to see gold end near its monthly highs on average. The gold bull seasonals truly are outstanding this time of the year, very bullish heading into spring.
Though these seasonals are merely a secondary driver, subordinate to greed and fear, they still offer excellent insights into trade timing for speculators and investors alike. Since trading is a giant probabilities game, anything we can do to tilt the odds farther in our favor is very welcome. And buying gold, silver, and PM stocks near gold’s seasonal lows is an easy and effective way to do it. Then when you are ready to sell, consider exiting near gold’s seasonal peaks in late February, mid-May, or early October. Buying low and selling high is essential, and understanding seasonality can help you do it.
At Zeal we’ve been actively trading this gold bull for over a decade now, since its very dawn, with great success. And after relentlessly studying gold all these years, I continue to be amazed at how strong and predictive its seasonality has been. It is one of many trading tools we’ve developed to help optimize our buy-and-sell timing, leading to big profits for our subscribers. Since 2001, all 591 stock trades recommended in our subscription newsletters have averaged stellar annualized realized gains of +51%!
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The bottom line is demand-driven seasonals have been a powerful force shaping this secular gold bull. A variety of income-cycle and cultural factors around the globe combine to drive major gold rallies at certain times of the year. Though seasonals are a secondary driver that can be temporarily overridden by excessive greed or fear, they are still a fantastic tool to help time entries and exits in gold-related trades.
And right now we are heading into gold’s strongest time of the year seasonally, its biggest seasonal rally. On average throughout this secular bull, gold has soared 10.4% higher between late October and late February! The longer you wait to deploy, the less you will be able to harness these major seasonal tailwinds. And with gold far from overbought today, there is no sentiment reason not to be aggressively long.
Adam Hamilton, CPA November 11, 2011