Gold remains
deeply out of favor, languishing near major lows. Traders are still
convinced gold is going nowhere, and want nothing to do with it.
But provocatively that?s par for the course in early June, when gold
slumps to its most-important seasonal low. Gold?s seasonals are now
bottoming, just ahead of the usual major surges in global gold
demand coming in late summer and autumn. This is a fantastic time
to buy.
Seasonality
describes the strong repeating tendencies of some assets? prices to
behave in certain ways at certain times throughout the calendar
year. It is driven by consistent changes in supply and demand that
are tied to the seasons. Wheat is a great example, as its supply
fluctuates considerably based on celestial mechanics. Harvest times
naturally yield big new supplies, which tend to drive down prices.
Gold?s seasonality
is somewhat counterintuitive. Unlike the grown commodities, this
metal is mined globally at a steady pace year-round regardless of
sunlight, temperature, or weather. But supply is only half of the
price-defining equation. It?s gold?s demand that ramps up
dramatically at certain times during the calendar year. Since mined
supply is effectively fixed in the short-term, it can?t swell to
meet these big demand surges.
So when they
arrive, gold?s price is quickly bid higher. This commodity?s
seasonality is totally demand-driven. There are two major
components to worldwide gold demand, jewelry and investment. And
over in Asia, these are often synonymous. Families plow surplus
income into gold jewelry which they prize for its adornment beauty,
but it is considered an investment. Investment demand at the
margin sets gold prices.
And in these lazy
days of early summer, global gold investment demand retreats to its
lowest levels of the calendar year. This is simply a summer
thing, nothing more. All the world?s major gold-demanding
regions of Asia, Europe, and the US are located in the northern
hemisphere, so they experience summer simultaneously. Then traders?
collective focus drifts from markets and investing to vacations and
leisure.
This first chart
illustrates how gold prices tend to slump to major seasonal lows in
June. Teasing out seasonal tendencies requires averaging price
fluctuations across many years. But gold?s price varies
dramatically over time. For example it averaged around $275 in
2001, price levels that certainly aren?t comparable to the $1575 in
2011. While a $12 daily gold move is nothing today, it was epic 14
years ago.
So to render many
years of gold price action in perfectly comparable terms, each
calendar year has to be individually indexed. Gold?s closing
price on the final day of the previous year is recast at 100, with
the entire year?s daily percentage moves indexed off that. So at an
index level of 110, gold is up 10% year-to-date regardless of its
prevailing price levels. All of these individual calendar-year
indexes are then averaged.
And voila, here?s
the result of 14.5 years of daily gold-price data plugged into a
10k-formula spreadsheet! Running from 2001 to 2015, this reveals
gold?s indexed percentage price action as averaged across all
calendar years. This metal indeed has very pronounced
seasonal tendencies! It tends to rally and slump at certain times
of the calendar year depending on global investment demand. Check
out early June.
Gold tends to
suffer a sharp selloff as the market summer dawns and investors and
speculators leave their computers to venture out into the glorious
sunshine. This is actually gold?s sharpest seasonal selloff of the
entire calendar year. Gold is nearly always down in the dumps in
early summer, wallowing in apathy and antipathy. But before we
delve deeper into gold?s seasonals, this is the wrong chart
to use.
Since price action
is radically different in bull and bear markets, seasonality isn?t
really comparable across that great divide. Between 2001 and 2012,
gold was inarguably in a strong secular bull market. From
April 2001 to August 2011 in particular, gold soared 638% higher!
It was the best-performing asset class in the world by far,
trouncing the flagship US S&P 500 stock index?s 2% loss over that
same span.
After such an epic
wealth-multiplying bull run, gold consolidated those gains in 2012.
It rallied strongly again late that summer before slamming into the
most extreme market anomaly of our lifetimes. In late 2012 the Fed
launched its QE3 campaign of conjuring vast amount of dollars out of
thin air to monetize debt. QE3 was far different from QE1 and QE2,
being totally open-ended. This was wildly unprecedented.
The Fed kept
actively trying to convince global investors and speculators that it
would be quick to step in and ramp up QE3?s bond buying if there was
any material stock-market selloff. Traders gradually came to the
belief that the Fed was backstopping stock markets, that they
had miraculously become riskless. So traders quickly scrambled to
buy every dip, short-circuiting normal healthy sentiment-rebalancing
selloffs.
The resulting
Fed-fueled
stock-market levitation radically distorted world markets.
Prudent diversification of portfolios across asset classes was
forgotten as traders lusted after those central-bank-goosed stock
markets. Alternative investments, led by gold, were abandoned.
This extremely anomalous shift peaked in the second quarter of 2013,
when gold plummeted 22.8% on
record selling
in the dominant GLD gold ETF.
That was gold?s
worst quarterly performance in an astounding 93 years, an
ultra-rare once-in-a-century superstorm! That single quarter forced
gold down 27.9% in 2013, well into bear-market territory. That was
the most aberrant gold year we?ll witness in our lifetimes, as far
from normal as imaginable. And obviously 2013 is averaged into the
seasonal gold chart above, distorting and skewing normal gold
seasonals.
Thankfully gold?s
extraordinary Fed-distortion-driven bear was largely confined to
2013. Gold stabilized in 2014 with a trivial 2% loss, and is
dead-flat so far this year. So technically, gold?s bear market
is long over. And the vast amounts of capital the Fed?s
stock-market levitation sucked out of gold in 2013 are almost
certain to return as both stock markets and gold mean revert back
out of these extreme anomalies.
Since it?s
essential to separate out the opposing bull and bear seasonals, this
next chart offers a much-more-accurate view of gold?s
intra-calendar-year price tendencies. It individually indexes and
then averages gold?s price behavior between 2001 and 2012.
Excluding that incredible aberration of 2013 offers a far-clearer
view of gold?s seasonality. And again right now, gold is
experiencing its major seasonal low.
The typical sharp
selloff gold suffers in early June as summer seduces investors away
leads to gold?s most-important seasonal bottoming of the
calendar year. On average gold bottoms on the tenth trading day of
June, which happens to be the very day this essay was published.
This marks the absolute single best time of the year in pure
seasonality terms to aggressively invest in gold, silver, and their
miners? stocks!
Gold?s
second-strongest seasonal rally of the year starts marching higher
from this
summer-doldrums sentiment wasteland. On average between 2001
and 2012 before the Fed?s extreme market distortions, gold powered
7.5% higher between mid-June and early October. The factors that
drive the strong surge in gold demand in August and September are
well-known. They center around Asia?s ancient love affair with
gold.
Gold starts
climbing in late June and July because smart Western investors are
front-running the usual big surges coming in Asian demand. With
India and China in the northern hemisphere, their farmers share the
same growing and harvest seasons we have in the States. And after
an entire year?s hard work and heavy investment, harvests are
reaped. Asian farmers finally know how much surplus income they
earned.
Then they plow
some of their year?s savings into physical gold bullion, a wise
investment throughout virtually all of world history. This may seem
quaint to us in the West, but we do the same thing. There is a big
investment surge (stocks and gold) in the US in late December and
early January, right after we figure out how much surplus income we
earned during the year after bonuses are paid and tax burdens
calculated.
Asian harvest
buying gradually gives way to India?s famous festival season, the
auspicious time when young Indian couples want to get married.
Weddings are often arranged by parents, and they believe
festival-season weddings have greater odds of yielding long,
successful, happy, and lucky marriages. And gold has long been an
integral part of India?s elaborate and fascinating weddings. So it
is bought heavily.
The families of
Indian brides pay fortunes to outfit them with extensive gold
dowries. Much of this is in the form of beautiful and intricate
22-karat jewelry the bride can wear on that most-important day of
her life. This gold jewelry is not just an adornment, but secures
brides? financial independence within their husbands? families.
Parents spare no expense in providing this gold for their precious
daughters getting married.
So Indian gold
demand soars in September, pushing world gold prices higher.
While recently overtaken by China, India had long been the world?s
biggest gold consumer. And something like 40% of its entire massive
annual gold demand occurs during this autumn wedding season! Smart
contrarian investors and speculators start buying into the
precious-metals sector in June and July ahead of this clockwork
surge.
Gold suffers
another sharp seasonal selloff in mid-October, but then starts
powering higher in its best seasonal rally of the calendar year.
Between early October and late February, this metal blasted another
10.1% higher on average between 2001 and 2012. And much of the
marginal new gold demand fueling this excellent rally comes from the
West, where we enter our own cultural festival season leading into
Christmas.
Between
Thanksgiving and Christmas, the majority of annual American and
European discretionary spending occurs. Part of this feeds a
mammoth surge in demand for gold jewelry for Christmas gifts for
wives, girlfriends, daughters, and mothers. Many Western jewelers
reportedly do half of their entire year?s sales between
Thanksgiving and Christmas! All that buying pushes gold prices
sharply higher.
The strong
marginal gold demand persists in late December and January, but
shifts to pure investment. Once again that?s when we Westerners
figure out how much surplus capital we earned that year, just like
the Asian farmers after harvest. Then we either decide for
ourselves where to put this money to work or send it to
professionals to invest it for us. So there are big capital inflows
into gold during this new-year season.
After that,
Chinese gold demand takes the baton in February. The Chinese
calendar isn?t solely driven by solar cycles like here in the West,
but also lunar cycles. So the popular Chinese New Year and
surrounding festivities arrive sometime between late January and
mid-February. The Chinese buy gold aggressively then for both
investments and gifts, helping propel gold to another major seasonal
peak.
Provocatively
right now at gold?s major June seasonal low is the best time to
deploy capital in gold to ride all of these coming income-cycle and
cultural drivers of outsized gold demand! Unfortunately the great
majority of investors and speculators are too short-sighted to buy
gold low when it is deeply out of favor. They?ll instead buy in
higher later, after much of gold?s coming seasonal gains have
already been won.
This last chart
slices the gold-bull seasonality between 2001 and 2012 a different
way, monthly. Each calendar month is individually indexed, with the
final close on the last day of the previous month being set at 100.
And then all the like calendar months? indexes are averaged across
years. While early June is gold?s weakest time of the year, it
precedes some of gold?s best months in August and September.
The first part of
June is gold?s second-worst monthly time seasonally after
mid-October. Combining this early-June selloff with its late-May
lead-in marks gold?s sharpest seasonal selloff of the year. But
taking advantage of this typical early-summer weakness to buy low
makes great sense. Gold?s average gains in August and September
between 2001 and 2012 ran 2.5% and 3.3%, its fourth- and second-best
months!
So with gold
seasonals bottoming, right now is the best time of the year
to deploy capital in gold and the entire precious-metals realm
driven by its price. Smart investors and speculators buy in low
when few others want to and sentiment is miserable, because that?s
when the cheapest prices are found. While it isn?t easy
psychologically bucking the crowd and investing in something
unpopular, this yields the greatest gains.
But unfortunately
only a tiny fraction of traders will have the courage to pull the
trigger. Thanks to that extreme Fed-driven anomaly in 2013, and its
technical and sentimental aftermath still plaguing gold to this day,
many traders believe gold?s seasonality has been short-circuited.
Since gold?s seasonals didn?t work well in recent years, these
traders expect them to remain forever broken. But this is a
supremely-irrational assumption.
Gold?s seasonality
has existed for many decades, if not centuries. Nothing is going to
change the timing of Asian harvest, Indian wedding season, Western
holiday buying and year-end, or Chinese New Year. These are
deeply-ingrained income-cycle and cultural drivers of outsized gold
demand that will certainly persist for decades if not centuries to
come. An extreme central-bank-fueled anomaly can?t overwhelm them
for long.
I suspect that
critical core market principle of mean reversion after anomalous
extremes also applies to seasonality. Odds are gold?s seasonality
is due to come roaring back with a vengeance after being
artificially suppressed in recent years. The alternative bet makes
no sense, that gold?s once-in-a-century superstorm in 2013
will somehow define the new norm. There?s no doubt gold?s
seasonality will indeed reassert itself.
A second objection
to seizing this major gold seasonals bottoming to buy low arises due
to the looming threat of the Fed?s coming interest-rate hikes.
Investors and speculators alike are convinced that gold is in mortal
peril when rates are forced higher, since it has no yield. But
history shatters that silly fallacy too. Gold actually thrives
in rising-rate and high-rate environments, as I?ve
researched
extensively.
During the Fed?s
last rate-hike cycle between June 2004 to June 2006, it more than
quintupled its benchmark Federal Funds Rate from 1.0% to 5.25%.
Yet gold blasted 50% higher over that exact span! In the 1970s,
gold skyrocketed a staggering 24.3x higher while the Fed
catapulted its FFR from 3.5% in early 1971 to an astounding 20.0% by
early 1980! Higher rates hurt stocks and bonds, attracting
investors back to gold.
So instead of
being a threat, the Fed?s coming rate-hike cycle is likely to prove
the catalyst that reignites gold?s slumbering seasonality. And that
means outstanding gains are coming in gold, silver, and the stocks
of their miners. Investors and speculators can play gold?s coming
strong seasonal rallies in gold itself or the flagship American GLD
gold ETF. But their gains will be dwarfed by those in the gold
stocks.
Since gold has
been so far out of favor for so long, the gold miners have been left
for dead. Long since abandoned, they?ve been trading at truly
fundamentally-absurd levels relative to the price of gold which
drives their profits and hence ultimately their stock prices. So
the best of the gold miners are the place to be to really
leverage the upcoming gains in gold! They are going to soar as
gold?s seasonality returns.
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The bottom line is
gold exhibits strong seasonality, created by surges in global demand
throughout the calendar year. While this has been suppressed in
recent years by the Fed-fueled extreme market distortions, that
anomaly is only temporary. The underlying income-cycle and cultural
drivers of these periods of outsized gold demand have been around
for many decades if not centuries, and will persist for many more.
And right now gold
is experiencing its most-important seasonal bottoming as it
languishes in early summer?s sentiment wasteland. These early-June
gold lows precede this metal?s two biggest seasonal rallies of the
year, leading to major gains on average. So smart contrarian
investors and speculators should be backing up the truck to load up
on incredibly cheap gold, silver, and the stocks of their best
miners.
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