Gold?s strong
season is just getting underway, with this metal?s summer-doldrums
seasonal low in place. The past couple months? stiff headwinds are
starting to shift to fierce tailwinds, thanks to Asian demand
ramping up heading into autumn. Gold?s pronounced seasonality is
very important for all investors and speculators to understand, as
today?s inflection point is a very bullish omen for this
still-unloved asset.
Gold seasonality
is somewhat counterintuitive, with its mined supply essentially
constant year-round. Once a company spends over a decade and many
hundreds of millions of dollars to develop a gold deposit into an
operating mine, its future production profile is essentially fixed.
The gold supply is not like that of the soft commodities, where
harvest floods the markets with a massive onslaught of new supplies.
But supply is only
half the price equation, demand is equally important. And
rather fascinatingly, global gold demand varies dramatically
as each calendar year marches forward. There are specific times of
the year where demand explodes and other times where it withers.
Gold?s ironclad demand-driven seasonality is the product of
well-understood income-cycle and cultural phenomena from all around
the world.
And today we
happen to be right at the great ebb of this perpetual seasonal
cycle, the end of July. The summer is gold?s weakest season of the
year, because there are no major recurring demand surges. But
starting now, that changes dramatically. In the coming weeks
Asians will once again start flooding into gold in droves, forcing
its price higher. So buying today ahead of that near gold?s
seasonal lows is very prudent.
Soon gold will
start powering higher in its initial strong-season rally straddling
late summer and early autumn. As gold rises, so will the entire
precious-metals complex. The gold tracking ETFs, led by the mighty
American GLD gold ETF, will mirror gold?s advance. And silver and
the stocks of the precious-metals miners will leverage and amplify
it. The dawn of gold?s strong season is always an exciting time.
So this week I
decided to celebrate 2014?s major seasonal low by furthering my
long-running studies on
gold?s
seasonality. This critical knowledge will greatly help if you
invest in or speculate in anything precious-metals related. The
methodology is simple and easy to understand. Every calendar year
of gold?s secular bull since 2001 is individually indexed,
and then each year?s indexes are averaged.
The results
charted reveal gold?s seasonal tendencies over any calendar year.
Limiting this study to gold?s secular bull is important because
prices behave very differently in secular bulls and bears. And it
is essential to index each year individually before averaging them
to ensure percentage comparability. With gold averaging $311 in
2002 and $1409 in 2013, its raw unindexed prices just aren?t
equivalent.
Every calendar
year?s gold prices are indexed off the final trading day?s close
of the previous year, which is set to 100. If gold is up 10% at
any time during a year, its index will read 110. These indexed
percentage moves are always perfectly comparable regardless of
gold?s absolute price level. Every year?s since 2001 individual
index is then averaged together, yielding this unique and
indispensable gold-bull seasonality chart.
Gold has enjoyed a
very strong seasonal uptrend since its secular bull was born in
2001. On average over that span, gold ended each year an
amazing 13.4% higher! It?s just flabbergasting that gold is still
so unloved by investors with such an awesome track record. That
trounces the universally-adored S&P 500 stock index, which has
gained a pitiful
1.9% annually at best over essentially the same secular
timeframe.
The problem is
traders? short-term memories dangerously cloud their long-term
perspectives. All anyone remembers is 2013, the most anomalous
market year seen in our lifetimes after 2008?s stock panic. The
Fed?s reckless jawboning and massive
bond
monetizations catapulted the S&P 500 29.6% higher. And that
sucked vast amounts of capital out of alternative investments
including gold, which plummeted by 27.9%.
But investing is
about riding long-term trends, not betting crazy anomalies will
magically last forever. And gold?s secular-bull seasonals reinforce
how incredibly profitable it has been. Thanks to recurring gold
demand surges that flare up around the world at various times of the
calendar year, gold has enjoyed four major annual seasonal rallies
on average. And since we?re in late summer today, that?s a great
place to start.
Gold?s weak season
runs from late May to late July, the time of the year devoid
of regular surges in gold demand. I?ve long called these the
summer doldrums.
Gold tends to drift sideways to lower on balance in June and July,
spawning a dark sentiment wasteland where everyone either forgets
about gold entirely or starts to loathe it. Sound familiar? While
gold bottoms seasonally in early July, it still languishes until
late July.
And then like Rip
Van Winkle, gold awakens from its nightmarish slumber. The initial
catalyst is actually agricultural harvest season! All of
Asia is in the northern hemisphere, sharing the same growing season
we do. After an entire year of hard work and heavy capital
investment, Asian farmers start to harvest the fruits of their long
labors. They sell their crops and finally learn how much surplus
income they earned.
Some of this is
deployed into physical gold, driving up demand consistently in
August and September. This is particularly true in rural India,
where there isn?t much of a banking system and a deep centuries-old
cultural affinity for gold abides. This post-harvest gold buying
may sound quaint, but actually we do something very similar in
America. Our income-cycle investing happens in late December and
January.
Like Asian
farmers, we don?t know how much surplus income our entire year of
work generated until the end of the year. Finally after bonuses are
awarded and tax burdens are figured, we can invest any surplus we
earned. Thus the American stock markets tend to see major capital
inflows in early January. Investing can only come from surplus
income beyond living expenses, no matter where in the world one
lives.
This Asian
post-harvest buying pushes gold higher in August and early
September. And as it starts petering out, Indian?s famous
wedding season ramps up. If you know any Indians, ask them
about this fascinating cultural phenomenon. Indian weddings are
huge and elaborate productions that collectively demand a staggering
amount of gold to pull off. This buying accelerates gold?s
strongest seasonal rally of the year.
Marriage is so
important in India that most are arranged by families. The timing
of these weddings is critical, as Indians fervently believe that
getting married during the autumn 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.
Indian families
pay fortunes to outfit their brides with extensive gold dowries,
most in the form of intricate and beautiful 22-karat jewelry. Not
only can the bride wear this gold on the most important day of her
life, its value secures her financial independence within her
husband?s family. Like American parents, Indian parents spare no
expense when marrying off their precious children. They buy vast
amounts of gold.
Something like 40%
of India?s entire massive annual gold demand occurs during this
autumn wedding season! This helps drive gold?s biggest seasonal
rally of the year, which averages 6.9% gains between early July and
early October. With such an important and one-off event as a
child?s wedding, Indian parents buy gold aggressively regardless of
price or artificial barriers like the current crazy-high import
duties.
Gold takes a
seasonal breather in early October, but then its price shoots higher
again in November. Why? We start our own festival season here in
the West, the holidays of Thanksgiving and Christmas. That period
is dominated by a crazy spending frenzy. Many Americans do the
great majority of their entire year?s discretionary spending
leading into Christmas, and that includes heavy gold jewelry buying.
Jewelry demand
explodes as holiday dollars deluge into golden gifts for wives,
girlfriends, daughters, and mothers. Apparently many American
jewelers do well over half their entire year?s sales between
just before Thanksgiving and Christmas! This Western festival
season makes us happy too, just like Indians during their own
festival season. And happy people are far more likely to freely
spend money on discretionary wants.
This Western
holiday buying leads to another 5.0% gold surge on average between
late October and early December. That drives gold?s decisive
seasonal breakout above its seasonal uptrend. Much like July, that
October seasonal ebb is a great time to buy gold, silver, and the
stocks of their miners. Gold tends to slump a bit in December, but
soon awakens for another major 5.2% surge into late February.
The strong
early-year gold buying starts in the West, and is income-cycle
driven just like the Asian farmers? buying. That?s when we figure
out how much surplus income we?ve earned and invest some of it in
the financial markets. Even with gold still out of favor, there
were still enough smart contrarian investors over the course of its
secular bull to propel this metal sharply higher on average in
January.
And just as these
big Western demand surges subside, the major Chinese festival season
arrives. The Chinese calendar is based on the moon as well, and its
new year usually arrives in the first couple weeks of February. The
Chinese people celebrate this Lunar New Year by buying gold for
gifts. While these gifts are small, there are a lot of Chinese
which means a lot of aggregate gold demand. Income cycles play a
part too.
Like American
investors in late December and January, Chinese investors figure out
how much surplus income their entire year of work generated in late
January and February. So the popular festival buying is augmented
with serious investment buying. Once this surge in Chinese gold
demand peaks later in February, gold usually starts slumping into
late March. But note the chart above shows a mid-April low.
Why? April 2013?s
extremely anomalous
gold panic
was such a wildly-outlying event that it dragged down the entire
secular bull?s averages a bit compared to my
last seasonal
read in late 2011. And the subsequent extreme selling in 2013
significantly reduced gold?s average spring rally to merely a 3.0%
gain. I certainly suspect this will mean revert higher as normal
gold-buying patterns resume in the coming years.
Unlike the rest of
the strong season between late July and late May, gold?s spring
rally has no clear income-cycle or cultural driver. I suspect it is
the result of the same psychology that leads to general-stock buying
in the spring. After a dark, cold winter, the longer daylight hours
and warmer temperatures of spring leave people happier. And traders
who feel better are much more likely to deploy capital.
Gold?s strong
season is powerful and well worth riding for any investor or
speculator. All-in between early July and late May, gold has
averaged a stellar annual seasonal gain of 15.4% in its entire
secular bull between 2001 and today! That is one monster of a
seasonal rally. If gold merely enjoys an average one between its
recent mid-July low of $1294 and May, we are looking at $1493 gold
by next spring!
And since last
year was such an extremely anomalous down year that largely
short-circuited gold?s usual seasonal tendencies, probabilities
greatly favor the opposite this year. We are likely to see
far more upside than usual as gold continues to mean revert out of
2013?s extreme lows. And once again the ETFs like GLD will mirror
gold?s gains, but silver and the precious-metals miners? stocks will
amplify them.
This next chart
uses the same indexing and averaging methodology but carves up
gold?s secular-bull price action into calendar months instead of
years. Each calendar month is individually indexed off the final
close of the preceding month set at 100, and then they are
averaged. This perspective gives a clearer view on how gold tends
to perform in any given calendar month. And the best of the year
are approaching.
August, which is
almost upon us, is actually gold?s second strongest month of the
year on average with a 2.7% gain. Then September is the third
strongest, with a slightly lower (before rounding) 2.7% gain too.
And then after October?s seasonal slump, November is actually gold?s
strongest month of the calendar year at +3.3% on average. Now is a
great time to buy precious metals with gold?s best months of the
year nearing!
July is the best
time of the year bar none to add new precious-metals long positions,
with the whole string of major seasonal rallies still ahead. Late
October, late December, and mid-April are secondary buying points to
add positions, but with much less seasonal rallying left after these
points they aren?t as optimal as late summer. Right now is
the year?s most favorable time to deploy serious capital in precious
metals.
As always, it?s
very important to remember that seasonals are tendencies
based on long-term averages. They are secondary drivers,
affecting prices like headwinds and tailwinds affect airplanes.
Gold can certainly still move counter to seasonal tendencies for a
spell if that?s the way its primary drivers happen to be pushing.
Sentiment, technicals, and fundamentals can all easily offset and
outweigh seasonals.
So don?t get
discouraged or scoff at seasonals if gold moves the wrong way for a
week or two during a seasonally-strong time. That happens, as even
strong tailwinds can be bucked with sufficient power. But over
time, these seasonal tendencies are very strong and will normalize.
Recurring major gold buying worldwide is the underlying
source of seasonals, which is the most fundamental force
possible.
In addition to the
usual income-cycle and cultural gold buying, the coming months are
likely to see additional very bullish big fundamental buying come
into play. 2013?s extreme gold anomaly was driven by just two
groups of traders dumping gold at epic record rates, American
stock traders and American futures speculators. And so far this
year even before gold?s strong season they?ve actually been buying
gold instead.
GLD?s gold-bullion
holdings are actually rock-solid this year after
plummeting last
year. As of this week, they were up 0.9% year-to-date. That
may not sound like much, but it is a vast improvement from the
extreme 31.2% year-to-date plunge as of the same day in 2013! As
the overvalued
and overextended
US stock markets inevitably roll over, stock traders are going to
remember the wisdom of portfolio diversification.
They will flood
back into GLD shares faster than gold is rallying, forcing this
ETF?s custodian to shunt that deluge of excess capital directly into
gold-bullion buying. This will combine with the Asian buying to
force gold up faster. And that will accelerate the
massive buying
in gold futures that has been underway this year. American futures
speculators still have lots of buying left to do to mean revert to
normal years? levels.
So when the
fundamentally-driven tailwinds of the strong autumn seasonals
combine with heavy buying of the GLD gold ETF by American stock
traders and gold futures by American futures speculators, we are
likely looking at one exceptional autumn gold rally! It won?t be
smooth, it won?t climb in a nice straight line, and there will be
sharp setbacks. But on balance gold is perfectly poised for a major
new upleg.
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The bottom line is
gold?s strong season is just getting underway. While gold?s mined
supply is constant, its global demand fluctuates dramatically
throughout the calendar year. Major income-cycle and cultural
drivers from around the world lead to outsized gold demand surges.
And gold?s best months of the year are nearing as Asian harvest
buying ramps up followed by the fabled Indian wedding season?s
arrival.
The usual autumn
gold seasonal strength this year coincides with extremely toppy
global stock markets due to roll over any day. And when they do,
investors will flock back into neglected gold for prudent portfolio
diversification. This Western mean-reversion buying after last
year?s extreme gold anomaly stacked on top of Asian seasonal buying
ought to spawn one monster gold upleg. Get deployed ahead of it.
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