Gold Bull Seasonals 3
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By Adam Hamilton | 11 August 2008
GLD (Gold ETF), Last 3 Years
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It's been a tough few weeks for gold investors. In mid-July this Ancient Metal of Kings closed near $976, within spitting distance of its all-time nominal high of $1005 achieved in mid-March 2008. But since then it has sold off relentlessly, down 10.4% ($101) at worst [[obviously, NOT counting today! : normxxx]]. Several days of this ugly span were marred by sharp selloffs too, including this past Tuesday's 2.2% plunge on the Fed's machinations.
If you are playing gold on the long side, it is tempting to get discouraged. After all, this week CNBC was emphatically claiming that the global commodities bulls had ended. Never mind that CNBC has prematurely declared these bulls over about a dozen times in the past few years, the misery of the moment is hard to transcend. Gold certainly wouldn't fare well if the commodities-hating financial media is right.
Thankfully they are not. Global supply deficits in commodities that took decades of infrastructure neglect to create can't be magically fixed overnight. It will take decades [[anyways, more than a few months: normxxx]] to find mineral deposits, get permits, sink the mines, and bring these scarce natural resources to market to satiate soaring world demand [[AND, all the while avoiding rapacious governments and confiscatory taxation— governments are forever killing the geese that lay the golden eggs: normxxx]]. Gold is no exception, as it is often considered one of the most challenging and difficult metals to mine.
Provocatively, gold's weakness of late was expected by students of the markets. It was nothing unusual at all. Gold has strong seasonal tendencies in its price behavior and the summers are its weakest time of the year statistically. [[Moreover, gold can be extremely volatile!: normxxx]] Just a couple weeks ago I wrote an essay on the PM Summer Doldrums that delved into this period of time specifically. Gold seldom does anything but grind sideways during the summer months.
Many traders are surprised when they learn seasonality affects gold. It makes sense for the soft commodities like wheat where planting and harvest, hence relative scarcity and abundance, are slaved to the Earth's celestial mechanics that drive our calendar seasons. In their case, most new supplies come to market during a relatively tight calendar-defined window at harvest. This affects prices, of course.
But seasonality can even affect commodities that are produced fairly uniformly year round. In these cases it is not supply that fluctuates seasonally, but demand. If demand tends to cluster around certain parts of the calendar year, definite price impacts will be observed. For example snow shovels can be manufactured anytime, but demand (and price if hardware stores are good capitalists) only spikes after major blizzards.
In gold's case, its seasonality is governed exclusively by investment demand. This is always the biggest wildcard affecting the gold price. There are times of the year when investors rush to buy gold in various parts of the world, and times of the year when investors nearly forget about gold. These episodes of varying gold-demand intensity drive major price fluctuations that hit at specific times of the calendar year.
Before we dig into this gold seasonality, an important caveat is in order. Seasonal influences are real and tradable, but they are often just a secondary driver. Technical extremes that spawn sentiment extremes (excessive greed or fear) can easily override seasonals. I think of seasonals as prevailing winds. While you don't need a tailwind to drive your car down the highway, it is certainly nice to have.
In order to chart gold's seasonal trends within this secular bull, I individually indexed every year between 2000 and 2008. The first close in January was assigned a value of 100, and then the rest of the year's closes were indexed off of that. Indexing makes every year perfectly comparable in percentage terms regardless of gold's rising general price levels endemic to this bull.
Next I averaged each individual-year index to arrive at the blue gold seasonals line below. It reveals what the gold price has tended to do at any point in the calendar year since 2000. Specific days are rendered with large dots in order to clearly show where the actual data is relative to the lines that connect these datapoints. I also included standard-deviation bands to show how dispersed the underlying data was.
Averaging 10 and 90 or 48 and 52 both yield 50. But as a speculator, the second tighter data set makes me much more comfortable about the odds a tendency will repeat itself. So the tighter the yellow standard-deviation bands, the tighter the underlying pre-average data. Narrower bands around any seasonal time mean that particular seasonal tendency is less likely to be the product of anomalous extremes and more likely to repeat itself.
The first conclusion your eyes reap from this chart is probably gold's tendency to rise on balance. Throughout the calendar year, it is generally climbing. This is logical since these seasonal tendencies are [only shown for] the years since 2000, [during which] gold has been in a strong secular bull. While bulls do flow and ebb; advancing, then correcting; over time they inevitably lead to higher price levels; [[ anyways, during a bull move: normxxx]].
Seasonally, gold has carved a definite uptrend channel for the first 2/3rds of the calendar year. It is really well-defined too, with four solid intercepts at support and three at resistance. Like any conventional technical uptrend, traders can game this tendency. The seasonal tailwinds are more likely to blow gold higher when it is near support and lower when it is near resistance.
Regardless of what primary trading indicators you use, it is still wise to consider prevailing seasonals before you launch new trades. Ideally your primary and secondary indicators all line up, which gives you better odds for success in your trades. And if your primaries don't agree with seasonals, the primaries will probably still prove right yet the resulting move isn't likely to be as intense since it has to buck seasonal headwinds.
Within this seasonal uptrend, the biggest rally to exploit runs from mid-March to late May. Averaged across all the years since 2000, gold tends to run higher over this short span. Unfortunately this seasonal tendency failed in 2008, as you certainly remember if you were long gold then. Between mid-March and late May gold fell about 12% this year. Yet even with this bad 2008 averaged in above, gold's seasonal tendency is still to run higher over this particular span.
The events of spring 2008 are a great cautionary tale on reading too much into seasonality. Excessive greed or fear, regardless of their cause, can overwhelm seasonal tendencies. So once again make sure you use seasonals only as a secondary trading indicator. While they do help define the probabilities of a price moving in a certain direction, the probability scale still leaves plenty of room for variation.
After the usual spring gold rally, summer is this metal's weakest time of the year by far. Note above how gold merely tends to grind sideways on balance in June, July, and August. I just wrote an essay on this tendency alone if you want to dig deeper. The best way to weather gold's summer doldrums is to not expect too much from the metal and realize it is likely to simply trade sideways in a range-bound fashion.
But boy, if you can weather the summer doldrums without psychological damage, your prize is autumn. Autumn is the strongest time of the year for gold seasonally by far. From early August (like right now!) to early February, on average gold has rallied 14.0% in its bull to date. This is a big move, the part of the year in which most of gold's bull-market gains have been achieved. Be long gold between August and February! [[Anyways, while this gold bull lasts!: normxxx]]
This massive autumn rally starts accelerating in late August and gold blows above its seasonal resistance by mid-September or so on average. While going long in August is optimal, there is a brief pullback in early October that offers procrastinators one last chance to get long. And after that gold just powers higher without material respite into early February. Gold's seasonal strength over this period is awesome.
But why? What makes August to February so special? Since new gold brought to market is relatively constant throughout the year, it has to be a demand phenomenon that drives this big autumn rally. Investment demand for gold has to be much more intense between August and February than it is for the rest of the year. And this is indeed the case as a variety of cultural factors drive a surge in gold buying.
Starting in late August or early September, Asian crops are harvested. The vast majority of Asia (all of continental Asia) sits in the northern hemisphere, so it enjoys the same sidereal seasons as we do in the States. Thus Asian farmers harvest their crops at the same time of the year we do. But unlike American farmers, Asians tend to plow some of the surplus fruits of their labors into physical gold 'bullion'. [[(Usually, easily meltable gold jewelry.): normxxx]]
Gold is the ultimate form of saving. It has outlived every failed government and fiat currency regime in history and still retains its intrinsic value to this day. It will outlive every government and currency on the planet today too. So if you want to protect your surplus labor, save it to build wealth, gold is the best option. And this is especially true in countries with lower political stability than we enjoy, which is virtually all of Asia.
The demand spike in gold in late August and September that drives sharply higher prices most years is a result of this harvest buying. Crops are sold for cash, and some portion of this cash not directly needed for ongoing expenses is converted into physical-gold savings. It is too bad Americans are not smart enough to do this, both to save (consume less than we earn) and to store wealth outside of the ailing US dollar in gold.
The wise and prudent Asians, having lived through countless failed governments and currencies over millennia, have a deep cultural affinity for gold. This continues after harvest into the famous Indian wedding season. This fascinating cultural phenomenon tends to peak between early October and late November, and is directly responsible for those months' strong gold rallies.
In India, weddings are a huge deal. Most marriages are arranged, and couples are typically married off during autumn festivals like Diwali. It is believed that being married in festival season provides good luck, longevity, happiness, and success for a marriage. The families of Indian brides give them wedding gold in the form of intricate 22-karat jewelry. Not only is it beautiful adornment for the bride, but gold's intrinsic value helps secure her financial future and her financial independence within her husband's family.
India is the world's largest consumer of gold. Most of it is in the form of jewelry, but Indians don't separate gold jewelry and gold investment like we do in the West. They are one and the same. Brides' dowries may not sound like much, but collectively they are the biggest seasonal driver of gold investment demand on the planet. Something like 40% of India's entire annual gold demand occurs during the short autumn wedding season!
Sometimes Westerners marvel at this, yet we aren't all that different. As the tail end of Indian wedding season arrives, gold demand surges in the West for Christmas buying. A big portion, if not the majority, of discretionary spending in the West occurs between Thanksgiving and Christmas. Some of these holiday dollars flow into gold jewelry as gifts for wives, girlfriends, daughters, and mothers. So Western gold jewelry demand is also concentrated seasonally into a narrow period of time, essentially December.
After Asian harvest, Indian wedding season, and Western holiday buying run their courses, you'd think that gold investment demand would wane dramatically. But this isn't the case. One more event spikes global investment demand, Chinese New Year. The Chinese calendar is heavily influenced by lunar cycles, so its new year tends to occur between late January and mid-February on our Western calendar.
Gold is woven throughout the Chinese New Year mythos. For example, one of the popular icons for the celebrations is yuanbao. This symbolizes money and wealth and is shaped in the form of ingots that were the standard medium of exchange in ancient China. Gold trinkets are used to decorate homes for festivities and are also given as gifts. This drives strong Chinese gold demand.
I also suspect the Chinese, late in their year (January for us), tend to invest some of their surplus capital in gold. In the West we make many investment decisions late in our own year too, as that is when we finally know how much we made, how much we owe in taxes, and how much surplus capital we can save and invest. Chinese New Year celebrations and Chinese year-end gold buying keep gold buoyant into early February.
So as you can see, gold's strong seasonal rally between August and February is quite logical. Over this span various cultural practices combine to create one long investment-demand-driven surge for the yellow metal. Within these months at various times, all of gold's major consumers have a big cultural reason to buy. And much of this demand isn't economically sensitive. If you are an Indian father marrying off a beloved daughter, I bet you really don't care whether business was good that year or not. You will buy her gold.
Traders would do well to be long gold, and anything PM-related, for this August-to-February period. Almost all of gold's bull-market gains have been made within this investment-demand-intensive window. The optimal timing to get long is psychologically challenging though. Investors and speculators need to be aggressively adding gold positions in August at the dismal demoralizing lows of the summer doldrums. They have to force themselves to buy when they least want to, to be true contrarians.
This next chart looks at gold bull seasonals in a different way, indexed monthly. While slicing the gold price up in calendar months is somewhat arbitrary (trends seldom begin or end on the 1st or 31st), it is still interesting. This approach shows which calendar months tend to be the strongest for gold. Not surprisingly, all of the best occur within the big-autumn-rally span of time.
In order to be strong, gold has to approach a 2% gain in a given calendar month on average over the years since 2000. And I define weak months as a 1% loss on average. This asymmetry exists because we are in a secular bull where prices are generally rising. The same five optimal seasonal times to go long gold rendered in the first chart are replicated here for comparability. Early August is the best of them all.
This is because gold's biggest calendar month of the year on average in this bull has been September. Gold tends to rise by 3.5% that month. This might not seem impressive, but it really is for gold. If 150,000 tonnes of gold have been mined in world history, then the global above-ground gold is worth something like $4.3 trillion at $900 per ounce. So even a 1% move in gold represents several tens of billions in wealth creation or destruction. And of course these seasonal numbers are averages, which moderate the underlying results.
After gold's best month in September, it tends to consolidate into early October in the couple-week lull between the Asian harvest and the Indian wedding season. But then in late October it starts surging and this continues into November. At a 2.5% monthly gain on average, it is gold's second-best month of the year seasonally. Number three follows right after that, with December's 2.2% average gain. And then January comes in fourth at 1.9%.
So of the six months between early August and early February, gold's massive seasonal autumn rally, fully four are gold's biggest months of the calendar year. You absolutely want to be long gold, and indeed the entire PM-complex since everything PM-related ultimately follows gold's lead, in September, November, December, and January. Seasonal-demand-driven price increases are very compelling then.
Obviously this is really exciting today since we are now on the verge of gold's biggest seasonal rally of the year. But remember that seasonals are a tailwind, a secondary indicator. So if gold was overbought today and greed abounded, the bullish seasonals could easily be overridden. But thankfully it is not, indeed just the opposite has occurred. Gold is deeply oversold today and sentiment is horrendous. Excessive levels of both fear and frustration have conspired to create an explosively-bullish sentiment mixture.
I've been discussing these bullish gold, silver, and PM-stock technicals lately in our acclaimed monthly and weekly subscription newsletters. With primary and secondary indicators all lining up and calling for a major gold upleg in the coming months, we've also started adding new PM trading positions. This week's excessive selling has created a very-high-potential buying opportunity that we are exploiting. If you want to see exactly how we ride this thing, and have the chance to mirror our trades, please subscribe today!
The bottom line is gold does have strong seasonal tendencies. Even though gold isn't grown like wheat, the passage of the calendar influences gold investment demand across the globe which directly impacts the gold price. Gold is deeply woven into cultures around the world and their various customs create lumpy gold investment demand. It is clustered at specific times instead of spread out evenly across the year.
Naturally investors and speculators should exploit these seasonal tendencies. The best time seasonally to go long gold and other PM-related trades is right now. From August to February gold's biggest seasonal rally of the year erupts. During this timespan, which includes gold's four best calendar months, the lion's share of its entire bull-market gains have been made. I fully expect the rest of 2008 to unfold according to this precedent.
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Gold Bull Seasonals 2
By Adam Hamilton | 13 July 2007
Investment and speculation are ultimately the world’s greatest probabilities games. Traders exist in a realm of constant uncertainty, where capital must be deployed today well before the unknown future arrives. To increase the odds of success for any trade, traders should only deploy when probabilities swing way into their favor.
So it is not surprising that virtually all financial-market analysis is designed to help deepen our understanding of the underlying probabilities governing the markets at any time. The whole gamut of research approaches from fundamental to technical to sentimental ultimately boils down to gaming whether or not today is a high-probability-for-success opportunity to buy or sell.
Outside of the futures world, one particular technical tool used to help hone our understanding of probabilities in play is widely ignored. It is known as seasonality. Seasonality is the tendency for a price to be stronger or weaker at different times during the calendar year. This concept naturally emerged in the commodities world, where seasonal effects can make big differences in tactical price trends.
The classic seasonal examples are the agricultural commodities such as wheat. Summer, of course, is the prime growing season for wheat. So most new wheat that hits the markets floods in around harvest at the end of summer. With wheat supplies usually hitting their peak just after harvest, prices tend to retreat leading into harvest in anticipation of the temporary supply glut. Wheat traders know this and trade accordingly.
But seasonality is not limited to agricultural commodities rigidly governed by celestial mechanics. It exists, usually in more subtle forms, all over the place. For a little-considered example, think of general stock trading. It usually tends to taper off in the summer as traders go on vacation, so the summer stock markets are generally considerably weaker and softer than the winter markets when everyone is paying attention.
Seasonality also exists in gold. There are times of the calendar year when gold tends to do well and other times when it does not. Although there are many varying reasons for this phenomenon around the world, the most famous example of gold seasonality has to be the Indian wedding season.
Indians have a deep cultural affinity for gold, so in the autumn India’s farmers tend to invest their profits from harvest in gold. But even more gold is bought for the Indian weddings that happen late in the year during festivals, mainly in October and November. Something like 40% of India’s annual gold demand occurs in this short period of time. Wedding gold is often in the form of intricate 22-karat jewelry that the bride’s parents give her to secure her financial future and financial independence within her husband’s family.
Just as wheat traders use wheat’s seasonality to help them make trading decisions, gold and even gold-stock traders can use gold's seasonality. With gold having definite seasonal tendencies at different times during the calendar year, investors and speculators can study it to better understand when seasonality helps or hinders their probabilities for success in launching new trades.
For my own seasonality analysis, I prefer a different approach to the classical way seasonality is analyzed in the futures world. Very long time horizons, often 15 to 40 years of price data, are crunched to build a typical futures seasonality chart. This approach is sound and has a great benefit. By considering seasonality across bulls and bears alike, secular trends are largely filtered out. This yields the most purely-distilled form of long-term seasonality that persists across all market conditions.
But this classical approach also has limitations. Prices behave very differently during secular bulls compared to how they behave in secular bears. Since I happen to be trading gold and gold stocks during today’s secular bull, I am most interested in how seasonality has affected gold in this bull only. While such a relatively myopic perspective dilutes seasonality by crossing it with the secular trend in force, these hybrid seasonals ought to be much more representative of what we can expect seasonally in this bull.
Hence the title of this essay, gold bull seasonals as opposed to the usual ultra-long-term gold seasonals. Our current gold bull was born from deep secular lows back in late 2000 and early 2001. So this hybrid take on gold seasonals includes every trading day in gold from January 2000 to June 2007, the period of time this gold bull has encompassed. It truly reveals the unique seasonal tendencies of gold in this bull to date.
The calculation methodology behind this first chart is simple in concept. For each calendar year, the daily gold price is indexed off the first trading day of that year which is assigned a value of 100. Then these individual annually-indexed results for all calendar years are averaged on a day-by-day basis. The result shows gold's relative performance tendencies in an average bull-market year. It is pretty interesting.
In addition to these gold bull seasonals drawn in blue, I also rendered one standard deviation above and below them in yellow. Since these standard-deviation bands largely fall outside of the bounds of the main chart, an inset chart is included with the same vertical-axis intervals to illustrate the full range of these bands. The distance between these bands is important for interpreting the seasonals, as I’ll get into a little later.
On balance, gold has tended to rise 12% annually in this gold bull, from an indexed level of 100 in early January to 112 in late December. These are very impressive average gains which have already earned fortunes for contrarian investors and speculators.
But the most fascinating attribute of gold bull seasonals is they have formed a beautiful uptrend channel since 2000! There are actually parallel well-defined seasonal-support and seasonal-resistance lines which combine to make a seasonal uptrend channel. These simple technicals help traders understand when gold has the highest probability of being strong during the calendar year.
When trading a secular bull market, the greatest opportunities for profit are on the long side. So both investors and speculators seek to buy when prices are relatively low. The bullish tailwinds of gold seasonality are the strongest when gold approaches its seasonal support. Over the course of a typical calendar year, gold tends to hit its support three times and approach it on a fourth. These are the highest-probability-for-success times in seasonal terms to add new long gold and gold-stock positions.
The first support approach occurs in early January and the second in mid-March. It is provocative that these first two low points arose on schedule in calendar 2007. Gold hit an interim low in early January and another in early March. These two points proved to be the best times to add gold and gold-stock positions this year. Although it is true that H1’07 data is already factored into these seasonals, this is only one year out of eight so 2007’s influence on the chart line is relatively moderate. Check out last year’s pre-2007 chart which showed the same tendencies.
It is actually off of the mid-March seasonal low when gold's first big seasonal rally launches. It tends to run until late May before a pullback into the summer. This year gold started its first big seasonal rally on schedule in mid-March, but it failed early in late April due to abnormally heavy central-bank gold sales. Still though, as we have seen in our Zeal trades this year, it was very profitable to buy gold and gold stocks near the March seasonal low.
After the usual May top, gold's seasonally weakest time of the year comes into play. From May to late July, gold tends to grind sideways to lower. We certainly saw gold mirror these weak seasonal tendencies this year, as it has been fairly weak on balance since late April. While gold usually isn’t all that exciting in the summer doldrums, this necessary consolidation leads up to the biggest seasonal gains of the year.
In late July, in the next couple weeks here, gold tends to bottom and then start powering higher as autumn gold demand builds worldwide. The second big seasonal rally in gold occurs between late July and late September. This is similar in magnitude to the first one in the spring. The spring rally tends to take gold from 100 to 105 indexed, while the late summer one tends to run from 103 to 108 indexed. Both rallies are nice and often very beneficial for gold stocks, which are primarily driven by the gold price.
With August and September typically weighing in strong in seasonal terms, the obvious implication here is to get long gold, silver, and precious-metals stocks now if you are not already deployed. If late summer buying drives gold higher as usual, the more-speculative silver and precious-metals stocks will follow it up. Investors and speculators alike should take advantage of the seasonally weak summer to add positions ahead of the big seasonal rallies expected in the second half of the year.
After a brief seasonal pullback in early October, gold starts its third and greatest seasonal rally. Incidentally this happened last year too, as gold carved a major interim low in October way down near $562 an ounce! After this low, gold exhibits great seasonal strength in November and December. This third major rally continues into January and early February. Since this one takes gold from 105 indexed up to effectively 115 indexed if the January/February portion is added, this third rally is about twice as big as either of the first two.
Thus gold's bull-market seasonals greatly increase the probability for success for long positions in the second half of the year starting in late July. From August to early February, traders have the opportunity to ride two of the three big seasonal rallies including the biggest by far that starts in October. While it remains to be seen if gold will reasonably mirror its established pattern for the rest of this year, it sure has been mirroring it fairly well since last October. I sure wouldn’t bet against these seasonal tendencies today.
While these seasonals are certainly exciting and encouraging since we are heading into the best part of the year for gold, they shouldn’t be considered apart from their yellow standard-deviation bands. The standard deviation is a dispersion measure of how far apart the underlying annually-indexed numbers are that are averaged on any particular day to produce the blue seasonal line.
You can get the same average of 50 with underlying data of 45 and 55 or 10 and 90, but the average is certainly more representative of the first set. Obviously the greater the dispersion in the underlying data, the less representative is its average and the less reliable it is as an indicator.
The yellow SD bands in these charts, particularly in the inset charts, offer a visual proxy of how dispersed the underlying annually-indexed gold data is. Narrow SD bands, such as from July to October, show a relatively tight cluster of data from individual bull-market years. This means gold’s seasonal tendencies during these times are more representative of the actual underlying data. Conversely the huge SD spread in May shows that gold’s seasonal tendencies during that month are less representative. Please keep this in mind as you digest these charts.
Overall, I think the SD bands for these seasonals seem reasonable. They never come close to diverging far enough to suggest no meaningful clustering of the underlying individual-year data. If there were extreme spikes the seasonality’s usefulness would be suspect, but thankfully there are not.
But one problem with applying SD bands to indexed data is they are always closest near where the indexing starts. Since the first trading day of every year is indexed at 100 for gold, the average of the first day across all years is always 100. The deeper into a year you get, the more each individual year’s index diverges and the greater the SD dispersion grows. To attempt to gain an alternative seasonal perspective less affected by this tendency, I also indexed gold on a monthly basis.
In this next chart, the same raw feedstock data since 2000 is indexed at 100 at the beginning of each calendar month instead of each calendar year. Then all the individual January indexes are averaged and plotted, then the February ones, and so on. This resulting chart shows the calendar-month tendencies of gold within this secular bull market. It helps illuminate gold seasonals from a different perspective than the annually-indexed approach, highlighting both similarities and differences.
Also, I didn’t want the resulting data to get lost within a line since each individual trading day is potentially important seasonally in this approach. So in both these charts I rendered the actual datapoints visible as dots and then connected them with thin lines. This atypical approach enables us to quickly see whether a sharp monthly move is merely a single connection between two widely-separated datapoints or a more statistically-meaningful solid connection running through multiple datapoints.
As you digest this chart, realize that each calendar month is a discrete individually-indexed unit. At the first trading day of every month the indexing starts anew so there are no inter-month connections in this perspective. January is totally independent of February and so on down the line here.
Interestingly this monthly seasonal approach confirms the four outstanding seasonal long points that the annual gold seasonality revealed. Gold tends to be weak seasonally in early January, mid-March, late July, and mid-October. These four points, as well as a fifth in early June, represent the times of the year when gold is most likely to be seasonally weak and hence the highest-probability-for-success times to add long positions.
In addition, seven months are classifiable as seasonally strong. If gold gained more than 1% in a given month on average, if it closed a month above 101 indexed, then it is a strong month. 1% monthly gains correspond well with the 12% annual gains seen above in the annual seasonal analysis. January, April, May, August, September, November, and December all weighed in as strong by this definition.
Encouragingly, the very best calendar months of the year seasonally are all clustered in the second half. We are heading into this typically exciting time of the year for gold. November was the top-ranked month seasonally, running up to 103 indexed on average. September was not far behind, nearly hitting 103. 3% monthly gains in gold are huge and often translate into excellent returns in silver and PM stocks too.
The third and fourth highest-performing months for gold have been August and December respectively. Both saw monthly gains just shy of 102 indexed. 2% monthly rallies are certainly nothing to scoff at either. The really great thing to realize this time of year is that we are now rapidly approaching these seasonally exceptional months of August, September, November, and December. If gold holds true to form in 2007, we should be in for a bullish and profitable second half.
Obviously the broad strategic message behind these gold bull seasonals is that probabilities favor getting long in the summer to ride the major seasonal gold rallies between August and January. Buy gold, silver, and PM stocks in the summer doldrums when they are out of favor and hold for the expected gains over the next six months.
But there is an important caveat to bear in mind regarding seasonal analysis. While seasonals do offer valuable insights into probabilities that are not readily apparent by other means, they are a secondary indicator at best. Sentiment is much more important than seasonal technicals on a short-term basis and it can easily override seasonals. So seasonals should only be used as a secondary confirmation of primary indicators and not as a primary trading tool by themselves.
A key example occurred last year. Oil’s bull-market seasonals a year ago showed a huge seasonal tendency for oil to soar in August and September. Many traders, including me, were heavily deployed in oil stocks and options in advance of this seasonal tendency. But when no hurricanes materialized in July and August, sentiment plunged and traders sold oil aggressively. Seasonal tendencies established over eight years failed to hold in the second half of 2006. Bad sentiment overwhelmed the positive seasonals and traders took big losses in oil-related positions.
Thankfully this year the gold seasonals do line up with the already bullish gold fundamentals and technicals. And sentiment in the PM realm has been pretty rotten in recent months, typical of bottoming periods before big uplegs launch. With the primary indicators suggesting a major gold, silver, and PM-stock upleg is due, the secondary confirmation provided by the gold seasonals is very welcome. It increases our odds for success in long PM positions.
At Zeal we have been anticipating the inevitable return of strong bull-market conditions to the precious metals and we have been trading accordingly. We have been aggressively buying elite gold and silver miners and explorers on weakness and working to get fully deployed in the PM sector. To mirror our trades and enjoy practical cutting-edge commodities-stock-trading analysis, please subscribe to our acclaimed monthly newsletter today!
The bottom line is gold has already established very definite seasonal tendencies in its bull to date. Gold tends to be weakest in the early summer leading up to the end of July. Then it tends to rally in increasing strength through the end of the year and into January. With primary indicators suggesting that such a rally is indeed due, the secondary confirmation provided by the gold seasonals is very welcome.
If you are bearish on gold today like the vast majority of traders, realize that contrarians must trade against the crowd. The time to least doubt any asset’s near-term prospects is when the most people doubt them the most. gold typically tends to get beat up in the early summer months just like it did this year. But after the summer doldrums its big seasonal rallies make the wait well worth it.
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Gold Bull Seasonals 1
By Adam Hamilton | 17 November 2006
Since its latest interim low back in early October, gold has been rallying nicely. In the six weeks since then the Ancient Metal of Kings is up 13%. This is an impressive move by any standard, and it utterly dwarfs the much-hyped Dow 30’s 2% run higher into nominal record territory over this same period of time.
While gold certainly needed to correct and consolidate a bit after its incredible greed-laden surge that climaxed in May, gold’s current strength is not just a consequence of that necessary consolidation running its course in order to bleed rampant greed out of the metal. Although the maturing of gold’s consolidation is almost certainly the primary factor behind gold’s recent interim low and subsequent strength, a fascinating secondary factor also exists.
Gold is entering its strongest time of the year seasonally. Beginning in early November and running until early February or so, the winds of probability shift to gold’s stern. This seasonal tailwind, when combined with gold moving up for its own sentiment reasons, can lead to some impressive rallies higher.
While seasonality is certainly interesting and is a useful addition to a trader’s arsenal, the biggest risk with it is giving it more credence than it deserves. Seasonality is simply the tendency for a price to be stronger or weaker at different times during a calendar year. The important thing to remember is that a tendency is far different from a certainty.
I strongly believe seasonal analysis should only be used as a secondary type of indicator, never as a primary. This is because it is not the passage of calendar months that drives prices, but the flowing and ebbing of sentiment. And the whims of sentiment scoff at scheduling. Greed or fear can well up at any time. Big news that feeds greed or fear can break at any time. And interim highs and lows can happen at any time. Sentiment, not dates, is the key to short-term price movements.
A great recent example of seasonals failing occurred in oil and oil stocks. This year we had heavy positions in oil-stock calls that had led to extremely profitable realized gains up until early August. At that time neither oil nor oil stocks were overbought relative to their bull-to-date precedents so our primary indicators weren’t signaling an imminent correction. And on top of that, both the oil and XOI seasonals looked very favorable until late September.
Despite August and September being the best time of the year seasonally for both oil and oil stocks, oil sentiment was deteriorating on the lack of a buying catalyst and it started to correct about two months early. Since oil never topped in a typical sharp exuberant manner, and since its slide was slow and controlled, it didn’t look like a full-blown correction until too late. On some of our November oil-stock calls in particular, they swung from unrealized gains of 70% to realized losses of 70%.
Such ill fortunes are no big deal and are an expected part of speculation from time to time. Including these losses our average return on Zeal Speculator options this year is still running near +100% per trade. The real moral of this story is that strong seasonals are meaningless in the face of an adverse shift in sentiment. Seasonals exert some pressure like wind, but if the sentiment engines of a ship are steaming directly into this wind the headwind is never going to be able to overcome the sentiment.
I share this hard lesson as a fellow student of the markets because it is dangerous to read too much into gold seasonals. Nevertheless, they do certainly provide an interesting secondary perspective on the probabilities governing the gold market. And when today’s strong seasonals are combined with very bullish signals in gold’s primary indicators, it sure looks like sentiment and seasonals are aligned. Such an alignment is the best of all worlds for gold investors.
You futures traders are certainly familiar with seasonal charts as they have long been popular in the futures world. Usually in futures seasonal analysis, very long time horizons are used to build the seasonal charts. It is common to see 15 to 30 years of price data crunched to arrive at one seasonal chart. The benefit of this, of feeding in raw data for bull and bear years alike, is that secular trends are largely filtered out. A long-term seasonal chart spanning both bulls and bears is much more likely to yield pure distilled seasonality.
While I respect this classical approach, my own studies of the markets over the years inevitably show that prices behave very differently in bulls and bears on a short-term tactical basis. So as a gold and gold-stock investor and speculator today, I am most interested in how gold behaves in a bull market since it is in a bull that we now sojourn. As such, I suspect that seasonal charts constructed with data from only our current bull are much more relevant to gold trading today than the usual multi-decade charts.
So the feedstock data fed into the charts in this essay largely encompass only our current gold bull, which happened to be stealthily born back in April 2001. (I included 2000 as well since gold had already started bottoming late that year.) Thus every trading day in gold between January 2000 and October 2006, the last complete month before this essay, is factored into these seasonal charts.
The calculation methodology is simple in concept. For each calendar year the daily gold price is indexed to the first day of that year at 100. Then that year’s subsequent gold movements are converted into an index meandering off of this start of 100. This process is repeated for each calendar year and then all the individual calendar-year indexed results are averaged. A big spreadsheet and thousands of formulas later, the chart below emerges.
It reveals gold’s seasonal tendencies at different times in the year for its bull market to date. Although once again I urge you not to use the sometimes-fickle seasonals as a primary indicator, they are interesting as a secondary indicator. And when primary sentiment-driven indicators and the seasonals line up, the odds start getting quite high that the existing tactical gold trend has plenty of room to run yet.
While our seasonal research at Zeal is still young, this is the most fascinating bull-only seasonal chart I have seen yet. It is exceptionally interesting due to its seasonal trend rendered above. For almost the entire year, with the exception of December, gold tends to meander upward within a seasonally-defined trend. Gold tends to rally up to seasonal resistance and then correct back down to seasonal support like clockwork. These seasonals curiously look just like a typical raw-price trend.
If you want to add gold or related positions to your portfolios, the best time seasonally is when gold is languishing near its seasonal support. This tends to happen in late March/early April, late July, and early November. Off of each of these three major seasonal buying points marked above, gold’s trio of seasonal rallies tend to launch.
Gold’s first seasonal rally from mid-March to mid-May lasts about two months and carries the Ancient Metal of Kings from around 100 indexed to 105ish, a 5% gain on average. This seasonal tendency certainly exerted itself with a vengeance this year, as gold blasted 31% higher during this period in 2006! It was the biggest single rally of this entire gold bull and it happened, interestingly, when seasonals were favorable.
After gold’s strong seasonal surge into May, it enters its seasonally-weakest time of the year during the summer. This is logical on multiple levels. Since sentiment has to get quite unbalanced to the greed side to drive the steep spring rallies, it makes sense that greed has to then be gradually bled out until fear begins to loom. There is no better antidote to greed than a price that grinds lower in a consolidation over some months. Consolidations kill greed dead, almost without fail.
In addition, summers are just a slow time for trading anyway. Kids are out of school so families go on vacations and enjoy the warm summer sun in the northern hemisphere, where almost all of the world’s most important financial markets are located. Summer is almost always a slow lethargic time in the markets with little enthusiasm, the perfect breeding ground for sideways trading and consolidations.
This seasonally-weak summer in gold takes from two to four months depending on how you slice it. Gold hits its seasonal support in late July, a little over two months after the mid-May seasonal interim high. But gold doesn’t eclipse its May highs again, around 105 indexed, until early September or so which gives the weakness a duration approaching four months. Either way, we shouldn’t enter summers with great short-term expectations for gold.
Gold’s second major seasonal rally starts in late July and runs until the end of September on average. It takes gold from around 103 indexed to nearly 108 indexed, or just under 5% higher. The timing of this rally is intriguing because gold has long had a harvest component to its seasonality. In Asian cultures, particularly India, fresh income from the August/September harvests are plowed into gold as a form of investment. We could learn a lot from the Indian farmers, as putting the surplus fruits of our labors into gold is probably the best and safest way to preserve them.
Then gold tends to correct in October, which really didn’t happen this year. Last month gold bottomed early in October and has been strong ever since. This just emphasizes the critical point that seasonals are merely tendencies and they are not strong enough to trade upon solely. It is sentiment that drives the markets over the short term, and sentiment and seasonals certainly do not have to be aligned.
Then seasonally gold is done correcting and back down to its seasonal support by early November. And it is here we enter its seasonally-strongest time of the year. On average gold rallies from early November to early February, a big three-month span. This rally is exceptionally strong too. It is the only rally of the year that breaks out well above gold’s seasonal resistance. From its 105ish start to its 114ish finish when its wraparound into January is considered, this big rally approaches 9%!
This large seasonal rally makes logical sense as well. The busiest time of the year for trading the markets is during the winter. Kids are back in school and people are working hard, so they start to refocus their attention on their portfolios. In addition to this, both the end of one year and the beginning of the next are times when people are most reflective on their investments. Most individual portfolio rebalancing seems to happen in December and January since year end triggers so much thought on the future. So it is probably natural for people to buy gold in a gold bull during this reflective period.
Obviously this is exciting now since today, in the middle of November, we are just a sixth of the way or so into the strongest seasonal gold rally of the year. If gold seasonals hold true to form this year, we should have healthy odds of seeing gold continue to rally into early February. Thus the excellent gains we have seen in gold so far in recent weeks could very well merely be the beginning. I sure hope so!
But then again, these are seasonals. They can act like helpful lighthouses that help traders navigate into profitable shores or they can act like lethal sirens that seduce traders into deadly waters swirling with adverse sentiment. Only time will tell which role they will play over the next several months. Nevertheless, since sentiment is so aligned with them today I suspect these seasonals will prove prophetic this year.
One of the biggest limitations of seasonals is that they are averages of multiple years. So a seasonal average of 105 can emerge from one year at 104 and another at 106 or one at 55 and the other at 155. In the latter case, the statistically-smoothed seasonal line betrays the extreme variance of the actual underlying data. Unfortunately gold tends to be more volatile and variable rather than less. The inset chart in the lower right above highlights this.
The inset chart is the same annually-indexed gold bull-only seasonal data, but with yellow lines rendered representing one standard deviation above and below the seasonal average. Each vertical-axis increment in this inset represents 10. So in December the first standard deviation of this gold data is so large that seasonal gold has a two-thirds chance of ending up anywhere between 98 indexed, down on the year, to 123 indexed, way up on the year. So please realize chaotic and highly variable gold data feeds its smooth seasonal average.
This next chart looks at the same raw data in a different way. Instead of indexing each calendar year starting at 100, each calendar month is indexed starting at 100. Then all the January indexes are averaged, all the Februaries, etc. The result shows the pure calendar-month tendencies of gold. There is a visual problem with this chart though that you have to keep in mind.
Each month below is a discrete unit, meant to be considered in isolation. Yet our goofy charting software insists on connecting the last day of one month with the first day of the next visually. So realize that any sharp moves at the very end of a given month are not seasonal but in reality just a gap between the end of one month and the beginning of the next that shouldn’t have been rendered. Each new month starts at 100 and is a totally independent unit.
Looking at gold seasonals this way spread across discrete calendar months tends to bolster the message of the annually-indexed averages above. Gold’s strongest calendar months seasonally mostly tend to occur between now and early February.
At best, intriguingly, the strongest months in gold seasonally all tend to witness equal gains of about 2.6% to 2.7% during the calendar month. This level is witnessed in May, September, November, and December. And early February, although it falls short, still has the next best intra-month indexed gains on average. So all things being equal, your odds of success on the long side should be the highest seasonally from now to early February as well as in May.
If you want to buy gold the weakest months are very close to the annual weakest spots in the first chart. Mid-March, late July, and mid-October tend to be the worst spots for gold seasonally when indexed monthly. This year gold bottomed in early October, just a week or so before the typical October mid-month weakness that marks a great entry point ahead of the year-end rally. And since then gold has been rallying just as seasonals expect.
Pretty interesting eh? Nevertheless, please be careful here. The standard deviations of monthly seasonals are also quite large, with one standard deviation graphed above in the inset utterly dwarfing the range of the averaged monthly-seasonal data. We are talking swings of +/-5 here above and beyond the core seasonal data which can’t even manage to hit +3. Once again the underlying gold data is highly variable before the averages smooth it.
When considered properly with all their limitations out in the open, the seasonals provide an interesting secondary perspective on some of the probabilities likely to influence a market. In gold’s case, we are entering the seasonally strongest period of the year over the next several months. If this was the only thing gold had going for it then the seasonals wouldn’t be particularly noteworthy. But since gold just completed a necessary and healthy consolidation and its sentiment is growing favorable again, this alignment is quite bullish.
At Zeal we have been redeploying into elite gold stocks since late September or so, because back then our primary pure-sentiment-driven indicators were showing that a major interim bottom was highly probable. So far they have been right and we are already up 20% to 30% on some of these new trades. As long as gold sentiment remains favorable, we plan to continue our campaign and layer in more new trades. Bullish seasonals are just the icing on the cake.
If you want to join us in our latest gold-stock campaign and mirror our new trades with your own risk capital, please subscribe to our acclaimed monthly newsletter today. With the stars lined up for gold once again for the first time in over a year we are continuing to add new positions as long as market conditions warrant. Today is a very exciting time to be a gold-stock investor and speculator!
The bottom line is the gold bull seasonals are looking very bullish over the coming months. Yes seasonals have all kinds of limitations and shouldn’t be used as primary indicators, but nevertheless they provide an encouraging secondary confirmation of a new sentiment-driven trend already in force.
With gold just coming off a major interim bottom following a healthy consolidation and gold sentiment improving, the near-term fortunes for gold look very promising regardless of seasonals. But when bullish seasonals are added to the mix, gold just looks that much better. We should be in for a very nice gold rally in the coming months!
M O R E. . .
Normxxx
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The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
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