CHAPEL HILL, N.C. (MarketWatch) — Gold is in the middle of its six-month seasonally unfavorable period.
That period began in March and lasts through August, as you can see from the chart at the top of this column. It’s analogous to the stock market’s six-month time frame that goes by the name of “sell in May and go away.”
In gold’s case, though, it starts (and ends) two months before equities, so perhaps we should call it “sell in March and go away.”
I’m bringing this seasonal pattern to your attention because it’s an additional explanation for the three-month trading range in which gold has been stuck since February. In my column last Friday, as you may recall, I pointed to unfavorable sentiment as one cause. Seasonal patterns appear to be another.
Since gold began trading freely in the U.S. in the early 1970s, bullion has produced an annualized return of only 1.2% in the March-August period, versus 13.4% in the other six months of the year.
Gold’s seasonal headwinds this time of year were a topic of conversation at last week’s Las Vegas MoneyShow. Doug Fabian, editor of the Successful ETF Investing newsletter and one of the speaker’s at that event, noted those headwinds and advised clients “to be prepared for a bit of short-term turbulence” in gold and gold-mining stocks. However, he remains bullish on the sector for the longer term.
How strong a statistical foundation is there for gold’s “six months on, six months off” seasonal pattern? To find out, I fed gold’s monthly returns since the early 1970s into my PC’s statistical software. It found the seasonal tendency to be significant at the 95% confidence level that statisticians often use to conclude that a pattern is genuine.
The past 12 months have been a good illustration of that tendency. In 2015’s seasonally unfavorable period (March through August), bullion lost 6.5% of its value. In contrast, in the six-month favorable period that began last September and lasted through the end of February, bullion gained 8.8%.
One thing missing, however, is a plausible explanation for why that pattern should exist in the first place. The only seasonal factor I’m aware of traces to Indian jewelry demand: Indian couples often schedule their weddings to coincide with the festival of Diwali, which occurs in mid-October to mid-November.
Still, as strong as this factor might be, it’s hard to see how it accounts for all of gold’s six-months-on, six-months-off pattern.
For now, though, you may not care whether gold’s trading range is due to unfavorable seasonal tendencies, unfavorable sentiment or both. Either way, it means gold is unlikely in coming weeks to mount a sustainable rally.
For more information, including descriptions of the Hulbert Sentiment Indices, go to Hulbert Ratings or email mark@hulbertratings.com.
I agree with point that March is a seasonally rough period for gold and have mentioned that each year, that the “PDAC Curse” isn’t just cute, it is a seasonal norm.
As for the mantra “Sell in May and go Away” this is typically applied to the general stock markets more than Gold, but there is a slow to sluggish period for May-August, and I posted in detail on this 2 weeks back so I’m just going to re-post those thoughts and each year’s gold chart for people to inspect for themselves:
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On May 7, 2016 at 8:28 pm,
Excelsior says:
I thought there may be a different perspective on the summer doldrums. As you know, I trade all year long, and don’t give a rip what day or month it is, as there is always opportunity each an every day.
However, having said that, there are seasonal periods that are interesting in how they may rhyme or have certain tendencies. For example, the “Sell in May and go away….” mantra or the “Summer Doldrums.”
***The seasonality of this time of year May/June/July/early August can really just be a more boring consolidation period without the extreme moves to the upside or downside. Many market observers have noted the the sell in May and go away or Summer Doldrums in precious metals, because this time of year is often rather uneventful, and there are typically bigger percentage moves in other asset classes or sectors.
Yes, I’m sure people will note a few times where the metal spikes or drops in this time period, but if you look year after year, the general trend in the time frame of (April – early August) is a sideways consolidation. The selling starts before May [typically in late April], and just like we just experienced at the end of and tends to “muddle around” sideways until roughly early August. Clearly Summer doesn’t even start until late June, so really much of this stagnant trading is actually in the Spring, but then is followed by slow start to Summer = the Summer Doldrums.
In my experience, it isn’t so much a matter of selling in May and buying back in September, or having a rigid definition of holding through the whole summer down to the calendar dates. Really the late Spring/early Summer doldrums are a time where investors lose interest in Gold and they focus on vacations, football & soccer games, cheerleading practice, beaches, lakes, camping, fishing, and kids with Summer vacation from school, so some tend to lose focus of the Gold narrative during this time frame.
However, once school goes back into session in August and vacations are over, things tend to heat up one direction or another (this is already well underway by September in most cases).
Basically, if one sets the parameters on inspection from how investors did selling in May band buying back on Sept 21st, then this misses the point of the Sell in May or Summer Doldrums period IMO. There are clearly some investors that did this in past from May to September, but I know very few people these days that are out of the marketplace for that long of a time period these days. Instead, what many people I’ve read or listened to in the past did in the sideways consolidation periods of the past were to sell out positions, place them in other sectors with more Alpha, and then came back in the July/August time frame in the later Summer.
As supporting evidence, check out the following annual charts on Gold that show from late Spring to early Summer has a tendency for Gold to be range-bound in general in the late April – early August zone each month:
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2007 Annual gold Chart. Notice the range from 650ish-690ish from late April-early May:
http://stockcharts.com/h-sc/ui?s=%24GOLD&p=D&st=2007-01-01&en=2007-12-31&id=p79130030910