Seasonality is a technical study that focuses on the price patterns based on the time of year. It is used to increase the odds of making a purchase or sale at the right time. As the old saying goes, don’t tell me just what to buy, tell me when to buy it!
Determining the “when” is not always successful. However, it can increase your percentages of being correct. If you could use something that increased your odds of winning the lottery, even if not guaranteed, would you use it?
Of course you would, all other considerations being the same.
So let us assume for the sake of discussion, that you have been thinking of buying some gold and silver. You are watching the radicalization of politics and open advocacy of socialism. The country is already running huge uncontrolled deficits that make you nervous. It looks like all the politicians want to spend a lot more and make deficits even bigger. You have been thinking of buying some gold. Is there any guidance relating to when you should do this?
Guidance might be very simple. Buy gold when you have the money to do so.
Or you could look at price points and where gold might be relative to recent highs and lows or try to make a judgment about when a favorable price trend may begin.
For the purposes of this discussion we are talking about a time of the year. This is the issue of seasonality.
At first glance, this may seem a bit silly. Why would gold have any kind of seasonal pattern? It is not a crop that is planted in the spring and harvested in the fall.
However, equities are not planted in the spring and harvested in the fall either, yet there are seasonal patterns that influence the stock market. People who have studied stock cycles talk about the Santa Claus rally, the time roughly from Thanksgiving to the end of the year. It is usually strong. Last year it was not. Seasonality does not always work, but rather is a tool to increase the odds.
The Santa Claus rally probably has several causes. Christmas gift buying is a major event for retail stores, that often make half of their annual earnings during this season. Also, very often pensions are funded early the next year. The accounting year closes for most individuals. Gift giving often is a measure of public confidence in their finances.
Whatever the causes, which can be difficult to discern, stocks do have some patterns such as the Santa Claus rally and conversely weakness in late spring, as in the expression “sell in May and go away.” Yale Hirsch used to make a good living selling what he called The Stock Market Almanac.
Seasonality and the Gold Market
In the interest of brevity, we will not explore the possible causes of gold’s seasonal behavior, but rather just focus on what the pattern is, because we think it fits neatly with previous market comments we have made about the current corrective phase. (see March 6, 2019 comments)
Below is a five year study of seasonal patterns in gold prices. You will note that March tends to be among the weakest months of the year, along with June and September. But, unlike the other months, March is followed by one of the strongest months for gold, the month of April. Look at the chart in some detail and you should note that the period we are going into is quite unusual.
What is striking is that current and next month show the most violent swing from low to high reading of any monthly sequence. The swing is from a 25% probability of higher prices to 75%. True, January is stronger, but it comes after of 50% month of December. Likewise September is a weak 25% followed by a 50% month. A 50% probability of advance however, is the same as a coin flip.
The swing in odds from 25% to 75% is the strongest swing of the year. That is the period we are in right now. We would say 75% odds are pretty good in the scheme of things.
You might say, this is interesting, but we are really talking only about the past five years. That is not much of data peg to hang one’s investment hat on.
So now let’s look at the past 20 years of data. Essentially we see the same thing but the numbers are a little different. If anything, the relationship we are identifying has strengthened over the past five years. March tends to be the weakest month, followed by one of the strongest. In line with the five year data, the swing from low odds to higher odds is greater in the March-April sequence than any other pair of months.
As we suggested earlier, seasonality does not produce a sure fire signal. No one “rings the bell” in markets as a courtesy to buyers and sellers. Seasonality is just a tool that can increase the odds of getting the timing better.
In this case the odds show a strong shift in probability in the weeks just ahead. Coupled with other technical studies which we have provided, the odds may improve even a bit more.
What can a “reasonable man” conclude from this data? Our take is this: if you were thinking of buying some gold anyway for long term strategic reasons, or adding to your existing portfolio, the markets are providing us with a nice dip in price during a month that is usually weak and the odds suggest it will be followed by a very strong month.
The conclusion is obvious. If you were already thinking about buying, and that such a purchase is prudent and makes sense based on your individual circumstances, odds suggest you should proceed with the plan and take action within the next few weeks.
All charts courtesy of Stockcharts.com. Information is derived from reliable sources but results cannot be guaranteed.