Seasons of Gold
The Daily Reckoning PRESENTS:Given the current gold trend, International Speculator’s Doug Casey explains why smart investors should give gold and gold stocks an appropriate place in their portfolio. Read on…
SEASONS OF GOLD
Many are already aware of a resource market phenomenon broadly referred to as the “quiet season,” which we here at Casey Research tend to view as the “Shopping Season.”
You also might call it summer.
The yellow metal typically shows weakness from February to April, rallies in May, then heads down for summer. In August, gold typically begins to rebound and moves up pretty much for the rest of the year. Of course, this is an average pattern, not an invariable one. In 10 years out of the last 30, gold dropped in the fourth quarter.
Even so, the long-term data suggests the average pattern is worth paying attention to.
But will the pattern hold up in the current bull market? The historical data is sparse, in that gold has traded freely only since Nixon closed the gold window on August 15, 1971. That triggered gold’s only secular bull market so far, from $35 in August 1971 to $850 in January 1980. For the moment, let’s discount that market’s first big leg, to Dec 1974 (when gold reached $200), as catch-up for decades of currency inflation. The best analogy to our current circumstance is the period from August 1976, when the metal bottomed at $103, to gold’s peak in 1980.
Why should gold bullion have a seasonal pattern? There are several reasons, among the more important being the jewelry market, which accounts for about three quarters of the gold sold each year.
What we see for the fourth quarter of each is the impact of the gift-giving tradition associated with the druid Winter Solstice, now known as Christmas. Layered on top of that is the Indian festival season of Diwali, which kicks off in November and continues through the first leg of the traditional wedding season in December.
You can see noticeable spikes in both January and September, months when Indian manufacturers typically restock inventories to meet the demands of the two Indian wedding seasons. The first, mentioned above, starts in November and ends in December. The second starts in late March and runs through into early May.
Can Indian jewelry buying be a major driver of gold market seasonality? Probably. Don’t forget that gold, viewed as an industrial commodity, has been in a primary supply deficit since 1990; more has been used than produced, and the world has been living out of inventory. Now Western central banks are slowing their ill-advised selling, and people in China, Russia, the Mideast and India will be buying in size. Further, in 2005, investment in gold ETFs and similar financial products showed a 53% increase, to 203 tonnes. And things are barely starting to warm up.
Given the tight supply and growing demand, this is a market where prices are very much set on the margin, which is where India plays a role. As you are no doubt aware, India traditionally has an affinity for gold, expressed most emphatically in wedding rituals.
The propensity to lavish gold on blushing brides has kept pace with the country’s rapidly rising wealth (its GDP growth has been better than 6% annually since the early nineties and is expected to top 8.1% in 2006). Economic success has fostered an entire new Indian middle class and middle-class wannabes with new-found wealth to be stashed and neighbors to be impressed. That adds an important new dimension to the gold market, helped along by a trend for Indian banks to aggressively market loans specifically for the purpose of buying gold during the wedding season.
In fact, in 2005 Indian gold jewelry sales rose by 25%, and now that country takes credit for about 23% of the world’s consumer gold sales. The U.S., at #2, takes down just 12%.
Jewelry buying is nice and certainly contributes to gold’s seasonality. But remember, what’s really going to supercharge the market is buying by central banks and the public, as they increasingly realize that the dollars they’re sitting on are melting.
The summer dip in gold, needless to say, doesn’t help gold stocks. And it’s amplified by the habits of Canadian brokers, who deal with their relatively short northern summer by taking relatively long summer vacations. That means fewer stories being breathlessly told to listeners with cash.
Even worse, the brokers – wanting to keep their clients safe while they themselves lounge at lakeside cabins – begin telling clients in March to sell and sit aside during the summer months, which sucks more air out of the market. Of course it’s not just the gold stocks; there’s a lot of wisdom to the old saw “Sell in May, go away”. It’s worth noting, however, that here we are in April and we see little sign of gold stock weakness – suggesting that there is either less selling going on or more buying from new-to-sector investors… or, likely, both.
And the people who do the actual exploration generally are busiest in the summer, typically working in remote areas of the Northern Hemisphere largely inaccessible in the winter. The absence of explorers from their offices translates into a dearth of news, made worse by the fact that even if there were new, the companies would want to hold on to it until it would do them some good–i.e. when there are brokers actually sitting at their desks.
To recap, in the summer gold bullion prices soften, resource brokers stop working the phones, and explorers head out to kick rocks and go incommunicado. There’s a news slowdown, low trading volumes and a flat to declining market for resource equities from about April 1 to about August 1, give or take a month.
And it is during that quiet period that we happily focus on shopping for our favorite stocks.
Or at least, that’s the way it is supposed to work.
I’m not going to tell you that things are going to be different this year. But only because the person who tells you “this time is different” is usually wrong and often walks into a disaster.
However, when pondering gold’s seasonality, it’s better to look at gold’s daily price action from January 1975 through January 1980. While the seasonal pattern generally holds up, the trend is clearly for higher lows and higher highs throughout.
That is, in our view, the track we are currently on. While gold’s price reflects the long-term seasonal pattern, the pattern is overlaid on a strong upward trend.
And lest you have any doubt, I am convinced we are now in the gold (and silver) bull market for the record books, a bull market that will surprise even me with its strength. And that’s saying something.
In the way of evidence that this year is going to surprise and delight, simply look at gold’s price action so far. Instead of the seasonal slump following January, gold has powered ahead and partied on in 2006 and is now trading at over $620, a 17% increase since the first of the year.
I wouldn’t be surprised if gold broke even $750 by year-end. As bad as things were in the late 1970s, the last secular bull market for gold, they are much, much worse now, by pretty much every measure. Whether the level of debt, the size of the entrenched and philosophically unsound bureaucracy, the Current Account Deficit, the Forever War raging on a nearly global basis, the entrenched and worsening problems with entitlement programs, the trillions of perilously perched derivatives… The list, unfortunately, goes on.
It’s hard to see a summer pullback for gold, should there be one, in anything other than a positive light.
You can keep your powder dry for the next little while and look to pick stocks for less during dips. Or you can just keep buying, riding the tides and ignoring the dips altogether. That’s the approach I’ll be taking… show me a good company, run by good people, working a good project and selling at the right price, and I’m a buyer… though at this time of year, being patient to let the market come to you probably makes the most sense.
If there was one misstep you could make at this point, it would be to get scared off by the inevitable volatility and step aside until it gets “safe” to come back in. Too often that results in missing major up-moves. Trying to pick the tops or bottoms of any market is a fool’s game.
A final thought: This market trend is solidly in motion. While it may periodically scare you as much as it thrills you, at no point doubt that it is your friend. Treat it accordingly and it will treat you well. In fact, even better than you likely imagine.
for The Daily Reckoning
May 2, 2006
Editor’s Note: While buying physical gold and silver is definitely a good idea, following Doug’s recommendations for gold and silver stocks is an even better one. With a fairly low level of risk, those stocks are known to bring quick double and triple returns – and sometimes much, much more than that. Subscribe to the International Speculator to get Doug’s monthly stock picks. Click here:
“I still don’t understand,” writes a dear reader.“What does it mean, please, when you write, ‘money leaves home a servant and comes back a master?’ I’ve wracked my brain to get that.”
The reader refers to the trade deficit. We hate to think of her wracking her brain over so trivial a matter, so we will attempt to explain what we mean in plain prose.
First, a lamentation: the trouble with public life in this great empire is that people don’t have the proper disrespect for it. They read the news and take it seriously. They listen to politicians and forget to laugh. They put books by economists in the non-fiction section. They buy magazines about celebrities such as Paris Hilton and Hilary Clinton. They want to discuss “public policy” with their friends.
Rare is the citizen who tries to figure out what the trade deficit is all about, and that poor soul has our sympathy.
We offer her a bit of recent history.
Back in the Land Before Internet, there was a group of voters known as “Republicans.” These people bemoaned deficits, bewailed debts in all forms, and bedeviled the ruling party – known as “Democrats” – with their constant complaints and warnings. Then, the “Republicans” found a champion – a former radio announcer named Ronald Reagan – and with him at the head of their legions they were able to smite the “Democrats” and drive them from office.
But once in power themselves, these “Republicans” fell under the spell of the Lorelei, known as “new conservatives,” or “neoconservatives,” who argued that the group needed an activist agenda similar to the one that served the Roman Empire – bread and circuses at home, wars overseas.
“But how can we afford such things,” asked the old “Republicans?”
“Don’t worry,” said the new conservatives, “deficits don’t matter.”
And so, the new conservatives did what no conservatives had ever done before – they became big spenders, worse than the “Democrats” who preceded them. By the reign of George Bush the Younger, the new conservatives were running up more debt every 18 months than all the presidents and all the administrations had since the republic was founded 204 years previously.
Those were just the feds’ public debts, but their pocket economists applied the same thinking to the nation’s private accounts. “Don’t worry about the trade deficit,” they said, “it is really a sign of economic health, not weakness.”
Another George – George Gilder, he of un-hedged faith in Global Crossing, whose spectacular collapse epitomized the tech meltdown – argues that the trade deficit is no problem because the dollars eventually come back to us. We buy things from Asia, and then the Asians take the money and reinvest it again in our economy. What could be better than that?
And that is what has prompted our essay today: yes, the dollars come back, but they went out as servants and they come back now as masters. When they are spent, they are doing our bidding. When they come back, we must do theirs, for they are our new patrons…owners of our factories, our mortgages, our national debt. To them, we owe our jobs, and even our national security.
Most of the foreign debt, for instance, is in the hands of the Japanese and Chinese. Without their support, the United States can afford neither its bread and circuses at home, nor its wars overseas.
But no true superpower can be beholden to its foreign creditors, says Paul Craig Roberts. No real empire has ever been in such a compromising position, adds Niall Ferguson. He who pays the piper, we note, eventually calls the tune.
And, no Daily Reckoning reader should miss the financial implication: the dollar is doomed. Yesterday, June contracts on euros rose to $1.26. Gold went up to $660.
The dollar is doomed for the simple reason that there is no one left to protect it. The old “Republicans” may wrench themselves around in their graves restlessly, but what can they do? Everything degrades, degenerates, and destabilizes – even political parties. And the Republican Party is now in the hands of big spenders, activists, dreamers, and schemers. The Fed is now run by a man who believes he can “target” inflation, and keep the economy booming.
The authorities can control the quantity of the dollar or its quality – but not both. Those who might have controlled its quality have disappeared from public life. What would you expect? The quantity is running wild. For the “New Republicans,” what had once been a matter of principle has now become a matter of convenience. And soon, the destruction of the currency will become a matter of fact.
More news our team at The Rude Awakening…
Eric Fry, reporting from Manhattan:
“The month of May has arrived, which means it’s time to pay homage to one of our favorite Wall Street adages: ‘Sell in May and go away.’
For the rest of this story, and for more market insights, see today’s issue of
The Rude Awakening.
Bill Bonner with more various notes…
*** Here’s another ridiculous idea that’s been brought up to help ease consumers’ worries over prices at the pump…
Last week, the Republicans assembled an energy package after public complaints about high gas prices were heard nationwide. The centerpiece of this “leadership proposal” is – $100 rebate check to compensate taxpayers for higher gasoline prices.
“Political anxiety in an election year is to blame for a lot of the bad bills Congress passes,” said Representative Jeff Flake, Republican of Arizona, who on Monday called the rebate a “knee-jerk populist idea” that voters would see through.
*** The price of crude fell below $74 a barrel today, on a government report that motor gasoline and crude inventories have both climbed.
Resource Trader Alert’s Kevin Kerr told MarketWatch that the first climb in gasoline supplies in nine weeks was due “to refineries getting rid of their wintertime supply of blended gas (winter-grade gasoline) and making way for the summer gasoline grade.”
“This build is likely the last one we will see in gasoline for a long, long time,” he said. “This is giving the market a decent breather, but it will be short lived.”
*** We could smell dinner cooking when we came back from our walk, but it was not what we expected. The gauchos weren’t grilling steaks over an open fire. Instead, Francisco and Jorge had brought with them a huge wok – at least, that is what it looked like.
“This is actually a big disk. You know, for turning up the ground before we plant,” Jorge explained. “We just attached a couple of horseshoes as handles. We use it to cook.”
They placed the wok directly over the fire. In it were about 100 pieces of chicken along with large potatoes, onions, and some other vegetables we didn’t recognize, all boiling gently in a whitish broth.
Francisco went over to his horse, reached into his saddlebag and pulled out a bottle of wine.
“Here is more of the wine that my grandfather made, ” he announced, pouring the whole bottle into the wok.
Close by, Henry, Edward, and Maria were taking turns blowing up our inflatable mattresses, holding the nozzle of a bicycle pump directly onto the air-intake of the rubber mattresses and pumping like mad.
When the mattresses were fully inflated, they placed them down in the vineyard next to the road and spread our sleeping bags out on top of them. It was only about 9 pm, but it was already getting cold.
As we waited, we wandered over to the vines and pulled off a bunch of grapes, They were ripe, ready to be harvested, and we ate all of them just waiting for dinner.
Gauchos don’t usually go to so much trouble when they are out on the range by themselves. But that day, wanting to make a good impression on the patron and his family, they took their time. When the meal was finally ready, we were all huddled around the fire, longing only to get into our sleeping bags.
Still, it was worth the wait. Jorge had thought of everything, even a can of peaches for desert.