When's the best time to buy gold?

What do Indian brides and Canadian stockbrokers on holiday have in common? They are both partly responsible for seasonal rises and falls in the gold price. So should investors wait for the usual summer dip - also known as 'shopping season' - before buying gold stocks?

By MoneyWeek

published 22 June 2006

in Features

Many are already aware of a resource market phenomenon broadly referred to as the 'quiet season,' which I 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.

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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.

The best time to buy gold: is the gold market seasonal?

Why should gold bullion have a seasonal pattern? There are several reasons, among the more important being the jewellery 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 jewellery 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 neighbours 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 jewellery sales rose by 25%, and now that country takes credit for about 23% of the world's consumer gold sales. The US, at #2, takes down just 12%.

Jewellery 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 best time to buy gold: should you buy gold stocks in summer?

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 news, 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 favourite stocks.

Or at least, that's the way it is supposed to work.

The best time to buy gold: are things different this year?

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.

The best time to buy gold: the trend is your friend

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.

By Doug Casey for The Daily Reckoning.