Seasonality
Seasonality is the repeating cycle over a calendar year. One example could be the rise of electricity consumed during the winter for heating and also during the summer for cooling. When looking at historical time-series data, seasonality may be a predictable component which can be removed leaving an adjusted dataset (Becketti 2013). Seasonality may however vary between time intervals and be less predictable. This is stochastic seasonality (Becketti 2013).
So what does this have to do with gold? If timed right, the seasonality pattern of gold could be exploited to increase returns. The adage, “sell in May and go away,” may be thought to describe the idea of seasonality. Such consideration might assist with the market timing of buying and selling gold (or any other asset).
Simple tests support seasonality as shown in the next three graphs (CXO Advisory Group, Inc.). These graphs are based on the closing spot price per ounce of Gold, the S&P 500 Index historical time-series data since January 1979, the NASDAQ PHLX Gold/Silver Sector Index – XAU since December 1983, the AMEX Gold Bugs Index – HUI since June 1996, and the SPDR Gold Shares ETF – GLD since November, 2004. Highlights from Figure 1 and Figure 2 show an average return strength in August, September and November. A weakness may be seen for the months of March, June, July, October, and December (The CXO Advisory Group, Inc.).
Figure 1 Average Return by Month
(Courtesy of CXO Advisory - http://www.cxoadvisory.com/5710/calendar-effects/any-seasonality-for-gold-or-gold-miners).
Figure 2 Average Return by Month, different periods
(Courtesy of CXO Advisory - http://www.cxoadvisory.com/5710/calendar-effects/any-seasonality-for-gold-or-gold-miners).
However, when the entire spot price historical time series data is equally divided into two sub-periods, the patterns of gold returns weakens.
Figure 3 Average Spot Return by Month, equal sub periods
(Courtesy of CXO Advisory - http://www.cxoadvisory.com/5710/calendar-effects/any-seasonality-for-gold-or-gold-miners).
The summary seasonality story from the graphs is that simple tests seem to support the notion that gold stocks exhibit a somewhat predictable periodicity, but the sub period spot price returns analysis may cast doubt on this intuition (CXO Advisory Group, Inc.).
Seasonality is not the only story. Gold is a commodity used in manufacturing such as for electronics, but is also a currency and a placeholder for value. Due to being used in multiple markets, multiple influences impact its pricing. When gold is used to store value, the rates of inflation may change its value through time. This is shown in Figure 4.
Figure 4 Gold Spot Price and Inflation
There is a lot of volatility in the growth rate of the spot price of gold as shown in Figure 5.
Figure 5 Gold Spot Price and Spot Price Growth Rate
Also, there may be macroeconomic pricing effects related to the global supply and demand of gold at different points in time. For example, if the manufacture of electronics requires a larger supply of gold, the investors may have to pay a higher price for physical gold bullion that they use to store value. In recent news, a predicted gold supply shortage is expected to push gold premiums up for the upcoming Indian festivals (www.blanchardonline.com). The decrease in gold imports for June and July (Reuters, India) support the idea of a shortage.
As seen in many markets, the Federal Reserve (Fed) comments and reports impact the gold market. On Wednesday, the Fed mentioned that that both bond yields and mortgage rates have been rising (www.blanchardonline). “George Gero, vice president at RBC Capital Markets, said gold was pressured by higher Treasury yields, seen as a gauge of short-term interest rates, a stronger economic outlook, and uncertainty related to the Fed statement” (www.blanchardonline).
A rise in interest rates may mean more competition for gold investment from bonds, which could initiate gold selling. However, the World Gold Council report from Wednesday stated that U.S. interest rates may have a reduced impact on gold prices due to ¾ of the demand coming from emerging markets (www.blanchardonline.com). Positive correlations between spot price and the DJIA and may indicate macroeconomic effects or be unrelated. For example, in Figure 6 when the spot price growth rate moves in the same direction as the DJIA growth may be showing but does not imply causality in any one direction on its own.
Figure 6 Adjusted Gold Spot and DJIA Growth Rates
Summary
A recent academic research paper posits that “gold returns for each month from 1980 to 2010 and find that September and November are the only months with positive and statistically significant gold price changes. This “autumn effect” holds unconditionally and conditional on several risk factors. We argue that the anomaly can be explained with hedging demand by investors in anticipation of the “Halloween effect” in the stock market, wedding season gold jewelry demand in India and negative investor sentiment due to shorter daylight time. The autumn effect can also be characterized by a higher unconditional and conditional volatility than in other seasons” (Baur 2012).
Sources:
1) Baur, Dirk G., “The Seasonality of Gold - The Autumn Effect”. May 13, 2012.
The Seasonality of Gold.
2) Becketti, S. 2013. Introduction to Time Series Using Stata. College Station, TX: Stata
Press. pp. 91-93.
3) Raw gold futures data (GC1, COMEX).
Raw Data.
4) Raw gold spot data (LBMA Gold Price).
Raw Data.
5) Raw U.S. inflation data (CPI, 1982-1984 reference base).
Raw Data.
6) “Gold Negative on Selling Pressure; COMEX Gold, Negative”.
Gold Negatice on Selling Pressure.
7) “Any Seasonality for Gold or Gold Miners?”.
Seasonality-for-Gold-or-Gold-Miners.
8) “Gold logs late rebound as Fed keeps money-printing mechanisms in overdrive”.
Fed Money Printing in Overdrive.
9) “Gold imports rise, premiums double in India as huge buying season nears”:
India Gold Imports.
10) “India holds off on gold imports as new rules cause uncertainty”.
India Gold Imports Uncertainty.
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