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A momentous shift in the financial realm occurred at the turn of the millennium, but did so without fireworks—not a single squib was heard on its behalf. After all, the gold market had long and dutifully languished, languished so utterly weary with its own 20-year bearish attitude that the proverbial "rock-bottom" was struck at 0 (and not just once but rather twice, as if to re-emphasize contempt at the price tag), a price so absurdly low it triggered a cathartic purging of all further legitimate bearish opinion on the matter. (Illegitimate bearish opinion continues to this day and suffers accordingly.)
The actual event was simply an occasion too subtle to be marked by celebratory pyrotechnics. But nonetheless, from the ashes of an overcooked bear sprang forth enlightenment, rejuvenation, and a bold new sense of purpose and direction—all told, a bullish head of steam not to be denied.
The Era of Floating Gold Prices
To bring us where we stand today, take a moment to look over the graphic summary (located to the right) of these past nine years—an epic tale told swiftly and entirely on its own merits.
Even the most casual study will reveal the presence of an investor-friendly detail that rides in like waves upon a gathering tide: a typical seasonal pattern emerges that is both evident and reinforced with nearly each passing year. Within the annual perambulations to higher ground can be observed a characteristic August-December rush following the sometimes listless, sometimes wayward, middling summer doldrums.
To get a sharpened view of the pattern that we perceive to be at play we've produced the following graph, a compilation of the annual cycle of the daily price movements for the past 39 years. The process of averaging the data over a period of years allows the daily market randomness (+/-) to cancel itself out while also minimizing the impact of unique or temporary trading activity. The net result is that only the essential pattern remains. And while presence of a pattern provides no guarantees, ultimately what an investor hopes for is strong evidence of an actionable trend, and we do indeed see that here.
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To be sure, this seasonal price romp is no mere anomaly born of the current bull market; in both timing and proportion it is consistent with the trend evident in gold's annual price performance averaged over the last 39 years. (That being the analytically appropriate era of floating prices corresponding to President Nixon's 1971 abandonment of the fixed exchange rate between gold and the U.S. dollar.)
Notably, despite June and July straddling the year's midpoint, gold's price level at that time has typically attained only the initial one-third of its annual price performance. The larger two-thirds share arrives in the final five months of the year.
At the risk of belaboring the obvious, to benefit from an advance one must first establish their position. The 39-year average annual chart makes a general case for establishing positions with "the sooner the better" as a guiding strategy. A due respect for the evidentiary magnitudes and seasonalities suggest a minor refinement by using the summer doldrums for a strategic mid-year entry at a mere one-third price point. It abides by the motto, "the biggest-possible bang for your latest-possible buck."
The larger point to take from this overview of seasonal price trends in the gold market is that one need not be sidelined, paralyzed by a fear and loathing of trying to "time the market" only to get it slightly... "wrong-ish" -- finding themselves in, but a bit premature. In a bull market, the sidelines is the worst place to be, and a price-watching paralysis is often at fault. Instead, take confidence in the seasonal trend—any random assortment of purchases made throughout the summer doldrums tend to be soon caught up and swept along by invigorating year-end rallies.
While the 39-yr graph demonstrates a 7.5% seasonal uptrend that transcends both bullish and bearish eras collectively, an isolated look at the current bull market sets a similar pattern but on a larger scale; average seasonal gains have been clocking in at 11.3 percent.
This is all welcome news for the bargain hunters and also for the obsessive price watchers sidelined by the tyranny of timing the untimeable; it takes that old Wall Street adage, "sell in May and go away," and soundly turns it on its head as a convincing call to action. With May out of the way it's time to roll up the sleeves and get to work bringing home some gold.
And Now... the News
In addition to the generalities of averages and trends, it is also important to reflect on details by which one can better understand a market's vitality (along with its occasional quirks.)
To that end, a word or two is called for regarding the only aberration in this pattern of the last decade, occurring in 2008 through the midst of the financial crisis. Gold prices actually surged in June and July as investors aggressively sought out the yellow metal to protect themselves as concerns mounted over the stability of the financial markets and the banking system, particularly in the aftermath of the Bear Stearns collapse in the spring of that year. But by autumn, as equities worldwide tumbled following the bankruptcy of another financial giant, Lehman Brothers, gold prices came under fluctuating pressures amid widespread financial liquidations to exit derivative positions, de-leverage portfolios, and, above all, to simply raise cash. In essence, the dirty water was thus wrung out of the gold market to a good extent, and therefore a repeat of this sympathic selloff in a time of financial distress is not to be expected. In fact, the current Eurozone debt crisis is proving this point very well; rather than selling off, gold has instead reached new record highs in most major currencies. But as for that initial financial shock in 2008, it should be noted however, that by year's end gold had retreated only 5% below the uncharacteristically elevated price level of that summer's "doldrums", whereas both the DOW and the S&P 500 tumbled by nearly 50% over the same period. Gold had held its ground while all others faltered.
The first half of 2010 looks very similar to that of 2001, 2003, 2006, and 2009, all with a notable run-up in prices featuring predominantly in the month of May. But whereas historic patterns suggest we may again see a pullback over these coming summer months, the circumstance of the current market is significantly different than years past. Gold demand in Europe is exceeding all recent precedent as sovereign debt contagion has many investors worrying over the sustainability of the European economy, and even the future of the Euro itself which has tumbled to four year lows against the dollar. Ratings downgrades are expected in Spain, Portugal and France. The future (for paper) beckons like a bleak grey cloud holding a promise of rain.
As the U.S. dollar cratered in 2008, the direction of monetary flight was toward the Euro. Rumors also took flight—everything from the transfer of oil transactions into Euros, to forex-savvy supermodels wanting contracts denominated in the European currency. The Euro was seemingly on the fast-track to replacing the dollar as the world's primary reserve currency. But fast-forward two years, and the landscape has again turned around. Investors (including Europeans themselves) can't seem to dump the Euro fast enough, and the dollar is experiencing a sustained rally. Through it all gold's once-near-perfect negative correlation with the dollar has fallen by the wayside—gold and the dollar have been moving in tandem for almost a year now. Even as the dollar has put forth a muscular rally against its peers, gold has been undeterred—newly achieving an all time high against this very same dollar while at the same time methodically racking up a series of record highs against the Euro, the Pound and the Swiss Franc. (Against the Yen a 27-year high was reached.) In short, the dollar may be strong, but gold is stronger still.
As the bull market in gold has evolved, it is becoming increasingly clear that the yellow metal's performance is less a statement about any given currency, and more about the state of the monetary system as a whole. As one currency, then another, comes in turn under duress, it spurs capital flight toward other currencies—with a portion finding its way to gold with every cycle. The simple result being that relative currency values ebb and flow vis a vis one another, while gold marches ever higher against them all. Many speculate that large portions of the capital coming back to the dollar these past few months will again eventually exit—perhaps re-igniting the traditional inverse relationship with the value of gold, providing rocket fuel for the yellow metal's next leg up. Put plainly, gold is the only currency politicians can't print, and as today's governments continue to confront financial and economic problems with massive stimulus efforts in the form of bailouts, deficit spending, and debt monetization, the future stability of all fiat currencies remains precarious at best. The Gold Standard was once dismissed as a "barbarous relic" by John Maynard Keynes, but its decade-long ascension to renewed monetary relevance instead suggests an undeniably important role both in the international monetary system and in the individual portfolio. Nations and citizens are alike in this choice they each must face: To accumulate their reserves/savings in a currency printable at a governmental whim, or to acquire their savings in gold.
The better choice is increasingly obvious. Central banks in 2009 became net buyers of gold for the first time in 20 years. Interest in the gold ETFs is at all time highs. Demand for coins and bullion at the individual investor level is so high, general availability of many popular items is hit-or-miss from week to week. It seems we're headed for a future where the price paid for gold will be eclipsed in importance by the actual ability to acquire it. So while a repeat of summers past with attractive dips in price remains a possibility, fundamental factors acting within the gold market suggest pull-backs may be short lived—if they occur at all.
(Graphics and text by www.USAGOLD.com)
