Gold, like many other investment assets, can be predictable to some degree. Not to the point of being able to accurately predict its price movements, but it is possible to venture some upward and downward movements that are usually repeated over time. It is what is called the seasonal cycle of gold. In this post we are going to explain the factors that cause these periodic movements in the price of metal.
As Luke Burgess from the Outsider Club blog explains , the gold market is incredibly cyclical in nature. These cycles, in the long, medium and short term, are usually quite consistent.
The main and best known of these is the eight-year gold cycle. Over the past five decades, the price of gold has bottomed out at least once every eight years, as can be seen in the chart below.
The last time the metal suffered this drop was in 2016. So, taking this periodicity into account, the next time this correction will occur will be in the year 2024.
As Burgess points out, because it’s such a long cycle, it’s hard for investors to take advantage of it. In his case, after 20 years of presence in the gold market, he has barely witnessed this fall twice.
Short Term Cycles
However, in the gold market there are more cycles than the eight-year one. They occur for various reasons. And these cycles, more in the short term, have a much greater utility for investors.
Some of these short cycles are recorded as a result of certain periodic economic events, such as the meetings of the so-called Federal Open Market Committee (FOMC ) of the US Federal Reserve .
These meetings are meticulously scheduled throughout the year (eight meetings) and the price of gold is usually much more active during the days that they are held.
In general, the price of the metal tends to rise during the days immediately before and the two days that the meeting lasts, to fall afterwards, when the president of the Fed appears before the press to announce the decisions adopted.
Despite this, according to Burgess, there is no pattern that is consistent enough for investors to benefit from these eight moments a year, although they should keep it in mind.
Seasonal Pattern
A short-term pattern that is much more reliable, since it tends to repeat itself every year, is the one that indicates the months of the year in which the price of gold tends to appreciate more.
Thus, during the last 45 years, the best months for the gold price have been September, November and January.
Analyzing the most recent data, it can be seen that there have been increases in the precious metal during the past months of September, November and January. In general, the rise at the end of the year is usually more pronounced than those of January and September.
Why are these increases in seasonal forms registered, in a pattern that has been repeated for the last 45 years?
As the Outsider Club post explains, everything is due to the significant demand for gold by the jewelry sector. The covid-19 pandemic has disrupted the industry’s usual behavior over the past year, but in a typical financial year about half of global gold demand comes from the jewelery sector.
The Five Gold Festivals
Precisely at the end of each year, at least five festive events coincide in the world during which sales of gold jewelry multiply.
The most important are the Indian festival of Diwali, also called the Festival of Light, and the Chinese New Year. During these two moments alone, about a third of the world’s annual demand for gold is consumed. It must be taken into account that China and India are the world’s two largest consumers of the precious metal, which is very present in their culture and tradition.
The Diwali festival takes place between the months of October and November, depending on the year. And the Chinese New Year begins at the end of January or the beginning of February.
To these must be added other moments in which gold sales increase, although to a lesser extent than the two mentioned: Christmas, New Year and Valentine’s Day.
The coincidence of several of these celebrations means that both the last quarter and the first of each year are those with the highest demand for gold jewelry.
Therefore, the price of gold usually rises during the last quarter of the year, due to this increase in demand from consumers and from merchants and jewelers who have to provide themselves with raw materials to manufacture the pieces they are going to sell.
In fact, it seems that the favorite month for jewelers to stock up is usually the month of September.
According to this seasonal pattern, the last quarter of the year is usually not a good time to buy gold, although it is a good time to sell it. And analyzing the evolution of the price in the last 45 years, it can be observed that the month of October is usually one of the best to acquire the metal, like the month of March.
