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Gold bucking usually seasonal weakness

Gold has a seasonal tendency to peak in late January after the holiday season, as jewelry demand starts to decline. Price increases can last into the first part of February, as inventories are being replenished by dealers preparing for retail sales for Valentine’s Day gifts.

Gold tends to post seasonal bottoms in late June or early July, as demand increases when jewelers again stock up ahead of a the seasonal wedding event in India and also, when investors return from summer vacations. Gold prices are also subject to spikes in demand from the investment community, as a hedge or protection from concerns over inflation or times of economic instability or uncertainties. It is valued in terms of the U.S. dollar, so periods of dollar weakness helps support gold’s value.

In the following chart, various 1-year seasonal patterns have been plotted using continuously-linked front-month gold future prices. Gold’s 2016 year-to-date performance is included for comparison. Gold’s 11-, 21- & 41-year seasonal patterns are all relatively similar throughout the year and fairly closely follow the pattern of an early-year peak, followed by sideways to lower trading toward a June/July low and then a rally to close out the year. However, since trading at its all-time high in August 2011, gold has been in decline and its 5-year seasonal pattern reflects this with an average 5% loss by yearend for the last five years. Whether or not this typical seasonal lull transpires this year will largely depend on the Fed, what it does or does not do with interest rates and ultimately the impact on the U.S. dollar.

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Is the Next “Gold Rush” Here?

Steady Investor News

Thoughts on gold from Zacks Investment Management...

Bucking the global commodity rout, gold spot prices have surged more than +11% over the past six months. Interest in gold is typically driven by disinterest in alternatives or because there is a heightened sense of uncertainty (or, at worst, global panic). It follows that, given some uncertainty over global growth and deflation, gold has again emerged as a temporary “safe haven” for investors.

Interestingly, though, this trend runs contrary to widespread expectations of tepid gold prices in the short to medium term. This is especially the case as the U.S. Fed is embarking on monetary tightening and as recent dollar strengthening has convinced most that gold would lose its luster compared to other higher-yielding assets.

That being said, nagging growth uncertainties around the world have cast a gloomy outlook on the U.S. trade balance such that many investors are predicting a pause in Fed rate hikes followed by a cooling off of the greenback rally. Expectations of the dollar’s depreciation could, in turn, lead to a bullish outlook for gold prices. But, we’d urge investors not to be fooled – we see this gold rally being fueled by an emotional response to market volatility and not due to a shift in the metal’s fundamentals.

As such, we don’t expect the gold rally to endure for too long (no gold rally really ever does).

While some panic-stricken investors rush to gold during a financial meltdown, the recovery period often negates the benefits. For example, in the 2008-09 Great Recession, gold rose mightily as stock markets crashed. But, in the post-crisis period the S&P 500 has grown by more than +46% since 2011 whereas gold declined by more than -9%. Gold doesn’t do so well in good times, and we still think these are good times.

Since 2011, the S&P 500 has Increased +46% while Gold has Fallen -9%

The current U.S. stock decline should not, in our view, be dubbed anything even close to resembling a financial meltdown. Strong economic fundamentals, underscored by firm U.S. consumer confidence (and bolstered by promising wage and employment conditions), should drive the stock market higher as global conditions start to improve and fears subside.

Bottom Line for Investors

The recent ‘gold rush’ is primarily a consequence of investors’ feverish desperation to hedge against uncertainty. Pessimism over global growth and policies has intensified so much that many are willing to hold a non-interest bearing commodity for its short-term potential price appreciation. But, as economies like Japan and Europe work through their monetary easing policies and global expansion resumes, it is assets with strong fundamentals (like stocks) that will likely yield investors solidly positive returns.

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Is The Glitter Returning to Gold Stocks?

Since gold peaked around $1900 per ounce in 2011, gold stocks have endured a challenging three years. In 2014, things started promisingly enough as gold stocks began to stage a recovery in the first half of the year. This was before weakness in global currencies, versus the U.S. dollar, and expectations of a Fed rate hike combined to reverse the momentum. And then, towards the end of last year, sentiment tumbled to all-time lows creating a unique opportunity for contrarian investors. However, while gold declined slightly in USD terms during 2014, it actually posted respectable gains in most foreign currencies. Gold has historically had an inverse relationship with the US dollar. Because gold is priced in USD, as the greenback strengthens the gold price typically weakens. However, in the first two months of 2015 this hasn’t been the case. Why? Well, a number of factors have driven renewed investor interest in both gold and gold equities. This includes stubbornly low inflation, fears of outright deflation in Europe and Japan, the ongoing conflict in the Ukraine and continued uncertainty surrounding Greece’s future as an EU member nation. In a bid to stimulate growth, several central banks have enacted negative interest rate policies leading to approximately $2 trillion of government debt globally that has a negative yield. This diminishes the opportunity cost of holding gold at a zero yield. Increasingly, investors are also growing concerned about the unforeseen consequences of central bank policies. Most recently, the markets were rattled when the Swiss Central Bank abandoned its commitment to peg its currency to the Euro. As a result, investors have begun to return to the sector. For the first time in several years, inflows to gold ETFs have turned positive and gold equities have been strong performers year-to-date. So, why should investors consider gold stocks? The primary reason that investors allocate a portion of their portfolios to gold stocks is portfolio diversification. Historically, the correlation between gold stocks and traditional stocks is very low. With the S&P 500 and Dow Jones indexes at all-time highs, it could be a good time to consider an asset class that typically does well during stock market corrections. How should investors position themselves to participate in the recovery? Not all gold stocks are created equal. Far from it. Some of the sector’s largest companies by market capitalization are the most indebted, have experienced declines in their production and have poor track records of creating shareholder value. Picking individual gold stocks is risky given their higher than normal volatility and mutual funds may not always be the best option for all investors. As a result, investors are increasingly looking at ETFs as a low cost way to gain access to a diversified basket of gold stocks. Traditional gold mining ETFs track purely passive market capitalization indexes which means that the larger the market value of a company, the larger its weight in the index. There are new index methodologies available that use different company factors such as quality and momentum to select and weight stocks. These alternative index methodologies are growing in popularity with both institutional and individual investors.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney- client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.