Seasons of Gold
By Doug Casey
The International Speculator
May 1, 2006
The April 2006 issue of
the International
Speculator leads
with the article below on the seasonality of gold. (To sign up
for your copy, click
here.)
Included in the article
are charts by analyst extraordinaire Bud Conrad, showing the
monthly average annualized increase in gold since 1975.
Given the current gold trend,
I urge you to give gold and gold stocks an appropriate place
in your portfolio.
Doug Casey
Long-term subscribers are already
aware of a resource market phenomenon broadly referred to as
the "quiet season," which we here at Casey Research
tend to view as the "Shopping Season."
You also might call it summer.
As you can see in Chart A,
which summarizes gold's monthly price moves over the past 30
years, 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.
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 chart for that 5-year bull market
fits the long-term pattern quite well.
But Why?
Why should gold bullion have
a seasonal pattern? There are several reasons, among the more
important being the jewelry 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.
In Chart A, you'll 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 jewelry 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 illadvised 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 neighbors 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
jewelry sales rose by 25%, and now that country takes credit
for about 23% of the world's consumer gold sales. The U.S., at
#2, takes down just 12%.
Jewelry 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 Gold Stocks
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 new, 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 favorite stocks.
Or at least, that's the way
it is supposed to work.
The Crystal Ball
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 not to focus on just the long-term pattern
shown in Chart A or even the five-year average pattern in Chart
B. They show what's normal -- not what's inevitable.
Instead, focus more on Chart
C below, which paints a straightforward portrait of 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.
Based on traditional patterns
alone, Bud Conrad, who assembled Chart D, projects that gold
could be headed to $700 this year. He calculates how fast gold
was rising over the 1976 to 1979 period and applies that to the
price at the start of this year to see how high gold might rise.
The dotted line shows the projection from history, and the solid
line shows the actual so far this year. Needless to say, we are
off to a great start.
I think this could be conservative,
and breaking even $750 by year-end wouldn't surprise me. 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.
Chart D shows how the market
could behave if the price replays the trend of the bull market
of the late 1970s. You can use it as a baseline, something to
watch as a way of gauging just how wild things are getting in
gold and -- by extension -- gold stocks, over the coming year.
How We Play It
I doubt we'll see much of the
traditional pullback this summer. But if it occurs, don't hesitate
to use it to back up the truck for your favorite stocks. To help
in that regard, we publish a quarterly Buy, Sell and Hold issue
of the International Speculator, with updated recommendations
on all the stocks we are following -- now enhanced with our indications
of "Best Buys" and analysis of company press releases
on the Casey Research web site. And don't neglect adding to your
hoard of physical gold coins.
Looking over our stocks, I
have to say that there has never been, in my experience at least,
a better slate of junior explorers to choose from.
That's thanks to many factors,
including improvements in technology, the general lack of exploration
over the last 30 years and the opening up of the ex-communist
block to foreign investment. Toss in strong metals prices and
talented management teams, and you have all the ingredients for
significant discoveries.
While it's too early to tell
whether we'll get a mega-discovery -- of 10 million ounces or
more-this year, the odds hugely favor a number of 1- to 3-million-ounce
discoveries being made. As discussed at some length in IS XXVI,
No. 12, December 2005, "How High Will Your Gold Shares Go?",
the combination of much higher gold and silver prices, big discoveries
and the near certainty of a collapsing dollar, will create an
uber-bull... a once-in-a lifetime chance to make life-changing
profits quickly.
I know you may find it hard
to believe, but by the time this thing is over, your $.50 cent
stocks will be trading for $5.00, and your $2.00 stocks, for
$20. Or more. It's going to be at least as wild as the Internet
market was in the late '90s.
Given that view, 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.
Editor's Note: While buying
physical gold and silver is definitely a good idea, following
Doug's recommendations for gold and silver stocks is an even
better one. With a fairly low level of risk, those stocks are
known to bring quick double and triple returns - and sometimes
much, much more than that. Subscribe
to the International Speculator to get Doug's monthly stock picks.
-Doug Casey
The International Speculator

321gold Inc

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