The cruelest month for gold

Commentary: October, not September, typically bad for gold

CHAPEL HILL, N.C. (MarketWatch) — Brace yourself, gold traders: October is right around the corner.

And it is the worst month of the calendar for gold.

To be sure, most gold traders already have their hands full dealing with September, which has been a sobering one for the yellow metal. Even after Tuesday’s 3.6% rally, bullion is down 10% for the month.

They probably can’t wait for the month to be over.

But consider October’s track record. Over the last three decades, the London PM Fixing Price in U.S. dollars terms has lost an average of 0.9% during October. That compares to a 0.6% gain in all other months. That difference of 1.5 percentage points is statistically significant.

(By the way, I didn’t go back further in the historical record because it was only in the mid 1970s that it became legal for U.S. citizens to own gold.)

What accounts for gold’s seasonal weakness? One theory focuses on gold’s historical tendency to move inversely to stocks. Since October is often when stocks hit a tradable low and begin a strong rally, that’s when money tends to flow out of gold into stocks.

Though this theory doesn’t fit the facts perfectly, it at least is consistent with what tends to happen in September, a month that on average is bad for stocks. And, sure enough, it tends to be a good one for gold. In fact, just as September is the worst month of the calendar for stocks, it is the best one for bullion.

One place where the theory starts to break down is in November and December, which tend to be strong ones for both gold and stocks. But, according to a study from Ned Davis Research, there are other seasonal factors that may help to explain gold’s strength in those later months.

Those other factors trace to jewelry demand in India. Ned Davis senior equity analyst John LaForge explains that, even with all the speculative interest in investing in gold, “roughly 50% of gold demand still comes from jewelry. Over half of this comes from India and China. While China is fast becoming a large player in the jewelry market, India has been the primary driver for years.”

And it turns out that Indian demand for gold follows a seasonal pattern of its own. One period in which it begins to pick up is around Diwali, a five-day festival which begins at some point during the mid-October-to-mid-November time frame. Furthermore, this is when many Indian couples schedule their weddings.

LaForge analyzed gold’s price behavior in the month before and after the last 10 Diwali festivals, and found that gold typically carves out some sort of a tradable low right around the start of Diwali.

Gold traders take note: This year, Diwali begins on Oct. 26.

Source; http://www.marketwatch.com