What is The Best Time to Invest in Gold?
A Look at Seasonality in Gold Prices
Gold is often seen as the real currency of the world. Investors use it as a store of value that protects them from inflation. It stabilizes their portfolio when stocks and bonds are volatile and usually benefits from economic uncertainty and a weak US dollar. But when searching for an entry point to make an investment, it’s interesting to look at the historical performance throughout the year. Is there a right time to buy gold?
Historical evidence
The random walk hypothesis claims that in an efficient market, prices have no memory. This means that prices of stocks, bonds, commodities, … only change due to new information. Therefore they cannot be predicted and follow a so called ‘random walk’. In reality markets only work partially efficient. It is interesting to study if the price of gold follows certain recurring patterns. When looking at the yearly price evolution from 1975 to 2019 we find some remarkable elements (see Graph 1). January and September are the strongest months. March is the worst performer and the only one with a clear negative performance. The period from March to July is relatively weak, whereas the period from August to October is very strong. There is no clear evidence that these patterns are consistent over time. Graph 2 shows a more detailed image of the performance of gold over the last 20 years. We can see that there is a huge variance between years. In recent years, January was the strongest month, with a positive performance for 7 straight years. The historically strong autumn months (September to November) seem to have ended their winning streak recently.
Possible catalysts
Before we jump to conclusions we have to understand the reasons behind these trends. There is not too much research about this topic. A part of the seasonality can be explained by recurring cultural events. The Western holiday season (year end) and Chinese new year (end of January) could explain an uptick in demand for gold jewelry around these periods. China and India are very important markets for physical gold. In India there are two wedding seasons: One between October and December and one between January and March. Diwali, the Hindu festival of lights (October - November) also plays an important role. Historically, the monsoon season in the third quarter used to be an important driver for gold prices. Many farmers use gold as an insurance for bad harvest. In years of heavy rainfall they would pile up their gold holdings, to sell them off in dry years. Since the 2011–2012 gold boom the role of gold in their financial system has changed, which could explain the weaker performance of gold in autumn since then. Another explanation for seasonality could be that investors hedge their portfolio against stock market losses. “Sell in May and go away” is a well-known adage for stock market investors. This could explain the strong summer period for gold. May is also a month where many citizens receive tax refunds they can use to invest in gold in the following months.
Graph 3 shows the average course of gold throughout the year. We can see the relatively quiet period in spring and the uptick in summer. Particularly interesting is the jump in the second half of December, which continues in the first half of January. This suggest that the best timing for a short term trade would be to step in mid-December and get out a few weeks later, or at least before March kicks in. For a mid-term trade, the end of spring would be the best time to step in, to benefit from the longer rise in summer. Be careful, because these patterns don’t occur every year. There is no significant evidence for a winning strategy, since the data set is quite small. For a long-time believer in gold, it’s best to step in at any moment when prices show a short-term weakness. In the long run, gold has proven to be a strong investment.
What to expect?
In 2020 gold prices have soared to new records in summer, but they fell back in autumn. The strong performance of the stock market and cryptocurrencies like Bitcoin have taken the wind out of gold’s sails. Optimism about a vaccine against Covid-19 has reduced the need for a save haven asset. There are still plenty of reasons why gold can rise in the following months. Economic uncertainty will remain for a long time, just as the extremely flexible monetary policy. Central banks around the world pour money into the system, that can inflate prices of assets like gold. An uptick in inflation for goods and services could also be beneficial for gold.
