The Golden Opportunity
ByGold usually does well from the end of July to the end of September. This seasonal trade is based upon the increase in demand for gold from the gold fabricators buying gold to make jewelry for the Indian wedding and festival season that occurs in the autumn (67% of gold produced is used for jewelry and India consumes the most gold).
The ideal seasonal trading dates have been from July 27th to September 25th. From 1984 to 2008 the XAU (PHLX Gold/Silver Sector) has produced an average return of 7.9% in its seasonally strong period. Even during its strong seasonal time period, gold’s returns can be very volatile. From 1984 to 2008 the seasonally strong period had twelve periods of greater than 10% performance (fi ve periods of greater than 20%), and three periods of a loss greater than 10%.
Despite all of the volatility in the gold market, in Canadian dollar terms the metal has been range bound. The XGD ETF has generally oscillated between $16.50 and $22.00. Recently XGD has pulled back with gold prices: this is the season for weakness in gold. Having an investment pull back before a seasonally strong period is usually favorable. It sets the trade up for positive bounce at the right time.
The XGD graph uses an upwards green arrow to show the seasonal buy date and a downwards red arrow to show the sell date. XGD has performed relatively well over the last three years including last year. In the autumn of 2008 gold stocks sold off substantially, as hedge fund managers liquidated their positions in gold to cover their margin.
Look for XGD to pull back to $15.50 or $16.50 over this month. Although this would be an excellent price point to enter the sector, a higher price does not exclude the trade from performing well. It is possible that the seasonal trade will take XGD to $22. If the ETF crosses this point early in its seasonal period on good volume the $22 should act as support and be considered for a partial stop-loss position.
