History Lesson: September Is Best Month for Gold

We’re heading into September tomorrow, so it’s a good time to revisit the historic seasonality of gold and gold stocks.

Over the past four decades, September has been the best time for gold in terms of its month-over-month price appreciation. You can see this on the chart below — in a typical year, the price of gold in September rises 2.5 percent above its August price.

The gold price has risen in 16 of the 20 Septembers since 1989, by far the best success ratio of any month of the year.

What accounts for this predictable trend?

September kicks off several of the planet’s most potent gold-demand drivers:

• The post-monsoon wedding season in India, and Diwali, one of that country’s most important festivals;
• Restocking by jewelry makers in advance of the Christmas shopping season in the United States;
• The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift-giving;
• And in China, the week-long National Day celebration starting October 1 and the run-up to the Chinese New Year in early 2010.

This could be a challenging September in India, the world’s largest gold consumer. The economic slowdown and gold prices near record highs drove jewelry demand down 31 percent in the second quarter compared to the same period in 2008.

On the other hand, the World Gold Council says India’s bank deposits saw 22 percent year-over-year growth in the second quarter of 2009, so cash is available to be spent if the rupee price for gold weakens even slightly. The WGC also expects the wedding and Diwali season to “underpin a seasonal improvement over the remainder of 2009.”

China, the world’s #2 gold market, actually saw a year-over-year gold demand increase of 6 percent in the latest quarter, with buyers favoring 24-carat gold jewelry for its quality and as a store of value. The WGC says that trend toward the purer form of gold should continue, though the third quarter is usually the low season for this segment of the market.

While September is a good month for gold, it is historically a great month for gold stocks as measured by the NYSE Arca Gold Miners Index (GDM), as seen in the chart above. The GDM index comprises a broader collection of gold miners—including more smaller-cap companies—than either the NYSE Arca Gold Bugs Index or the Philadelphia Stock Exchange Gold and Silver Index.

After the typically soft months of June and July, the gold miners start to bounce back with a 2 percent bump in August before shooting up another 8 percent in September. Since 1993, when it was created, the GDM has been up 11 times in September and down just five times.

In September 1998, the GDM had by far its best-ever month (up 54.3 percent) when the bullion was bouncing off a two-decade low price of less than $275 per ounce. A decade later in September 2008, however, amid the severe credit squeeze triggered by the global financial crisis, the GDM fell 10.2 percent.

The strong correlation between the gold price and the value of gold-mining stocks explains much of the average September jump for gold stocks. But the relationship is not lock-step — gold stocks (particularly for companies that do not hedge their production) have historically offered leverage to the gold price. In up markets, earnings growth has tended to exceed the increase in gold price. Of course, the leverage also works in the opposite direction — gold stocks also tend to decline more when the price of bullion is falling.

One of the most consistent correlations for gold is its inverse relationship with the U.S. dollar — when gold is up, the dollar tends to be down, and vice versa. Looking at weekly data going back 20 years, this relationship occurs nearly 70 percent of the time.

The seasonality chart above shows that September is only second to December in terms of dollar weakness, the average result for the U.S. Trade Weighted Dollar Index (DXY) being a 0.66 percent decline from August. Looking at the 39 Septembers going back to 1970, the dollar has seen negative performance 26 times, more than any other month of the year.

The Federal Reserve’s massive stimulus spending and the expectation that the current low-interest-rate environment will continue for many more months are additional headwinds for the dollar, and thus tend to be positive for gold.

In our June commentary Why the Time Could Be Right for Gold Stocks, we pointed out that gold stocks tend to outperform the overall stock market when the federal government is engaged in deficit spending. This year’s federal deficit is expected to be a record $1.6 trillion, and the White House projected this week that the deficit will grow another $9 trillion between 2010 and 2019. These huge deficits will fan inflation fears and keep downward pressure on the dollar.

Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold-stock position in advance of seasonal demand growth. The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this September will follow the well-established trend.

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002. The NYSE Arca Gold Bugs Index (HUI) is a modified equal-dollar weighted index of companies involved in major gold mining. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The U.S. Trade Weighted Dollar Index (DXY) provides a general indication of the international value of the U.S. dollar.

Disclaimer: All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Comments

[Donald Ingram:]

Also September and October are historically significant for the markets, only in a bad way. CRASH! This year may be the year that gold/silver come truly back into their own as the only true store of wealth as REAL money. Long GLD and SLV. Hold the physical.

Sep 01 02:24 AM

[Louis Paquette:]

I've always been a big believer in gold seasonality, even if it didn't work too well last year (not much worked well last year mind you). Looks like it's setting up for a break over $1,000 to new highs this year though. Nice bar charts Frank!

DiamondLou

Sep 01 02:12 PM

[Bill L.:]

Question, Gold and silver have been failing to make highs against the dollar's recent lows. What do you attribute this too, and does this affect your longer term outlook?

Sep 01 04:16 PM

[Larry House:]

I don't trust history when investing in the present.

Sep 01 04:18 PM

[ron_paulite:]

If the stock markets crash, do you really think Gold and Silver (at least the paper kind) will go up???


On Sep 01 02:24 AM Donald Ingram wrote:

> Also September and October are historically significant for the markets,
> only in a bad way. CRASH! This year may be the year that gold/silver
> come truly back into their own as the only true store of wealth as
> REAL money. Long GLD and SLV. Hold the physical.

Sep 02 01:03 AM

[einstein p ...:]

Gold looks right, but got off to a shaky start in September. Bought a bit of EGO on the pullback. Think natural gas and oil is a better hedge against inflation, but you can't be too thin, too good looking, or have too much insurance. Thus I bought gold and will probably buy more as we continue to print dollars to pay for our follies.

Sep 02 01:45 AM

[Joshua Hayes:]

as long as Gold holds the 50 DMA there is no reason to get bearish on Gold. Gold has been a great long since 2001 and will continue to be in the long-term as long as the Fed/Congress continue with their reckless dollar policy. I think investors with a long-term horizon with capital in the stock market would be wise to look to hedge their investments with Gold/Silver bullion or GLD/SLV if bullion is not available to purchase. The long-term prospects for GLD/SLV are very good when you look at the massive wealth-destroying printing job the Fed is doing via the St. Louis Fed charts. Until I see some real drawdown in our spending/debt, there is no way I can dare abandon my long-term Gold/Silver long position. I do NOT think it is wise to invest all your money in Gold/Silver. However, if you are a good stock picker like those of us at BigWaveTrading.com and have years of experience and can really get your port moving it might be of benefit to move some of that money into GLD/SLV just in case. Though those of us that know how to invest can actively go long/short, sometimes there are moments when a good long or short position does not exist. During these times it is nice comfort in knowing that you have some money in Gold/Silver that is working for you. I never have problem finding stocks to invest in on the long or short side. However, I realize most people are not like me and thus need to have a longer-term position. My best recommendation is to either invest quarterly in a VERY STRONG growth/value mutual fund with strong 3-yr, 5-yr, and (if available) 10-yr track records or I recommend going long GLD/SLV. Better yet, I prefer that you own Gold and Silver bullion. However, unless you store it at your home you will have to pay the safety deposit fees. A small price to pay for ultimate security. I am an active investor but there are two long-term investing trends that I am SURE will pay out over a 20+ year period.

Sep 02 03:56 AM

[OceanTiger:]

20 of the last 40 years , Gold moves higher, 50-50% chance. Gold may not appreciate versus the intrinsic value of commodities, it has their value based on US Dollar. Hold value stocks such as HPQ, ABT,GILD… see Trade4Rich.com

Sep 02 12:48 PM

[machop:]

this is a great call. Good timing too.

And this time it is different.

Sep 02 03:11 PM