Gold: History Solves the Mystery (Part 2)

I wrote an article back in July about my expectation for a sideways summer followed by an autumn rally in the Gold market. Since then Gold has made new all-time-highs, however we are currently hitting some resistance up near the 1070 price level.

The trend is definitely up, and as they say, the trend is your friend. However with the news on decreasing Indian demand for the metal, and when you consider that Gold has rallied virtually un-checked these past few weeks, I think that we may see a bit of a pull-back before heading higher. However I do believe that we will go higher. In my opinion it is not a question of if, but when, and how high. I believe that history may help to solve that mystery as well.

The Magical Month of March

While past performance is not necessarily indicative of future results, in 7 of the past 8 years, Gold has rallied in the 1st quarter. In 7 of 8 years, the 1st quarter high was made in the month of March including our previous all-time-high of $1,034 an ounce set back in March of 2008. That high has since been shattered and now we are in uncharted territory, but I believe that March still has the potential to be magical.

click to enlarge

This is not to say that the market cannot move higher sooner, but if history repeats itself, I believe that gold bugs will have more than St. Patrick's Day to celebrate in the month of March. Having taken profits on most of my December longs, I personally am looking to limited risk options on the April Futures contract for my next long position in Gold. The April contract expires on March 26th 2010 giving us plenty of time to weather the storm of a pull-back, while still giving us an opportunity to take advantage of Gold's magical month of March.

Disclosure: I am long options on the April 2010 Futures contract.

Comments

[Laurence Hunt]

I like Adam Hamilton's (Zeal) work on gold seasonals.

Mid-October through March is the strongest seasonal period, though I will never forget May 2006.

In my research, the gold bulls have run 7 months each in 2003-04, 2005-06 and 2007-08. Such patterns are made to be broken, but I don't think this time, though I wouldn't rule out a run of longer than 7 months, beginning in September 2009. At present, however, the pattern looks like a March top would be high probability.

2009 Oct 15 07:58 PM

[Albertarocks]

Yup! I'd have to agree with Mr. Hunt's assessment. Gold does indeed have a very obvious seasonal cycle under normal conditions where it peaks in March almost every year. This time though, it's going to be very interesting to see what kind of momentum gold has going into March 2010. I have a hunch that if gold is on a rip-roaring run at that time, it may signal that the FED has finally lost it's grasp on the lid. If that's the case, and I suspect it will be, my guess would be that any pullback in March 2010 will be a minor and short lived hiccup in a long, long road upward.

2009 Oct 15 09:53 PM