Gold Seasonal Analysis And Portfolio Rebalancing

by: Chris Ridder, CFA


Only September has a statistically valid directional bias.

Money Managers have the largest net long position in over a year.

Producing hedgers have largest net short position since 2014.

I came across a post, on the popular financial blog ZeroHedge, which reported that the fall for the price of gold, in March, was a monthly seasonal dip historically.

Source: Hard Assets Alliance via ZeroHedge

I have learned, the hard way, that when I see a "study" like this, which does not show a scientific statistical study, that I have to check the data myself.

I did this by downloading the monthly close, of the price of gold, in London, from the St. Louis Fed's database. Using this data I created monthly return data from January 1975 to February 2016. I then used the econometrics software gretl to test if the average monthly return for the gold market is statistically significant. This was done using a "dummy variable" to represent each month of the year (see this PDF Link for an explanation of this process or the gretl software help file).

Here are the results I achieved:

Month Average Lower Band Upper Band
January 1.04% -0.99% 3.08% No
February 0.26% -1.31% 1.83% No
March -1.05% -2.88% 0.78% No
April 0.10% -1.29% 1.49% No
May 0.24% -1.11% 1.58% No
June -0.46% -2.05% 1.14% No
July 0.21% -1.20% 1.61% No
August 1.08% -0.47% 2.63% No
September 2.27% 0.22% 4.31% Yes
October -0.39% -1.93% 1.16% No
November 0.89% -0.84% 2.62% No
December 0.40% -1.39% 2.18% No

Note: Calculations of confidence intervals used HAC standard error corrections

I found that only the month of September can be shown to have a statistically validated directional bias, and that is upward.

All other months are, statistically speaking, indistinguishable from zero.

My average figures differ from the original study. This could be because they used the 10:30am London time gold price while this study used the 3pm London time gold price. Also, they could have used the average gold price during the month, where as, I used the price at the end of the month; which traders, and investors, mark-to-market their portfolios. I have provided a link above to validate the data I used.

Source: St. Louis Fed data & author's calculations

I have an alternative hypothesis as to why gold has fallen in March until today. Gold, GLD, rallied 1.84% after Yellen's "dove-ish" speech to the Economic Club of New York, along with other asset classes, and is now up .10% in March.

The alternative hypothesis is that gold futures speculators have one of their largest net long positions in over a year, and hedging producers have their largest net short position going back to the beginning of 2014.

Look at a graph, of the data, from the CFTC's commitment of traders report and the front Gold futures contract.

Unless the investment base of gold holders widens it would appear that there are not too many people left to buy.

In the short term I am bearish on gold for this reason and the fact that gold, or GLD, has risen 17.05% in the first quarter, which ends in two days as this is being written. I would expect some portfolio rebalancing to occur, which would have long term investors in gold trim their "long" positions.

For the long term I have a have bullish strategic asset allocation view towards gold. However, in the short term I would have a tactical asset allocation away from gold. That is until portfolio rebalancing selling is done, and speculators are net short gold futures.

If you are a trader, look to short today's rally. If you are a long term gold investor expect some downside noise but don't sell unless your macro-view has changed.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in GLD over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long physical gold