Seasons of Gold
John Mauldin's Outside the Box

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Introduction

Today we look at gold. I made my first dollar on gold stocks back in the mid-1980s when Doug Casey personally called me up and told me to by a particular stock. It was quite a home run and I have paid attention to what Doug says on gold stocks ever since. Lately he has been on a roll in his newsletter as well. 32 of the last 35 stocks he has recommended are up as of the latest issue.

I am pleased to be able to send you the introduction from Doug's recent edition of International Speculator. Doug talks about the seasonality of gold and speculates on future price movements. If you are interested in specific gold stocks and gold stock investing, I really suggest you subscribe to Doug's letter. They will send you his recent update which covers in-depth all the stocks he likes and a few he says to avoid. Below is a link to information on subscribing to his letter.

http://www.caseyresearch.com/crpmkt/crpSolo.php?id=30&ppref=CSN031EA0206B

John Mauldin, editor

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Seasons of Gold

By: Doug Casey
April 3, 2006

Long-term subscribers are already aware of a resource market phenomenon broadly referred to as the "quiet season," but which we here at Casey Research tend to view as the "Shopping Season."

You also might call it summer.

As you can see in Chart A, which summarizes gold's monthly price moves over the past 30 years, the yellow metal typically shows weakness from February to April, rallies in May, then heads down for summer. In August, gold typically begins to rebound and moves up pretty much for the rest of the year. Of course, this is an average pattern, not an invariable one. In 10 years out of the last 30, gold dropped in the fourth quarter.

Even so, the long-term data suggest the average pattern is worth paying
attention to.


But will the pattern hold up in the current bull market? The historical data is sparse, in that gold has traded freely only since Nixon closed the gold window on August 15, 1971. That triggered gold's only secular bull market so far, from $35 in August 1971 to $850 in January 1980. For the moment, let's discount that market's first big leg, to Dec 1974 (when gold reached $200), as catch-up for decades of currency inflation. The best analogy to our current circumstance is the period from August 1976, when the metal bottomed at $103, to gold's peak in 1980. The chart for that 5-year bull market fits the long-term pattern quite well.


But Why?

Why should gold bullion have a seasonal pattern? There are several reasons, among the more important being the jewelry market, which accounts for about three quarters of the gold sold each year.

What we see for the fourth quarter of each is the impact of the gift-giving tradition associated with the druid Winter Solstice, now known as Christmas. Layered on top of that is the Indian festival season of Diwali, which kicks off in November and continues through the first leg of the traditional wedding season in December.

In Chart A, you'll see noticeable spikes in both January and September, months when Indian manufacturers typically restock inventories to meet the demands of the two Indian wedding seasons. The first, mentioned above, starts in November and ends in December. The second starts in late March and runs through into early May.

Can Indian jewelry buying be a major driver of gold market seasonality? Probably. Don't forget that gold, viewed as an industrial commodity, has been in a primary supply deficit since 1990; more has been used than produced, and the world has been living out of inventory. Now Western central banks are slowing their illadvised selling, and people in China, Russia, the Mideast and India will be buying in size. Further, in 2005, investment in gold ETFs and similar financial products showed a 53% increase, to 203 tonnes. And things are barely starting to warm up.

Given the tight supply and growing demand, this is a market where prices are very much set on the margin, which is where India plays a role. As you are no doubt aware, India traditionally has an affinity for gold, expressed most emphatically in wedding rituals.

The propensity to lavish gold on blushing brides has kept pace with the country's rapidly rising wealth (its GDP growth has been better than 6% annually since the early nineties and is expected to top 8.1% in 2006). Economic success has fostered an entire new Indian middle class and middle-class wannabes with new-found wealth to be stashed and neighbors to be impressed. That adds an important new dimension to the gold market, helped along by a trend for Indian banks to aggressively market loans specifically for the purpose of buying gold during the wedding season.

In fact, in 2005 Indian gold jewelry sales rose by 25 percent, and now that country takes credit for about 23% of the world's consumer gold sales. The U.S., at #2, takes down just 12%.

Jewelry buying is nice and certainly contributes to gold's seasonality. But remember, what's really going to supercharge the market is buying by central banks and the public, as they increasingly realize that the dollars they're sitting on are melting.

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The Gold Stocks

The summer dip in gold, needless to say, doesn't help gold stocks. And it's amplified by the habits of Canadian brokers, who deal with their relatively short northern summer by taking relatively long summer vacations. That means fewer stories being breathlessly told to listeners with cash.

Even worse, the brokers--wanting to keep their clients safe while they themselves lounge at lakeside cabins--begin telling clients in March to sell and sit aside during the summer months, which sucks more air out of the market. Of course it's not just the gold stocks; there's a lot of wisdom to the old saw "Sell in May, go away". It's worth noting, however, that here we are in April and we see little sign of gold stock weakness--suggesting that there is either less selling going on or more buying from new-to-sector investors... or, likely, both.

And the people who do the actual exploration generally are busiest in the summer, typically working in remote areas of the Northern Hemisphere largely inaccessible in the winter. The absence of explorers from their offices translates into a dearth of news, made worse by the fact that even if there were new, the companies would want to hold on to it until it would do them some good--i.e. when there are brokers actually sitting at their desks.

To recap, in the summer gold bullion prices soften, resource brokers stop working the phones, and explorers head out to kick rocks and go incommunicado. There's a news slowdown, low trading volumes and a flat to declining market for resource equities from about April 1 to about August 1, give or take a month.

And it is during that quiet period that we happily focus on shopping for our favorite stocks.

Or at least, that's the way it is supposed to work.

The Crystal Ball

I'm not going to tell you that things are going to be different this year. But only because the person who tells you "this time is different" is usually wrong and often walks into a disaster.

However, when pondering gold's seasonality, it's better not to focus on just the long-term pattern shown in Chart A or even the five-year average pattern in Chart B. They show what's normal--not what's inevitable.

Instead, focus more on Chart C below, which paints a straightforward portrait of gold's daily price action from January 1975 through January 1980. While the seasonal pattern generally holds up, the trend is clearly for higher lows and higher highs throughout.

That is, in our view, the track we are currently on. While gold's price reflects the long-term seasonal pattern, the pattern is overlaid on a strong upward trend.


And lest you have any doubt, I am convinced we are now in the gold (and silver) bull market for the record books, a bull market that will surprise even me with its strength. And that's saying something.

In the way of evidence that this year is going to surprise and delight, simply look at gold's price action so far. Instead of the seasonal slump following January, gold has powered ahead and partied on in 2006 and is now trading at over $580, a 12% increase since the first of the year.

Based on traditional patterns alone, Bud Conrad, who assembled Chart D, projects that gold could be headed to $700 this year. He calculates how fast gold was rising over the 1976 to 1979 period and applies that to the price at the start of this year to see how high gold might rise. The dotted line shows the projection from history, and the solid line shows the actual so far this year. Needless to say, we are off to a great start.

I think this could be conservative, and breaking even $750 by year-end wouldn't surprise me. As bad as things were in the late 1970s, the last secular bull market for gold, they are much, much worse now, by pretty much every measure. Whether the level of debt, the size of the entrenched and philosophically unsound bureaucracy, the Current Account Deficit, the Forever War raging on a nearly global basis, the entrenched and worsening problems with entitlement programs, the trillions of perilously perched derivatives... The list, unfortunately, goes on.

Chart D shows how the market could behave if the price replays the trend of the bull market of the late 1970s. You can use it as a baseline, something to watch as a way of gauging just how wild things are getting in gold and--by extension--gold stocks, over the coming year.


How We Play It

I doubt we'll see much of the traditional pullback this summer. But if it occurs, don't hesitate to use it to back up the truck for your favorite stocks. To help you in that regard, in this issue we offer up our quarterly Buy, Sell and Hold updates on all the stocks we are following on your behalf--now enhanced with our indications of "Best Buys." And don't neglect adding to your hoard of physical gold coins.

Looking over the stocks, I have to say that there has never been, in my experience at least, a better slate of junior explorers to choose from.

That's thanks to many factors, including improvements in technology, the general lack of exploration over the last 30 years and the opening up of the ex-communist block to foreign investment. Toss in strong metals prices and talented management teams, and you have all the ingredients for significant discoveries.

While it's too early to tell whether we'll get a mega-discovery--of 10 million ounces or more--the odds hugely favor a number of 1- to 3-million-ounce discoveries being made. As discussed at some length in IS XXVI, No. 12, December 2005, "How High Will Your Gold Shares Go?", the combination of much higher gold and silver prices, big discoveries and the near certainty of a collapsing dollar, will create an ueber-bull... a once-in-alifetime chance to make life-changing profits quickly.

I know you may find it hard to believe, but by the time this thing is over, your $.50 cent stocks will be trading for $5.00, and your $2.00 stocks, for $20. Or more. It's going to be at least as wild as the Internet market was in the late '90s.

Given that view, it's hard to see a summer pullback for gold, should there be one, in anything other than a positive light.

You can keep your powder dry for the next little while and look to pick stocks for less during dips. Or you can just keep buying, riding the tides and ignoring the dips altogether. That's the approach I'll be taking... show me a good company, run by good people, working a good project and selling at the right price, and I'm a buyer... though at this time of year, being patient to let the market come to you probably makes the most sense.

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If there was one misstep you could make at this point, it would be to get scared off by the inevitable volatility and step aside until it gets "safe" to come back in. Too often that results in missing major up-moves. Trying to pick the tops or bottoms of any market is a fool's game.

A final thought: This market trend is solidly in motion. While it may periodically scare you as much as it thrills you, at no point doubt that it is your friend. Treat it accordingly and it will treat you well. In fact, even better than you can currently imagine.

Conclusion

I trust you enjoyed that. Again, if you are interested in subscribing,
you can go to:
http://www.caseyresearch.com/crpmkt/crpSolo.php?id=30&ppref=CSN031EA0206B

Your looking for his own pot of gold analyst,


John F. Mauldin
johnmauldin@investorsinsight.com

Disclaimer

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

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Posted 04-10-2006 9:50 PM by John Mauldin

Comments

Thoughts From The Frontline wrote Islands of Stability
on 12-05-2007 12:53 PM

Introduction "Year after year, economic theorists continue to produce scores of mathematical models