Can Gold Go Higher? History Says Yes

While October has historically been a weak month for gold, November and December are a very different story. Since 2001, gold has posted a gain in November/December every single year. Additionally, these gains always make up a significant portion of the total yearly gains, with an average of 43.65% of the years’ total gains since 2001.

It’s also worth noting that gold is often sitting at or near its yearly highs come the end of September, similar to where it is now. However, in 6 of the last 9 years, gold did not reach its peak until the month of December, suggesting that it still has room to run this year.

While the historic trends indicate that gold experiences a strong year-end seasonal cycle, they don’t indicate the reason. The two most common arguments for the run are the activity in the stock market, and jewelry buying. Investors who argue that gold’s strength in September comes from the “anti-risk trade” may have a case... for September is historically the weakest month for stocks. Yet this argument fails to explain why both stocks and gold exhibit strength in the November and December months.

Despite the influx of specialty ETFs and retail investments, about 50% of the demand for gold still comes from jewelry. Moreover, over half of this demand originates from India and China. China is quickly becoming one of the larger jewelry players, as the country has experienced unparalleled growth in the past few decades. India, on the other hand, has been the primary player for quite some time.

In India, demand for gold is strong during two seasonal festivals, Akshaya Trithiya (late April – early May) and Diwali (mid-October – mid November), both occurring during large wedding seasons. Diwali is generally cited as the main driver of year-end gold strength. This comes as no surprise as the 5-day festival is celebrated by most Hindus, which is the primary religious sect in India. Statistics from the World Gold Council show that jewelry demand rises around Q4 in most years, around the same time as the Diwali Festival.

With China’s ongoing effort to keep its currency artificially low, other countries have recently begun selling their own currencies in order to lower their values and to remain competitive. Japan, Switzerland, South Korea, Thailand, and Brazil have all sold their home currencies, which carries implications that are generally stimulative and reflationary. This devaluation competition also benefits gold, which is considered a main store of value. Despite selling their currencies, it is interesting to note that central banks have also almost stopped their sales of gold. Selling of gold has dropped to its lowest level since the signing of the Central Bank Gold Agreement in 1999, which was purposefully implemented to limit gold selling.