The gold market has always been fascinating and lucrative for investors and traders. And while most market participants know the traditional seasonal rally that occurs during the holiday season, there is a lesser-known but equally influential rally in the gold market - the second-strongest one. Referred to as the "Gold Rush," this phenomenon presents a unique opportunity for traders and investors to unleash the potential of their current or upcoming gold positions.
In an article, I wrote for Barchart in early 2023, "Gold: "I Bought The First Break, I Bought The Second Break, And I Was The Third Break!" I described why I thought gold prices were ready to go sideways until the end of July:
- The February contract was near First Notice Day (FND), and all long positions would be required to exit or face delivery of 100 ounces of gold per contract held.
- Gold had rallied 20% from its seasonal low in October
- The Chinese government offered to relax its zero-tolerance pandemic policy as the country approached its New Year festivities. But will they follow through?
- There was significant overhead resistance near $2,000 per ounce.
- Managed money had an amount of accumulated long positions that had signaled a market turn in the past.
- A seasonal pattern had warned of sideways to down market activity during this period.
Understanding the Gold Rush: What is it and why is it important?
The Gold Rush is a term used to describe a phenomenon in the gold market with a significant increase in demand and price for the precious metal during a specific season. It is the second-strongest seasonal rally in the gold market, following the traditional year-end rally. The Gold Rush typically occurs during the summer months, from the latter portion of July through the end of August. So, why is the Gold Rush important?
Several factors contribute to the Gold Rush. One major factor is the seasonal tendency of interest rates to decline during the Gold Rush period. Higher interest rates are a headwind to gold price appreciation, and lower interest rates are a tailwind. Traditionally the United States (US) government's year-end is September 30. During this period, the US does not need to issue as many debt products (Bonds, Notes, Bills, etc.)
April 15 is the deadline for American taxpayers to pay government taxes on their earned income. For 2022 the US collected $5.03 trillion in federal revenues, which was $630 billion higher than in 2021.
These factors contribute to more cash leaving the private sector and flowing to the government for their expenditures, contributing to lower interest rates.
Economic indicators, such as inflation rates or interest rate decisions, can also impact the attractiveness of gold as an investment asset.
Market participants can strategically position themselves to take advantage of this seasonal rally by understanding the Gold Rush and its underlying factors. Whether through buying physical gold, investing in gold-related stocks and exchange-traded funds (ETFs) symbol GLD, or trading gold futures, symbol GC for a standard size or MGC (Barchart symbol GR) for the micro-size, and options, the Gold Rush potentially presents an opportunity to profit from the price movements in the gold market.
However, it is essential to note that while the Gold Rush can offer lucrative opportunities, it also comes with risks. Market volatility, unexpected events, and fluctuations in global economic conditions can all impact the gold market. Therefore, before participating in the Gold Rush, thorough research, risk management strategies, and consultation with financial professionals are recommended.
Seasonal Analysis
Source: Moore Research Center, Inc. (MRCI)
The above chart is research provided by MRCI with a 15-year average of how gold has performed during different periods of the year. On the left is the end-of-year rally that usually begins in November and last until February of the following year. Gold usually makes its most distinctive move during this period. The second-largest movement, the Gold Rush, begins in the latter part of July and runs until the end of August when gold traditionally puts in its seasonal high price.
The Commitment of Traders (COT) Report
Source: CMEGroup Exchange
As of July 18, the COT report reveals that managed money traders are aggressively adding new long positions (blue vertical bars) for the past three weeks. The yellow line represents the futures contract price for the gold market. Notice that in October 2022, as the price rallied, the blue lines expanded as managed money was buying. As the yellow line declined, managed money would sell off their longs and await for the uptrend to resume before buying more contracts. The recent price action of gold is similar to the end of other corrections in the gold market where managed money became aggressive buyers.
Technicals
Source: Barchart
The daily gold chart reflects the end-of-year rally. The red box illustrates the sideways nature of the market. In the middle of the red box, you can see prices tried to rally above the seasonal high to the left, and they could not sustain that rally and eventually corrected back to the current July lows.
The last green box is the million-dollar question, has the Gold Rush begun?
In closing
In conclusion, understanding the Gold Rush and its significance in the gold market is another opportunity for possible profits for investors and traders seeking to harness the potential of this seasonal rally. By staying informed about market trends, economic factors, and geopolitical developments, market participants can make informed decisions to capitalize on the gold market's upward momentum and price surges during this time.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
