Over the past five years, data shows distinct patterns in the seasonality of gold prices. September has consistently been weak, with prices often closing lower than they opened, suggesting a decrease in market confidence or a shift in investment focus. In contrast, due to increased buying, July has shown a higher probability of gold prices closing above their opening mark.
Are the Spring doldrums in gold prices ready to change to higher prices?
Recently, the gold market has experienced a shift, breaking through a long-term pivotal area and maintaining a strong bullish trend. Despite this strength, there has been a noticeable correction, with prices peaking in April 2024 with a retest in May 2024 before declining into a trading range. This consolidation phase is critical as it potentially sets the stage for forming a seasonal bottom, preparing the market for a subsequent strong rally. Investors/traders should be aware of this pattern and prepare for the possibility of investing near these seasonal lows to capitalize on the upward trend that typically follows.
Source: Barchart
Yesterday, Federal Reserve Chairman Powell spoke, and the markets viewed his response as more dovish on interest rates, giving gold a bid today as it trades near $2,371 per ounce based on the August futures contract. Powell noted that the US economy is gradually slowing down but emphasized the need for more data before considering rate cuts to ensure that recent lower inflation readings reflect economic conditions.
In labor market news, US job openings in May surpassed expectations, rising after significant declines in the previous two months. Despite this increase, the data suggests a continued easing in labor market conditions, which may lead to lower interest rates. Investors are now keenly anticipating the release of the recent FOMC minutes from their June meeting later today, followed by the nonfarm payrolls report on Friday for more insights.
Some of today's bullish price moves may be related to geopolitical events in the Middle East. Israel is warning Palestinians to evacuate ahead of a potential attack. Traders would rather have long gold than short gold positions going into a holiday-lengthened period. US markets will be closed on Thursday in observance of Independence Day. Friday's volume is expected to be low due to traders taking extended holidays until Monday of the following week.
Commitment of Traders (COT) Report
Source: CMEGroup Exchange
The COT report for managed money traders confirms the dominant uptrend in gold. Managed money traders are typically trend followers. The yellow line represents gold prices and shows a series of higher highs and higher lows. What is significant is that each of these new highs brought new long positions for managed money traders (blue bars). New buying at each new price high is a bullish confirmation of trend activity.
Another bullish activity is that this year, the managed money traders are holding 198K long positions compared to only 122K last year at this same time. Current long positions account for 28% of the total open interest compared to 21% last year.
Managed money is near a four-year high in long positions. But, it is well off the 2019 high of 308K long positions, leaving room for more buying as the trend increases.
Gold's performance has not gone unnoticed. The 6-month return was +9.77%, while the 52-week performance was +14.43%.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
Typically, MRCI research leans towards the 15-year pattern. But, since the Pandemic, many markets have changed their recent seasonal pattern indicated by the 5-year pattern. Gold is no exception to this point. The red line is the 5-year pattern of gold prices. We are currently looking at what prices have done during this period. July has been a significant low before gold begins a measurable uptrend after consolidating in the prior months.
In recent articles for Barchart, "Seasonal Downtrend in Interest Rates Gains Momentum" and "Long-Term Yields Poised to Fall – Lower Mortgage Rates Near," I discussed how a seasonal pattern for lower interest rates occurs during the June to August timeframe. Gold is highly correlated to interest rate prices. As interest rate prices increase, yields decline, often making gold a more attractive investment. The seasonal pattern above for July shows a significant price increase in gold during July. Is this a coincidence? Not if you believe in probabilities.
Source: Barchart
I've overlaid the MRCI's 5-year seasonal pattern over the year-to-date gold prices. Notice how well the year's highs and lows follow the 5-year seasonal pattern.
Currently, gold is trading near the lower end of its channel. In uptrends, this setup can become a low-risk trade. Alternatively, traders could wait for a defined uptrend before entering the market. This is not a trade recommendation but a thought for you to investigate independently.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
In closing….
The gold market is navigating a consolidation phase, presenting a potential seasonal bottom that could pave the way for a rally. This pattern aligns with historical seasonal trends, where July typically marks a low before a significant uptrend. The dovish remarks from Federal Reserve Chairman Powell, coupled with easing labor market conditions and geopolitical tensions, have supported gold's recent bullish momentum.
Moreover, the Commitment of Traders report indicates strong interest from managed money traders, further bolstering the bullish outlook. Despite recent corrections, the market's fundamentals remain sound, and the seasonal patterns suggest a promising period ahead for gold prices.
As always, while seasonal trends provide valuable insights, they should be complemented by thoroughly analyzing technical and fundamental indicators. Investors and traders should remain vigilant, considering all factors to make informed decisions and capitalize on potential opportunities in the gold market.
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.
