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By Kishori Krishnan Exclusive To Gold Investing News

Investors in gold could see their assets surge in value during September, as the month traditionally sees a sharp rise in demand for the precious metal. Gold has seen an increase in value during September for 16 of the past 20 years, with prices jumping by more than five per cent in the past seven.

For all practical purposes, September has been the best time to buy gold in terms of its month-on-month price appreciation over the past four decades. Frank Holmes, CEO and chief investment officer at US Global Investors said, in a typical year, the price of gold in September rises 2.5 per cent above its August price.

And since 1989, the gold price has risen in 16 of the 20 Septembers, by far the best success ratio of any month of the year.

What accounts for this seasonal trend?

There is a run-up to several events that can drive up gold consumption.

In India, jewellers build up their gold stocks ahead of the Diwali religious festival, which takes place in October. September also sees the start of the post-monsoon wedding season. Demand for gold jewellery in India accounted for over 20 per cent of the global market last year.

Jewellery makers also tend to buy up gold ahead of the Muslim holy month of Ramadan, as many families give gold as gifts during the Eid ul-Fitr holiday that marks its end.

Elsewhere, gold demand typically rises in China between National Day on October 1st and the Chinese New Year in January or February.

September also kicks off several of the planet’s most potent gold-demand drivers: Restocking by jewelry makers in advance of the Christmas shopping season in the United States.

Historically, this is a good time for gold mining stocks, as measured by the NYSE Arca Gold Miners Index (GDM). The GDM index comprises a broader collection of gold miners - including more smaller-cap companies - than either the NYSE Arca Gold Bugs Index (HUI) or the Philadelphia Stock Exchange Gold and Silver Index (XAU).

After the typically soft months of June and July, the gold miners start to bounce back with a 2 per cent bump in August before shooting up another 8 per cent in September. Since 1993, when it was created, the GDM has been up 11 times in September and down just five times.

In September 1998, the GDM had by far its best-ever month (up 54.3 per cent) when the price of bullion was bouncing off a two-decade low price beneath $275 per ounce. A decade later in September 2008, however, amid the severe credit squeeze triggered by the global financial crisis, the GDM fell 10.2 per cent.

The strong correlation between the gold price and the value of gold-mining stocks explains much of the average September jump for gold stocks. But the relationship is not lock-step. Gold stocks (particularly for companies that do not hedge their production) have historically offered leverage to the gold price - both up and down.

In up markets, earnings growth has tended to exceed the increase in gold. Leverage also works in the opposite direction, of course. Gold stocks also tend to decline more when the price of bullion is falling.

One of the most consistent correlations for gold is its inverse relationship with the US dollar. When gold is up, the dollar tends to be down, and vice versa. Looking at weekly data going back 20 years, this relationship occurs nearly 70 per cent of the time. And September is only second to December in terms of dollar weakness, the average result for the US Trade Weighted Dollar Index (DXY) being a 0.66 per cent decline from August.

Looking at the 39 Septembers going back to 1970, analysts have seen the dollar having a negative performance 26 times, more than any other month of the year.

Back to the present. In 2009, the Federal Reserve’s massive stimulus spending and the expectation that the current low-interest-rate environment will continue for many months to come are additional headwinds for the dollar, and thus look to be positive for gold.

Moreover, gold stocks tend to outperform the overall stock market when the federal government is engaged in deficit spending. This year’s federal deficit is expected to be a record $1.6 trillion, and the White House projected last month that the deficit will grow another $9 trillion between 2010 and 2019. These huge deficits will fan inflation fears and keep downward pressure on the dollar.

Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold-stock position in advance of seasonal demand growth.