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.
As with everything else, there is a rider. This could well be a challenging September in India, the world’s largest gold consumer. The economic slowdown and gold prices near record highs have driven jewelry demand down 31 per cent in the second quarter compared to the same period in 2008.
On the other hand, the World Gold Council says India’s bank deposits saw 22 per cent year-over-year growth in the second quarter of 2009, so cash is available to be spent if the rupee price for gold weakens even slightly. The Council also expects the wedding and Diwali season to “underpin a seasonal improvement over the remainder of 2009.”
China, the world’s No.2 gold market, actually saw a year-over-year gold demand increase of 6 per cent in the latest quarter, with buyers favoring 24-carat gold jewelry for its quality and as a store of value. The WGC says that trend toward the purer form of gold should continue, though the third quarter is usually the low season for this segment of the market.
Best to hedge your bets.
A leading Irish brokerage house claimed that gold prices are on the verge of reaching $1,000 per ounce. The highest price ever achieved by the yellow metal was $1,030 per ounce - a level it reached in March 2008 - but it now appears to be eyeing four-figure territory again.
GoldCore has explained in a note quoted by Bloomberg that anyone with a Gold Investment is likely to benefit from another another surge upwards in the next few weeks.
Last week, Marshal Berol of the Encompass Fund, which has a 9.63 per cent equity position in Seabridge Gold - a company involved in nine North American gold projects - predicted that inflation will return with a vengeance when the recession comes to an end.
“There are a lot of reasons we believe that the demand for resources will continue to expand. It’s supply-demand in the case of gold,” he said. “It’s the storehouse of value. There’s the inflation aspect. We’re not of the camp that thinks deflation is here to stay, or that there’s not going to be some decent growth globally.”
Canadian stock markets closed higher Wednesday as a sudden surge in the price of gold propelled the S&P/TSX global gold index to a 10 per cent single-day gain. The December gold contract jumped $22, or 2.3 per cent, to US$ 978.50 an ounce, its biggest bounce in five months. Gold stocks shot higher, with Barrick Gold (TSE:ABX), the world’s largest producer, climbing $3.29, or 8.5 per cent, to $41.93, Vancouver-based Goldcorp (TSE:G) rising $3.91, or 9.8 per cent, to $43.86, Agnico Eagle (TSE:AEM) gaining $6.83, or 11 per cent, to $69.15, and Kinross (TSE:K) finishing up $2.20, or 11 per cent, at $22.90.
Among juniors, New Gold (TSE:NGD) rose 36 cents, or ten per cent, to $3.93, Gammon Gold (TSE:GAM) added 89 cents, or 12.5 per cent, to $8.00, and Evolving Gold (TSE:EVG) jumped 20 cents, or 14 per cent, to $1.60.
Amongst the actively traded stocks on Thursday were Eldorado Gold Corp (TSX:ELD), a miner, which was up 40 cents, or 3.37 per cent, to $12.27. The Vancouver miner’s shares continued their ascent following the announcement last week of a stock-swap deal to buy the rest of Australia’s Sino Gold Mining Ltd. The friendly, $2-billion deal expands the Canadian international miner’s presence in China, one of the world’s major gold mining countries.
Yamana Gold Inc (TSX:YRI), a miner, was up 42 cents, or 3.72 per cent, to $11.72. The gold sector led the surge on the subgroups, up almost five per cent. Centamin Egypt Ltd (TSX:CEE), a miner, was up 15 cents, or 8.82 per cent, to $1.85. Iamgold Corp (TSX:IMG), a miner, was up $2.20, or 15.94 per cent, to $16.
Rise & shine
In London, gold and silver climbed to three-month highs as a weakening dollar boosted demand for the precious metals as alternative investments. Gold advanced 2.3 per cent Wednesday, the biggest gain since March 18, as equities and the dollar declined. The US currency fell as much as 0.4 per cent against the euro Thursday.
“The euro has picked up again,” said David Barclay, a metals analyst at Standard Chartered Plc in London. Immediate-delivery bullion advanced as much as US$6.40, or 0.7 per cent, to US$ 984.90 an ounce, the highest since June 3. It traded at US$ 983.40 by 11 a.m. local time.
December gold futures were 0.6 per cent higher at US$ 984.80 an ounce on the New York Mercantile Exchange’s Comex division. Gold has climbed 12 per cent this year as the US Dollar Index, a six-currency gauge of the greenback’s value, has slipped 3.8 per cent.
In New York, gold for December delivery jumped $19.20, or 2 per cent, to $997.70 an ounce on the New York Mercantile Exchange, after earlier hitting a six-month high of $999.50. Prices have added about $44, or 4.6 per cent, over the past three days, breaking free from two months of wayward trading between $930 and $970 an ounce.
Silver prices, which have trailed gold this year, got a boost as well. December silver soared 6 per cent, rising 92.5 cents to $16.29 an ounce, after earlier hitting $16.31, its highest point since August 2008. Silver prices have surged more than $2, or 14 per cent, in just five days.
The surge in gold is a sign of how jittery investors have become. The rise this week coincided with a pullback in stocks as investors worry that a six-month rally of as much as 50 per cent has overshot the economy’s recovery.
“This is telling you that the bull case for equities that a lot of people have been skeptical about has run it’s course and a lot of people are putting more money in gold to balance their portfolios,” said Adam Klopfenstein, senior market strategist at Lind-Waldock, a futures brokerage.
Vista Gold Corp has announced updated mineral resources for the Guadalupe de los Reyes gold project.
Blue Note Mining Inc has said that it intends to raise up to 2,400,000 flow-through common shares at $0.25 for gross proceeds of up to $600,000, and up to 3,000,000 non flow-through units at $0.20 for gross proceeds of up to $600,000, for a total private placement of up to $1,200,000.
Joseph Kahama has been appointed president of Tanzanian Royalty Exploration Corporation, which specialises in the acquisition and exploration of natural resource properties. The Canadian company, which was formerly known as Tan Range Exploration Corporation, is primarily engaged in exploration for gold properties in Tanzania.
Lake Victoria Mining Company (OTCBB: LVCA) has received positive results from the initial metallurgical studies conducted on tailing samples from the company’s Singida Gold Project, central Tanzania. The tailing samples assayed 4.65 grams per metric ton gold, and initial leaching tests resulted in an extraction of 86.6 per cent of the gold.