Gold and bullion-backed exchange traded funds, such as the SPDR Gold Shares (NYSEArca: GLD), have not treated investors well this year. GLD, the largest gold ETF in the world, is down nearly 8% over the past 90 days and has bled over $1.2 billion in assets this year, but seasonal factors could allay some of the yellow metal’s troubles.
As ETF Trends reported on Wednesday, seasonal factors could bring some upside for GLD this month. In August, gold has finished in positive for four of the past five years. Gold has also produced a 6% average return over the past five years. Additionally, miners also generated outsized returns during August after recovering from a July sell-off. [August Sector Ideas]
Gold futures and physically-backed ETFs have been pressure this year amid speculation the Federal Reserve is preparing to raise interest rates, which has pushed the dollar higher. Higher interest rates would diminish gold’s attractiveness since the precious metal does not pay interest like fixed-income assets.
Timing the long gold trade based on seasonal factors is integral to the trade’s success.
“Seasonally, there is a strong price period for gold (shaded in yellow in chart below) from late August until late September or early October as demand increases when jewelers again stock up ahead of a the seasonal wedding event in India and also, when investors return from summer vacations,” according to Almanac Trader.
According to the World Gold Council, India imported 891.5 tons of gold last year while demand was 811.1 metric tons. The council believes consumption will increase to between 900 tons and 1,000 tons this year. [India Unlikely to Stem Gold’s Decline]
However, traders should note that while the gold seasonal trade has worked better than half the time over the past four decades, the odds of success are not overwhelming.
“Entering long positions on or about August 26 and holding until October 1 has worked 23 times in the last 40 years for a success rate of 57.5%. In the 18 years since 1996, this trade has been profitable 13 times with a cumulative potential profit of $18,640 per single futures contract,” according to Almanac Trader.
Moreover, some of the trades worst performances arrived in recent years with big losses in three of the past four years, including 2014, notes Almanac Trader.
SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.