How Seasonality Impacts the Gold Price
How can seasonality help spot bullish and bearish trends for smarter trading decisions?
Seasonality is an important concept that’s universal to several assets. In a nutshell, it quantifies historical periods where an asset showcases bullish and bearish traits. Understanding the ramifications is crucial because traders often use seasonality to guide their positioning. If the seasonal trend is bullish, you may want to think twice before opening a short position.
The gold line on the chart below tracks gold’s seasonal performance from 2002 to 2018, while the red line at the bottom quantifies the accuracy of each month’s move. In addition, the data accounts for the impact options expiration. As you can see, the start and end of the year are often the most bullish for gold, with sideways movement largely dominating from March through August.
What Are the Limits of Seasonality?
Seasonality is one of many tools that help analysts handicap the future path of gold. However, it should not be used in isolation. Several technical and fundamental metrics help determine gold’s future path and often supersede the seasonal implications.
For example, trend lines, moving averages, and indicators like the RSI, MACD, and Stochastic Oscillator are paramount when trading gold. Likewise, fundamental metrics like the U.S. dollar, real yields, and central bank policy can rapidly shift sentiment.
So, while gold may follow its seasonal pattern during times of relative tranquility, many other factors need to be considered, and we cover them extensively in our premium trading alerts.
Quantifying Seasonal Charts’ Accuracy
We noted how the red line on the chart above quantifies the accuracy of the seasonal data. And when the figure is at 90% or higher, it means that gold tends to rise or fall in that month 90%+ of the time.
If you analyze the red line’s movement, you can see that seasonal accuracy is highest at the start of the year and steadily declines before bottoming near the end of the year. This means that the reliability of the seasonal forecast is highest from January to March and lowest in November and December.
From a trading perspective, the data implies that long positions have a higher probability of success at the start of the year versus the end of the year. As a result, if you can build an investment case where the technicals and fundamentals support a higher gold price in January, the seasonality implications make the risk-reward proposition highly attractive.
The Impact of Options Expiration
Options have a measurable impact on gold’s short-term movement because they force dealers, hedge funds, and market makers to offset their positions. For example, if investors are bullish on gold and purchase a large amount of call options relative to put options, institutional options sellers will buy gold to hedge their exposure. Likewise, if put demand exceeds call demand, institutional option sellers will short gold to avoid suffering large losses during a decline.
Furthermore, since options expiration occurs on similar dates each year, the unwinding of these hedges can impact the gold price. If a large lot of gold call options are about to expire out of the money, dealers will sell their long gold hedges as they no longer need the protection. This can lead to large swings on the expiration day and is important to monitor if you trade gold at short intervals.
Crunching the Numbers by Quarter
While the original chart highlights gold’s seasonal performance throughout the year, we can also break down silver’s movement over a three-month timeframe.
Showcasing a similar trend, silver’s first-quarter seasonal chart shows a smooth path to higher prices, with an accuracy metric that declines as the quarter unfolds.
In contrast, the Q2 data below highlights the chop that gold realized from April through June, with higher volatility present despite mostly positive returns.
Moving on to Q3, gold tends to build a base from July to mid-August, before rallying sharply toward the end of the month. Then, a pullback often commences before gold ends the quarter near the high end of its three-month range.
Finally, while the fourth quarter also has bullish implications, gold’s performance volatility is higher than Q3, which creates more trading opportunities. As a result, October through December often presents us with ample opportunities to go long and short.
Annual vs. Quarterly Charts: Which Are Better?
Because the gold market is highly sophisticated, no one indicator can promise you profits. In reality, the more supporting indicators are in your favor, the higher your probability of success.
Therefore, annual and quarterly seasonal charts are best used in conjunction with each other, as the implications from one chart can support or contrast the other. Therefore, analyzing both allows you to wait for periods where the two charts signal the same outcome.
Moreover, by comparing the accuracy metric during similar timeframes and being aware of options expiration, you can improve your chances of a successful trade, which inherently improves your PnL.
Key Takeaways
- Seasonal charts are more accurate at the start of the year versus the end of the year and provide a solid foundation for spotting long and short opportunities in the gold market.
- Seasonal charts should not be used as stand-alone indicators, as many technical and fundamental metrics supersede seasonal factors. Therefore, you need to analyze a confluence of indicators to achieve trading success.
- You should consider options expiration if you trade at short intervals. The hedging behavior of dealers, hedge funds, and market makers can materially impact the gold price during certain periods of the year.
- Seasonality charts are best used by combining annual and quarterly data to help spot periods where both signal the same outcome.
- To stay ahead of the trend, consider our premium alerts. We cover every angle of the gold and silver markets from both, technical and fundamental perspectives. In addition, we post free daily articles if you want to learn more, or you can sign up for a free seven-day premium trial and cancel anytime.