Late Summer Opportunities in Gold

The end of summer historically presents a buying opportunity for gold investors.

On the dark line on the chart below, measuring the Comex futures contract for December delivery over the past 15 years, you can see that the relative strength of gold bottoms out in late August and early September. The lighter line shows the historical pattern over three decades, with the late-summer period (circled in red) being one of the weakest times of the year.

Gold prices have risen every September since 2000 as investors in Europe and North America wrap up their summer holiday season and a cluster of holidays take place around the world for which gold is bought and given as gifts.

December Gold (CMX)

Historical Patterns (1975-2006)

India is the world's largest market by volume for gold jewelry, and jewelers there typically begin stocking up on gold for that country's most important festival, called Diwali, which this year comes in early November.

Around the same time—after the monsoon rains and before the weather gets hot and dry—is the prime period for weddings in India. Gold, in the form of intricately crafted jewelry, is a traditional gift for Indian brides whose parents want them to have not only something beautiful they can wear, but also an enduring financial asset.

It's been estimated that up to 70 percent of gold jewelry sales in India occur during the wedding season, and as rapid economic growth expands that country's middle class, it is not unreasonable to think that gold demand will grow as well. A recent story by Reuters stated that those in the Indian gold jewelry industry expect demand to hold up well as long as prices remain below 9,000 rupees per 10 grams, which currently equates to about $685 per troy ounce.

The second largest market for gold jewelry by volume and the largest by retail value is the United States, according to the World Gold Council. The greatest demand is seen late in the year—not only from Christmas shoppers, but also from Indians and other prosperous immigrant communities that have brought their cultural affinity for gold to their new homeland.

In mid-September, Muslims will begin their most important holiday season—the month-long observation of Ramadan. Fasting, prayers and introspection are stressed during Ramadan, but the end of the solemn holy month is marked by Eid ul-Fitr, a period of celebration and gift-giving. And in late December comes Eid ul-Adha, a four-day festival of sacrifice that also features the giving of gifts. Reduced gold-price volatility and "lifestyle" marketing is credited with raising demand across the Middle East this year.

In China, where gold is viewed as a symbol of good fortune, a major shopping spree for gold is expected around October 1 to accompany National Day, a weeklong celebration. This would add to the strong gold demand already seen since February, the start of the Year of the "Golden Pig', an auspicious year that comes around only once every six decades. On top of that, with the 2008 Summer Olympics taking place in Beijing, brisk sales of commemorative gold bars have been reported.

The World Gold Council reported that gold demand in mainland China, Hong Kong and Taiwan was up nearly 30 percent in the second quarter of 2007 compared to the same period a year earlier. Along with jewelry, gold mementos in the shape of pigs have been popular gifts. Chinese New Year in 2008 falls in early February, and jewelers will be stocking up for that occasion as well.

Going back to the chart, we can see these demand drivers at work. The 30-year and 15-year trend lines both show a sharp spike in relative strength in the early fall and then another one in the final six weeks of the calendar year.

Based on the long-term record, this time of year may represent a good entry point for those who want to buy gold in advance of a seasonal upswing in demand. Managing expectations by using historical patterns can improve the chances for success but of course it doesn't guarantee against losses.

For more insight on investing strategy, I suggest you read Michael Mauboussin, chief investment strategist at Legg Mason Capital Management. He writes extensively about investor behavior and suboptimal decision-making. One of his most valuable observations in his May 2007 article "Turtles in Omaha" is on the importance of following consistent processes when investing: "What separates good from great investors is not knowledge or raw smarts, but patterns of behavior."

Mauboussin's work, including his latest article on why cash flow may be a better indicator of corporate health than earnings, is available here .

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