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Gold Seasonal Trend Analysis, Is the 18 Month Consolidation Complete?

Commodities / Gold & Silver 2009 Aug 05, 2009 - 12:04 AM GMT

By: Bill_Downey

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleAnother month has come to an end in the gold market and it is always good to review where we’ve been and where we might be going.  For those of us who follow the market closely, you know how important it is to constantly review the important aspects of the market and to keep those aspects in the forefront. Even if you view from a distance, a good monthly review is essential to keep up with the price trends of the gold market.  The past 17 months sideways consolidation to a certain degree can sometimes put us in a frame of mind in gold that we get so used to the sideways trend that we might sometimes miss what is brewing underneath the market.


In this monthly update below you will read what I think is good evidence that this market is preparing for its next LEG of price movement.  Here’s the evidence I’ve gathered. 

 With all the information available these days it becomes very easy to forget about certain types of information one reads that is important.  We end up getting caught up in the markets and with all the data we look at, it is very easy to forget about the important things we’ve read or should be following. A lot of times, we remember them after the fact when a good sized move jolt’s our memory.  This is why it’s good to review some important indicators on a month to month basis so as to stay in tune with the markets as much as possible.   

In early July I wrote a mid year gold seasonal review and outlook for the 2nd half of the year. If you would like to review it its under the long term button or here:  http://www.goldtrends.net/Long%20Term.htm

This is a follow up to that update.

The chart below is a 29 (blue line) and 15 year (red line) seasonal average for the price of gold.  You can see for the most part that the 15 year average continues to follow the same trends that were established 30 years ago when gold became “free” to trade on the open markets. 

 One exception is over the past 15 years, gold on average makes a lower low in August than the July lows.  But not always as you’ll see.  The important thing for us to walk away with is not which will be the lower low, but the fact that the lows for gold on average (6 of last 8 years) occur sometime between the end of July and August.  The good news is since the BULL MARKET began (over the last 8 years) the gold price has only twice dropped below July’s lows.  The 15 year average (red line) shows that it is about equal with July in downside.  The chart further down this report will give you a good idea of July and August action.

  On average, we have arrived at the optimum time this year where gold usually makes its lows on average.  The key word here is on average.  For on a year to year basis, gold’s peaks and valley’s will remain in the same time frame but there are exceptions.   Price range will vary depending on whether gold is strong, weak, or Normal.  But every now and then, an “out of the box” event will occur such as we saw in 2008.  The September period as you can see is usually the strongest momentum of the year.  Last year however, gold got caught in the global liquidation of assets and price retreated 30%.  So while the ODDS are going to favor a rally hear (six of last eight years as you’ll see later), we have to remember that nothing is guaranteed.  

In a normal year, (such as this year so far) gold has been following the seasonal script very closely and it usually makes a trend change up right around this time.

As you can see by the seasonal chart, gold usually peaks in mid winter with the average time in the first two weeks of February.  The 2009 peak price was on February 17th at the 1007 area (the high for the year).  From there gold pulled back into the March timeframe coinciding with the seasonal chart as well.  In fact, this year we even had a price rally into May and a price peak the first week of June.   And it gets better.  From a June 5th-6th price peak,  gold sold off into the first week of July and then proceeded to rally up until the last week in July where price peaked at the 960 area.

Now notice if you will that the seasonal price chart shows a fast drop into the end of July and a hard bounce up to the beginning of August.  On Tuesday and Wednesday of July 28th and 29th this week, gold dropped hard and fast just like the seasonal chart depicts. To top it off gold reversed its downtrend on July 29th and by Friday’s close exploded right back up to the 960 area following average seasonal tendency on the charts back up into the beginning of August. 

Should gold continue to do what it does on average, the first two weeks of August seem to suggest there’s going to be a lot of choppy up and down action.  I can’t help but suspect a couple of price fake outs on both the upside and the downside.  I decided to take a look also at how the bull market has performed in the July/August time period since the bull began in 2001.

The monthly gold chart below covers this current bull market in gold.  The red arrows point to the month of August.  We can see how optimum this time frame usually is for Gold to be purchased.  On the chart there are two AUGUST sell-offs.  There was one in 2006 and one in 2008.  One was small one was deep.   What’s it going to be this year?

One thing that I noticed is that each correction (2006 and 2008) occurred during years where gold, on both occasions of the correction, had massive rallies leading into that time frame.  In fact they were the two biggest moves of the bull market to date.   In 2006 the low came in October.  But the real disaster on this chart was the failure of last year right in the month of August.  Although gold corrected with everything else, the true hidden strength of gold was demonstrated during that correction.  Look at the price bars. You can see on the chart that the drop in August, September, and October months each had a HIGH of 900 on the monthly chart. Then November, December and January all closed on their monthly highs.  So while the there was a drop of 30% from top to bottom, the price pattern seems to suggest that gold and was SO STRONG that although it was affected by the mass liquation/deflation, it’s price could not be contained lower and in fact a good look shows the drop was basically over in the first 90 days and gold then proceeded to march right back up to its highs!  Compare that to other markets. 

    NOTE: JULY BAR NOT SHOWN (July 958 high 903 low)

I’ve constructed a trend line off of the HIGHS of 2001 thru 2004 and the lows of 2006 and 2008.  Then I inserted a parallel from the 2006 high thru the 2009 lows and constructed a channel. As it turns out it really helps clarify the price action we’ve had during 2009.  From this technical perspective we see that gold has broken out above the channel and all year price has been supporting on the top of this channel.  

Now we can see how important the 880 to 900 level is on this chart.  For good measure and to allow for channel penetration, we could infer that MAJOR support is the 850-865 level for gold. This would make room for this years low at the 865ish area and allow for a 15 dollar penetration of that low.   Based on the monthly charts, if these areas fail to hold price, then the odds will quickly shift to a potential drop into October period.

I could not help notice what seems to be lack of support on the monthly chart below that 850 area and that channel line linking the lows of 2006-2008.  Is there any event that could spark a sell-off in gold?  I think the only thing that gold bugs need to be on watch for is another event like last fall that would trigger liquidation in most markets again.  CLOSES BELOW 880 should be viewed with extreme caution for the bulls………especially if everything else is selling off at the same time.

The table below summarizes my summation of the monthly spot gold chart

Year

Market Condition

Aug/Sept rally ?

Price Peak

Price Low

2001

Sideways/ $50 dollar range for whole year.   Apr & Sep only rally months

Yes

Sept

May & Sept/Oct

April

2002

Rally from Nov 2001 to May / then 3 month correct to Aug/Rally to yr end /August strong….then sideways to Nov. December was a big month

Yes

Aug/Sep

May & Feb 2003

August

2003

Rally from Nov 2002 peaked in Feb/low in April, bounce in may/selloff to July/August strong. (up 9 out of 12 months – 3 month down from Winter to spring). Best gains were in the fall.

Yes

Aug/Sep

February

April

2004

2003 rally peaked in March/ 2 month correct to May low/August strong & rally lasted to November – Slightly up for year. Best gains in the fall.

Yes

Aug/Sep

March and November

May

2005

Correction from Nov 04 to Feb 05 low, sideways to Aug/ Rally from Sept to yr end. /Aug unch from July – Strong up year. Major fall rally.

Yes

Sept

Nov 2004

June

2006

Rally from 2005 extends to May 06, June selloff/bounce to July & selloff to October then Rally to yr end./ August sideways /Sept to Oct selloff (contra seasonal)

No

Contra Seasonal

Correction

To Oct

May

October

2007

Rally from Oct 2006 to Feb high/one month down & April peak/Sideways to mid August & rally start.  August sideways but close on highs of month. Major fall rally.

Yes

 

Aug/Sep

Feb and April

June & August (June just a few bucks lower)

2008

Rally from Aug 2007 to March/2 month correction/rally to mid July & major selloff in Aug/Sep to October low.

No

Contra seasonal

Major selloff

March and July

October

2009

Rally from Nov 2008 peaked in Feb/low in April, bounce in may/selloff to July/ ----

Was big gain July 31st start of rally?

February

APRIL

Now that we have looked at the data, what can we glean out of it for our potential benefit?  Here’s what the data suggests to me.

1)  There is usually a mid to late winter peak.

2)  There is usually a correction in the spring.

3)  There is usually a bounce from the spring correction into the early summer.

4)  Once the bounce into summer is complete, there is usually a pullback or correction into the late July/August time period.

5)  A RALLY USUALLY BEGINS then, but sometimes is as late as Oct/Nov.

6)  Only two of the last 8 years has gold dipped below July/August during the year.  (2006 and 2008)

7)  In six of the last eight years, a rally has begun in the August/September time period. 

8)  In two of the last eight years, a correction began in July/August that lasted until October/November.

Observations:

1)  From Jan 2004 to August 2005 (18 months) the price of gold was virtually unchanged.  Then PRICE EXPLODED UP.

2)  From May 2005 to August 2006 (16 months) the price of gold was virtually unchanged.  (Then PRICE EXPLODED UP.)

3)  From March 2008 to August 2009 (17 months) the price of gold is virtually unchanged.    It is now August and it has been 17 months  ---------WHAT USUALLY HAPPENS DURING THIS BULL MARKET AT THIS POINT??  That’s right.  A significant rally. 

4)  The two times that prices corrected into October/November were in 2006 and 2008.   The year before the 2006 correction, prices rose from 425 to 725.   The year before the 2008 correction prices went from 650 to 1000.  Both corrections came after a major rally.  That is not the case this year.

5)  The entire bull market RALLY from 400 to 725 took place from September 2005 to May 2006 (10 months) and from September 2007 to March 2008 (7 months).   Thus the entire run from $425 gold to today is about 46 months.

6)  In those 46 months, all the gains came in 17 of those months. The rest of the time (29 months) were spent in a choppy sideways to lower price action.  (Now you know why some of you have had difficulty making a good buck. If we think about it, the most important thing we need to know to be successful is when the TREND has reverted back up for the next leg of price acceleration for gold)

7)  The best time to buy gold is the August/September time period.  This is when the majority of rallies start.  They aren’t necessarily from the lowest point, but they are of longest duration and strongest of rallies.  I’ve heard this is when the Jewelry market probably begins its ramp up for Christmas, and when India starts buying gold for the upcoming wedding season.  Major rallies develop when the investment public joins in at the same time.

Closing thoughts:

As long as we are above the June lows (920) and the JULY LOWS (903) and in conjunction with the upper channel line on the chart, the ODDS greatly favor a fall rally.  Should August fall below the JULY LOWS, and the channel line, it would raise a danger flag and would suggest caution and the potential for the current consolidation/correction to extend later into the fall.  Should all markets be in freefall and gold as well, odds suggest a test of the lower trend line.  Should August CLOSE the month on the highs, it would suggest the rally is probably under way.

What would confirm the rally?

Well, moves above last months 960 would certainly start things off.  But we must hurdle the winter and spring highs at the 990 – 1007 area, followed by the all time high at 1033.  But we need to exceed this area with conviction.  What I mean is that we need to see a few things during the rally.  We need to see gaps in price, long range days like last Friday and very high volume.  We need to see the mining stocks move above their RESISTANCE AREAS and ignite a rally that takes the lead in the stock market.  We need to see price close above the 1075-1100 area. 

If you would like to follow along with daily, weekly and monthly readings as well as commentary with regards to the gold and silver market and the key support and resistance areas where trend changes are defined, you can visit my FREE website, where there is no registration or log-in required at: http://www.goldtrends.net/

May you prosper

Bill

Bill Downey is an independent investor/ trader who has been involved with the study of the Gold and Silver markets since the mid 1980’s. He writes articles for public distribution for other newsletters and websites as well as his own free site at: http://www.goldtrends.net/
Email: Goldtrends@gmail.com

© Copyright Bill Downey 2009

Disclaimer - The opinion expressed in this report is the opinion of the author. The information provided was researched carefully, but we cannot guarantee its total accuracy. The report is published for general information and does not address or have purpose or regard to advise specific investments to anyone in the general public. It does not recommend any specific investment advice to anyone. 


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