Looking at data from the past five years, a clear pattern emerges in the seasonality of gold prices. September was consistently weak, with gold prices often closing lower than they opened, suggesting a decline in market confidence and a shift in investment focus. In contrast, July saw increased purchasing, which likely led to gold prices closing higher than they opened.
Could gold prices’ spring slump be poised to turn into a higher high?
Recently, the gold market has undergone a change, breaking out of a long-term key area and maintaining a strong bullish trend. Despite this strength, there was a notable correction, with the price peaking in April 2024 and retesting in May 2024 before dropping back into a trading range. This consolidation phase is significant as it sets the stage for a seasonal bottom to form, which could then be followed by a strong rally. Investors/traders should recognize this pattern and be prepared to potentially invest near these seasonal lows to take advantage of the uptrend that usually follows.
Source: Barchart
Federal Reserve Chairman Jerome Powell spoke yesterday, and the market took his response as more dovish on interest rates, leading to buying of gold, which today traded around $2,371 per ounce based on the August futures contract. Chairman Powell noted that the US economy is gradually slowing, but stressed that more data is needed before considering cutting interest rates to ensure that recent low inflation figures reflect the state of the economy.
In labor market news, U.S. job openings rose more than expected in May, after sharp declines over the past two months. Despite the increase, the data indicates that labor market conditions continue to ease, which could lead to lower interest rates. Investors are eagerly awaiting the June FOMC minutes later today, and the nonfarm payrolls report on Friday, which will provide further insight.
Some of today’s bullish price movement may have to do with geopolitical events in the Middle East. Israel has warned Palestinians to evacuate in preparation for possible attacks. Traders are favoring long positions over short positions in gold ahead of the extended holiday period. US markets will be closed on Thursday for Independence Day. Trading volume is expected to be lower on Friday as traders take an extended break until next Monday.
Commitment of Traders (COT) Report
Source: CMEGroup Exchange
Managed Money Trader’s COT report confirms the prevailing uptrend in gold. Managed Money Trader is typically a trend follower. The yellow line represents the gold price, showing successive higher highs and lower lows. Importantly, each of these new highs has resulted in new long positions for Managed Money Trader (blue bars). New buying with each new price high is a bullish confirmation of trend activity.
Another bullish development is that managed money traders are holding 198,000 long positions so far this year, a significant increase from the 122,000 long positions held during the same period last year. Current long positions make up 28% of total open interest, compared to 21% last year.
Managed money long positions are nearing a four-year high, but are still well down from the 2019 high of 308,000 long positions, leaving room for further buying as the trend strengthens.
Gold’s performance has been noteworthy, with a 6-month return of +9.77% and a 52-week performance of +14.43%.
Seasonal patterns
Source: Moore Research Center Inc. (MRCI)
Typically, MRCI surveys lean towards 15-year patterns. However, since the pandemic, many markets have changed their recent seasonal patterns, which are indicated by 5-year patterns. Gold is no exception in this regard. The red line is the 5-year pattern for gold prices. We are now looking at price trends over this period. July was a significant low before gold entered a visible uptrend after stabilizing in the previous months.
In my recent Barchart articles “Seasonal downward interest rate trend gains momentum” and “Long-term yields trending lower – mortgage rate cuts imminent”, I explained how a seasonal pattern of declining interest rates occurs between June and August. Gold is highly correlated with interest rate prices. When interest rate prices rise, yields fall, often making gold a more attractive investment. The July seasonal pattern above shows that gold prices rose significantly during the month of July. Is this a coincidence? Not if you believe in probability.
Source: Barchart
We’ve overlaid the MRCI’s five-year seasonal pattern on the gold price so far this year: Notice how this year’s highs and lows line up well with the five-year seasonal pattern.
Currently, gold is trading near the lower end of the channel. In an uptrend, this setup could be a low-risk trade. Alternatively, traders can wait for a clear uptrend and then enter the market. This is not a trade recommendation, just a thought for you to explore on your own.
It is important to keep in mind that while seasonal patterns provide valuable insights, they should not be the sole basis for trading decisions. Traders should consider other technical and fundamental indicators, risk management strategies, and market conditions in order to make informed and balanced trading choices.
lastly….
The gold market is in a consolidation phase, signaling a seasonal bottom that could pave the way for an upswing. This pattern is consistent with past seasonal trends that typically see lows in July preceding a significant uptrend. A combination of dovish comments from Federal Reserve Chairman Powell, easing labor market conditions, and geopolitical tensions have supported gold’s recent bullish momentum.
Additionally, trader commitment reports indicate strong interest from money traders, further reinforcing the bullish outlook. Despite the recent correction, market fundamentals remain sound and seasonal patterns suggest promising times ahead for gold prices.
As always, seasonal trends provide valuable insights but must be complemented by thorough analysis of technical and fundamental indicators. Investors and traders must remain vigilant in order to take into account all factors to make informed decisions and capitalize on potential opportunities in the gold market.
More metals news from Barchart
On the date of publication, Don Dawson did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information please see Barchart’s disclosure policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
