Photo: Flickr via bogenfreund
September and November are the only months with “positive and statistically significant gold price changes,” according to a study by Dirk Baur, University of Technology.Baur studied gold returns for every month from 1980 to 2010, and found that this “autumn effect” depends on a number of risk factors including hedging demand by investors, gold jewelry demand in India, and shorter daylight hours.
Here’s a breakdown of some of those factors by Baur:
- The fear trade – Gold prices surge when investors fear weak stock market or poor economic performance like higher inflation or a continued recession. While this is unlikely to happen at the same time every year, investors know that some of the most extreme periods of financial turbulence took place in the months of September and October (e.g. given the stock market crash of October 1987, the Asian financial crisis in October 1997 and the global financial crisis of September and October 2008).
- The Halloween effect – It is also possible that investors buy gold as a hedge against market losses before they heavily invest in stocks i.e. the period between November and May establishing the ‘Halloween effect’ or the ‘sell in May and go away effect’. In this case demand for gold could be higher in the months leading up to the Halloween effect.
- Changes in central banks’ demand for gold – Western central banks have for over a decade had the Central Bank Gold Agreement which defines the amount of gold that may be sold by central banks. The agreements previously ended in September and this could have a significant impact on gold demand and prices in September. That being said it is unlikely that central banks would concentrate their trades in one month preceding the expiration of the agreement.
- Recurring cultural events – Another seasonal impact on gold prices is recurring cultural events like India’s wedding season or the Christmas season. Remember jewelry demand dominates investment demand.
- Winter Blues – A more bizarre factor is that gold is more attractive in the months representing autumn i.e. September, October and November since the largest equity markets are in the northern hemisphere which have shorter daylight hours starting August. “The colour and complexion of gold may be viewed as a substitute for the decreasing amount of sunlight in these months,” writes Baur.
Bottom line: Baur sees a seasonal anomaly in gold returns in the autumn season and says more research will reveal whether such an autumn effect is short-lived or will persist.
[h/t Jason Zweig]
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