Gold Seasonality: Can We Profit From It?

Seasonality is observable in a wide variety of variables. In business, sales, production, inventory, man hours and the best time to discount can be at least partially predicted by seasonal effects. Gold is no different. In different months price swings occur somewhat predictably year after year. What causes this, to what magnitude does it occur and most importantly – how can we profit?

As we all know, two things affect the price of all things tangible and intangible – supply and demand.

On the supply side, Gold stays remarkably fixed. It is mined at a very consistent rate year round with factors such as weather and temperature having much less influence than other markets such as soft commodities. In addition to this, supply can only vary rather gradually from a mining standpoint, given that it takes around a decade to bring a new find into production. However, any seasonality in the gold price must be attributed to variations in supply and demand during different times of the year, since supply could also be increased by non-mining entities, such as investors selling their holdings.

Below is the average monthly trend in gold prices since 1969. To find this, we simply add the returns for each month in every year since 1969 and divide them by the number of observed years – 43.

To construct this graph we create an index for gold prices. Day one of each year is set as the base of 1.00. Each successive day is compared to the previous; if day 2 is higher than day 1, the index rises by the percentage increase over the two days, and vice versa.

 

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Fed Action Will Decide Next Major Move For Gold

As our regular readers will know, we view US real interest rates as the key determinant of gold prices over the medium term. Six weeks ago we updated the situation with U.S. real rates (discussion of the theory behind the relationship can be found in that article) and since then, we have observed the gap between gold and real rates closing.

At the time of writing in our December update, gold had bottomed from its biggest correction since September. Since then the precious metal has regained some ground, especially in the last few days on the back of the latest Federal Open Market Committee (FOMC) announcement.

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SK OptionTrader Subscribers Enjoy 71.58% Profits in 43 Days

As 2012 begins, SK OptionTrader subscribers can enjoy banking a profit of 71.58% on our recently closed GLD $155/$150 vertical put spread. For those of you unfamiliar, a vertical put spread is a strategy put in place by buying a put at a lower strike and selling a put at a higher strike, both for the same month. This results in receiving our net credit of $2.15.

After gold prices became heavily oversold in December we saw a buying opportunity and opened this position on the 12th December 2011. We signalled to our subscribers to “...sell GLD Feb 18 '12 $155/$150 vertical put spreads at $2.15 with 10% of our capital allocated to this trade”.

As gold prices recovered the profits on this position grew, so on 27th January 2012 our subscribers received this, “We hereby signal to close our short GLD Feb 18 '12 $155/$150 vertical put spread positions at $0.11”, meaning that we had banked a 71.58% gain in just 46 days.

That means that if you had invested $1000 in this trade, you would have paid for a 6 month subscription more than 3 times over!

As you can see from the above graph, gold rose around 10% over the same time period that this vertical put spread made over 70%. This kind of performance demonstrates that options are one of the best vehicles for accessing the gold market.

Our options trade outperformed gold by 7 times!

We are happy to have banked profits of 71.58% and 33.97% by closing our short positions on the GLD Feb-12 $155/$150 vertical put spread. We placed these trades when gold was just above and just under $1600, in the midst of a correction which had many calling an end to the gold bull market. We did not think the bull market in gold was over and therefore placed these trades. In our opinion we think we were rewarded handsomely for essentially just speculating that gold would be trading around its 200dma in early 2012. We took on what we viewed as a limited, low-medium risk trade in return for a reward that we would more consider appropriate for a medium-high risk trade. As always we look for trades with attractive risk-reward dynamics and this was a textbook example of the type of trade we look for.

Currently the SK OptionTrader model portfolio is up 446.55%, which means a $10000 portfolio invested in accordance with SK OptionTrader signals would now be worth $54,655.11. On average our positions gain 36.68% in 50.48 days, which provides an annualized return of 98.38%. If you would like to see a full record of our previous trades, feel free to check out our trading record. With exciting new opportunities like this arising, now is the perfect time to open a subscription with SK OptionTrader and begin increasing the profitability of your options trading portfolio.

For those subscribers who are too busy to trade their own accounts we are now able to offer an autotrading program with our SK OptionTrader service, as we are pleased to announce that we have entered into a partnership with Global AutoTrading and eOption, therefore auto trading is now available for SK OptionTrader signals.

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BENZINGA RADIO: Exclusive Interview with SAM KIRTLEY of SKOPTIONSTRADING

Following the publication of our recent research into the behaviour of gold both intraday and overnight, Benzinga Radio very kindly gave us the opportunity to discuss this phenomena via an exclusive interview with Sam Kirtley, which we hope that you find both interesting and informative.

Sam Kirtley first presented the short intraday / long overnight gold trade that has yielded astounding returns since 2001 in two articles: one posted in August 2010 and the other earlier this month . We spoke with him to get further insight on the trade and the new fund that SK Options Trading has in the works. 

In 2010 you first presented the idea of an overnight gold fund, citing your calculations that a $100 million hedge fund, starting in 2001 and going long gold on the PM to AM fix and short on the AM to PM fix, would be worth 2.6 billion dollars today. Talk to us about how you discovered this trade and what you have found out.

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What Does A Flattening Yield Curve Mean For Gold?

In this article, we look to analyse the relationship between gold and the U.S. bond yield curve. The yield curve is an immensely useful economic indicator and hence can be used as one of the determinants of the gold price.

We have previously covered yield curve dynamics, for a refresher the following excerpt should aid in comprehension of this article.

“For those readers who may be unfamiliar with how the yield curve works, we will provide a brief explanation. Bonds of different maturities have different yields. By plotting these yields against their maturities we can build a yield curve. The yield curve becomes steeper if longer term interest rates increase relative to shorter term interest rates. The yield curve becomes flatter if longer term interest rates decrease relative to shorter term interest rates. One way to measure the steepness of the yield curve is to look at the difference between the yields at two different points on the curve. For example one may look at the difference between the yields on 2 year Treasuries compared to the yield on 5 year Treasuries. Such a comparison will often be referred to as “2s5s” and is measured in basis points (bps) by subtracting the shorter term yield from the longer term yield. So if one says “2s5s are trading at +225” this means that the yield on 5 year bonds is 2.25% higher than the yield on 2 year bonds. If 2s5s go from +225 to +275 then the yield curve has steepened between those two maturities. If 2s5s go from +225 to +175 then the yield curve has flattened between those two maturities.”

Intuitively, one would expect a flattening yield curve to be bullish for gold. Flatter yield curve = economic weakness = safe haven assets (gold) becoming more valuable, especially if such weakening in the economy is followed by monetary easing, or increased expectations of monetary easing. As with any hypothesis, this one is useless without being tested.

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