Why Gold’s “Golden Opportunity” Is Bogus

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Metals

Almost everything in the market has a seasonality to it.

It’s a fundamental aspect of supply and demand. And it’s something all investors must realize.

I mean, there’s a reason winter jackets are on sale during the spring and summer.

In the past, I’ve shown you how the price of crude tends to move as a reflection of refinery utilization and peak demand seasons.

But a lot of other commodities have their own annual peaks and troughs too, including gold…

Since 1997, the best months for gold have been January and February. Then there’s a lull in the late spring and early summer months before picking up speed from August to October.

There are reasons for this. But the one that’s heralded as a “golden opportunity” for investors each year isn’t all that it’s cracked up to be.

I’m going to show you why, as well as show you the power of looking at near-term trends.

A Golden Opportunity?

Year after year, gold investors are told that India’s wedding season is a “golden opportunity” in the second half of the year…

They blindly follow this advice, never once looking at the data.

The problem is… everyone overlooks what’s actually taking place in India.

I’ve been warning about this “trend” for the past couple of years now. And as a trend trader, I know this is the most dangerous trap to fall into… because trends change.

As a reminder, Diwali, the Hindu “festival of lights,” happens each year in India in either October or November.

Gold is prominent in the festival. And Diwali overlaps the tail end of India’s wedding season, which also puts a heavy emphasis on gold.

With a population of 1.3 billion people, India is the second most populous country on the planet, behind China. So this seems like a very bullish opportunity for gold investors.

But let’s look at the facts…

Roughly 600 million people in the country make their living from agriculture. India’s rural farmers often take out loans to provide dowries and pay for weddings. In fact, suicides among India’s rural population have sadly increased as farmers have faced more financial ruin.

When gold prices are high – as they have been for almost a decade – India’s farmers are under a great deal of financial pressure. Because of this, we’ve seen a rise in popularity of hollow pieces of gold jewelry in the country.

It’s affordable and lightweight… and uses a lot less gold.

How big of an impact does this have? Well, last year, India’s gold demand was at its lowest since 2009…

We can see from the chart that India’s gold demand has cooled off each year since 2010.

On top of this, in November 2016, India’s Reserve Bank abolished notes of 500 rupees and 1,000 rupees. Also last year, India’s government demonetized a total of 15.44 trillion rupees, or roughly $240 billion. That’s 86% of all rupees in circulation.

And beginning April 1, 2017, the government enacted a ban on cash transactions of more than 300,000 rupees, or around $4,600.

These moves were part of a larger effort to rid the economy of “black money.”

India also introduced a Goods and Service Tax.

That was a headwind for gold demand. In fact, jewelry demand in India tumbled 22% in 2016. At the same time, Chinese jewelry demand – much like India’s – fell 17%.

Both countries have seen gold demand falling in recent years. Since 2013, China’s gold jewelry demand has tumbled 32.9% from 938.8 tonnes to 629 tonnes last year.

India and China account for half of global gold demand. So just how big of an impact do the two countries have on the gold market?

Gold jewelry demand fell 347 tonnes in 2016… India and China represented 273 tonnes of that.

Globally, gold jewelry demand fell to a seven-year low last year… almost entirely due to the continued declines in India and China.

The Pitfalls Long-Term Trends Hide

Now, I showed you the long-term gold price trend chart above. But here’s why, as a trend trader, you must look at the shorter term as well.

Over the past five years, the price of gold has fallen an average of 0.98% in October, 3.37% in November and 2.49% in December.

And these have been consistent losses during that stretch…

Further, when we look at the average monthly price movements of the SPDR Gold Trust ETF (NYSE: GLD), we see these struggles mirrored in the third and fourth quarters…

The trends are clear. Anyone who says India’s wedding season is an automatic boon for the price of gold is overlooking the short term.

In the first quarter of 2017, India’s gold jewelry demand surged 16% year over year to 92.3 tonnes. But that was compared to a spectacularly bad first quarter in 2016 when demand was a paltry 79.8 tonnes.

More importantly, those were two of only three quarters in the past decade when India’s gold demand has been below 100 tonnes.

Globally, gold demand has fallen 18% to start 2017.

That’s the reality.

But It Isn’t All Bad…

India’s gold jewelry demand fell by the largest amount on record in 2016. It appears to be a temporary phenomenon. And it gives us a bottom from which to move higher.

This year, India’s gold demand is expected to rise to between 650 tonnes and 750 tonnes – though no one is quite certain how the Goods and Service Tax is going to impact everything. By 2020, projections are for Indian gold demand to hit between 850 tonnes and 950 tonnes.

I do believe there’s a bullish uptick for gold. But the hype over India’s wedding season has been overblown. And investors shouldn’t buy into that…

The higher the price of gold, the more it affects demand, especially in key markets like India and China. It puts downward pressure on the price of gold…

It’s a continual give and take. And that’s just about the only trend gold investors can bank on.

Good investing,

Matthew

P.S. You can see how commonly held beliefs about trends and seasonality in the marketplace are often wrong…

Instead of relying on folksy “truisms,” I’ve mastered a system for spotting the seasonality of stocks. One of my picks is already up 32% in just a few months.

Click here to get in on the market-beating trends before it’s too late.