Many investors watched the gold rally this year, vowing to get in on a pullback. But they haven’t gotten a chance to buy. Gold is up more than 20% since the end of April.
There just hasn’t been a pullback.
However, there is good news for those who missed the rally. Historically, gold and gold stocks are weak in September.
The chart below shows the monthly trend in gold investments:
(Source: Trade Navigator)
The blue bars display how often gold futures rose in each month. The orange bars show the same information for SPDR Gold Shares (NYSE: GLD). And the green bars show the trend in the Arca Gold BUGS Index (HUI), which is an index that tracks shares of gold mining companies.
Gold futures, GLD and HUI are three of the most popular gold investments. Today, I briefly discuss their differences and the best months to benefit from a pullback on prices in all three.
Squeezing Extra Gains Out of Gold
GLD is now a cheap and an accessible way to own gold. But it has a relatively short history. Gold futures have traded since 1974. That’s shortly after the U.S. dollar went completely off the gold standard, an event that reset the gold market.
Like futures, gold miners offer a leveraged investment in gold.
Here’s an example of what I mean by that. Consider a mining company that spends $1,000 an ounce to produce gold. This miner produces 1 million ounces a year. If gold trades at $2,000 an ounce, then the company earns $1,000 an ounce in profit (or $1 billion).
If gold increases to $2,200 an ounce and costs remain the same, then the miner earns $1,200 an ounce (or $1.2 billion). Earnings increase 20% as the price of gold increased about 10%.
In this example, the miner offers more than two-to-one leverage. A 1% increase in gold prices results in a 2% increase in the earnings of the mining company.
This leverage gives gold miners a way to squeeze extra gains out of gold. But increased volatility boosts the risk of the investment.
Gold’s Best Month of the Year
Many investors meet their gold needs with one of these investments. Although all three tend to move in the same direction over the long run, there are some differences in the short run.
August is the best month of the year for all three investments. Pullbacks in all three tend to occur in September and October.
Knowing this could help investors who missed out on recent gains in gold. It could also help investors looking to add to their gold investments.
So remember, it’s possible that we’ll see a pullback in the fall. Investors should wait for this time as a buying opportunity.
But also keep in mind that the pullback could begin with gold at a much higher price if it delivers its typical August gain.
There is still time for gold to rally even higher by September. So, investors interested in gold can also consider buying a small amount now to avoid missing out on gold’s next big gain.
Michael Carr, CMT, CFTe
Editor, One Trade
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