Can Gold Go Higher?

Source:

". . .history says, yes."

Many argue that 2010's gold run is over, however our research suggests otherwise. Some key factors suggest a move higher before year-end. . .

Historic Trends

Since 2001, gold has posted a gain in November/December every single year; and these gains comprise a significant portion of the total yearly gains, with an average of 43.65% of the years' total gains since 2001. Although gold is often sitting at or near its yearly highs at the end of September, gold didn't reach its peak until December in six of the last nine years, suggesting that it still has room to run this year.

Seasonal Factors

While the historic trends show gold experiences a strong year-end seasonal cycle, they don't indicate why. The two most common arguments are stock market activity and jewelry buying. Investors who argue that gold's September strength comes from the "anti-risk trade" may have a case but it fails to explain why both stocks and gold show strength in the November and December months.

Despite the influx of specialty ETFs and retail investments, about 50% of gold demand still comes from jewelry—over half of which originates from India and China. India's gold demand is strong during seasonal festivals, Akshaya Trithiya (late April–early May) and Diwali (mid-October–mid November). Diwali is generally cited as the main driver of year-end gold strength.

Currency Tension and Cyclical Trends

With China's ongoing effort to keep its currency artificially low, other countries have also recently begun selling their currencies. This devaluation competition also benefits gold. Despite selling their currencies, it is interesting to note that central banks have also almost stopped their sales of gold. Gold sales haves dropped to their lowest level since the signing of the Central Bank Gold Agreement in 1999, which was purposefully implemented to limit gold selling.

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