October Is An Ugly Month For Gold

Gold edged up today, on investor expectations for continued strength in the yellow metal linked to recent ‘stimulus’ packages employed by central banks globally.

With all major central banks now engaged in some form of QE, we now have ‘QE Everywhere’ and the race to competitively devalue national and supranational currencies has intensified.

In the ‘beggar thy neighbour’ great game that is the global currency war, the only winners will be those that are fully diversified with physical gold and silver and those that own their bullion and other assets in the safest ways possible.

German business sentiment dropped for a 5th straight month this September. The Munich-based IFO Institute’s Monthly Sentiment Index hit its lowest level since early 2010 and the outlook component hit its worst level since May 2009.

The sentiment highlights the scepticism that many German companies have towards Mario Draghi’s plan to ‘stimulate’ the European economy.

The German experience with ‘stimulation’ was not a pleasant one and they are rightly wary of inflation and currency depreciation.

With the eurozone debt crisis dragging into its 3rd year, it is inevitable that Germany would begin to feel the pain that other countries have been living with for the past few years. However, German businesses and tax payers are increasingly concerned about the risk that contagion poses to the German bond market, economy and the single currency.

In recent weeks, gold and silver have seen the strong gains that were anticipated by the bulls.

Gold is 11.5% higher and silver is a sharp 24% higher in the last three months alone.

In the past month silver is up 11% and gold is up 5.7%.

As in all bull markets - two steps forward are often followed by one step back and a period of correction and consolidation is quite possible.

This week will see the end of September trading and September is, along with November, one of the strongest months to own gold.

Next Monday (October 1st ) we commence volatile October and October is one of the weakest periods for gold and has often seen sell offs (See Graphics). This may be due to gold’s short term correlation with equities and October can often be a brutal month for stocks.

Traders might be advised to tighten up stop loss positions and or take profits. The majority of investors should continue to buy and hold as selling and buying again incurs costs and there is always the risk that October may see gold strength – especially this year given the very strong fundamentals.

However, investors who wish to book a profit and were considering selling, for whatever reason (sometimes out of necessity), would be advised to try and sell prior to October.

After the very strong gains in stock markets in recent years there is a real risk of a stock market correction now and gold could again show short term correlation with stocks.

We believe that while a correction in stocks and gold is quite possible we do not believe it will be significant for either asset class and the risk of a 16.8% fall in gold as was seen in October 2008 is quite low.

Should a correction materialise very strong support will be seen at the $1,600/oz level.

However, we think that gold may come under pressure in the run into the U.S. Presidential election on November 6th and therefore advise caution until early November.

For more information on gold’s monthly performances over the last 11 years and over the last 40 years, see our recent blog ‘September And November Best Months To Own Gold’.