29 August 2008

Gold Doesn't Fall in the Fall

As this rather autumnal August comes to a close, Trader's Narrative offered up a seasonal trade in gold worthy of consideration:

According to historical seasonality, one of the best instances of such
trading opportunities in gold is about to set up:

As you can see, for most of the year gold goes sideways, flopping around and making everybody dizzy. Then towards the end of August and the beginning of September, it rockets up almost vertically only pausing a bit to finally close the year strong.

Gold doesn't fall in the Fall.

This trade thesis now has a catchy tagline. But does it hold up?

I dove into the decomposing leaf piles at Seeking Alpha to find this post, corroborating that this phenomenon exists.

Below are my own annotated charts of the weekly price of gold throughout the aughts. Click on the images to make them large and the writing legible. You should see that the seasonal trade was successful (and profitable) six of the last eight years. The other two years were basically flat. In this market, a record of six wins, zero losses, and two ties ain't too shabby a risk/reward scenario.

How will I take advantage of this trading opportunity? Presumably GLD, the SPDR gold ETF.

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