INTERVIEW: Gold's Buy Season is Coming

From October 2020

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Precious Metals have a seasonality little understood by those outside the Bullion Bank professional community. Yet both a "buy" and "sell" season do exist based on investor flows and bank allocation recommendations. Gold and Silver are not grown or harvested, but their price action is susceptible to the weather of investor demand. Yearly investor flows can be as reliably handicapped as any weather-based seasonality.

What Are The Seasons?

Authored by Vince Lanci of Echobay Partners

There is a sell season and a buy season. Both are tied to investor flows. Both are known by the asset allocators and bullion banks. And both, in absence of an external event, are dominant drivers of market behavior annually.

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Sell Season

Most institutions end their fiscal year on the calendar year. Some end it earlier, as early as November right after Thanksgiving Additionally many Portfolio Managers, especially those having a good year, tend to pull in reins to preserve profits. They start to book profits and reduce exposure to avoid jeopardizing their own year-end bonuses. When you combine institutional de-risking with a Portfolio Manager's desire to preserve his own P&L, the result can be a pronounced move counter to the market's prior trend.

Now add in the fact that the December contract in Gold and Silver have the longest duration before rollover in their respective products and you can better see why the open interest in those contracts gets so much bigger than the other expirations. Less rollover means less discernable contango tax. Longer duration means less maintenance. And there is plenty of industry side liquidity from hedging producers and end-users.

Flow Trading the Sellers

So, bigger open interest plus end of year profit booking equals selling pressure between August and November. Many speculative longs and asset allocators exit positions between September and November. This seasonality has been around forever in Gold and Silver. But it has become more pronounced in recent years because of the increased interest in the markets. The more interest, the bigger the flows. Bigger flows generate more temporary distortions and thus more opportunity. Bullion banks and smart prop firms know this and if hedge funds start to make their way to the exits during this period - there usually is a fire sale.

Buy Season

Sometime between beginning of November and end of December, asset allocators begin announcing recommendations to their clients for the coming year. These are usually macro percentage allocations like "5% energy, 10% bonds, 70% stocks" and so forth. It is at this time you begin to see the precious metals market begin to turn around based on the allocations suggested by firms.  This serves as catalyst for new money to pull the trigger on its trades. Even better; when the percent allocation increases for an asset, say 5% to 10% for metals, there is more buying.

Silver Too?

This is "buy" season and it happens every year not just in metals, but in all commodities. Its effect is historically most pronounced in Energy and Gold. 

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It is a big factor in Silver, but harder to identify because of Silver's unique status as: speculative, economic/industrial, and monetary qualities. More importantly. silver is very subject to open interest being lopsided and this frequently trumps allocation flows. Plenty of times the OI in Silver was lopsided short and the "sell season" in gold was "buy season" in Silver. Basically, the whole seasonality between August and December is "close your book down when you can".

Flow Trading the Buyers

Somewhere between the recommendation report's creation and the actual investor action lies the trade to be made. If you trade at a bank or prop firm and know the next few weeks your product will see inflows from fund managers, CTAs, institutional wealth mgrs etc-  it is reasonable to position yourself biased long in anticipation of those flows. Any business must stock up on a product when they know their firm is running a special on it.

Last week Daniela Cambone interviewed me on this topic for Stansberry Research:

Bonus: She asks me about the JPM settlement outcome which we broke when it all began

Real Assets Can't Be Printed

In recent years, in no small part a byproduct of the increased interest in precious metals as an investment vehicle, the market's own small seasonal tendencies have asserted a much bigger effect on the price of the asset itself. Because Gold and Silver are not paper assets, allocators cannot easily move the increased investment demand into a finite physical product. This creates bigger swings during these seasonal events, resulting in better trading and ultimately more opportunity for patient investors to get better prices if they understand the nature of the market's behavior and know the difference between price and value.

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