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The Gold Boomerang

Jay Kaeppel
2021-03-15
Like many physical commodities, gold has some unique seasonal quirks. Here we take closer look at two relevant trends.

Gold has been a major disappointment to many of late. Yet given its historical seasonal tendencies, perhaps the recent weakness should not come as a complete surprise. 

From here we will focus on "trading day of month" - i.e., the first trading day of each month is TDM #1. the second trading day of the month is TDM #2 and so on. 

We will focus on two trading periods, one bearish and one bullish:

  • Unfavorable: 25 trading day days after February Trading Day #18
  • Favorable: 6 trading days after April Trading Day #3

For 2021: 

  • the Unfavorable period extends from the close on 2/25/2021 through the close on 4/1/2021 
  • the Favorable period extends from the close on 4/6/2021 through the close on 4/14/2021

Let's consider the history of both periods and then combine the two.

Gold: February TDM 18 + 25 trading days

The chart below displays the hypothetical cumulative dollar gain or loss achieved by holding a 1-lot of gold futures during this period every year since 1975, including so far this year.

The table below displays the relevant facts and figures through 2020.

Gold: April TDM 3 + 6 trading days

The chart below displays the hypothetical cumulative dollar gain or loss achieved by holding a 1-lot of gold futures during this period every year since 1975.

The table below displays the relevant facts and figures through 2020.

The Two Periods Combined

Certainly, there are no "sure things" here. Still, the long-term tendencies are clear. Gold tends to show weakness during the first period, then "boomerangs" and tends to show strength during the second period. To further illustrate this, let's test the following hypothetical strategy:

  • Short 1 Gold futures for 25 trading days following the close on Feb TDM 18
  • Long 1 Gold futures for 6 trading days following the close on Apr TDM 3

The chart below displays the hypothetical cumulative dollar gain or loss achieved by holding a short 1-lot of gold futures during the first period and a long 1-lot position of gold futures during the second period every year since 1975.

The table below displays the relevant facts and figures.

Summary

The primary takeaway from the information above is that gold has a "tendency" to decline from late February through early April and a "tendency" to bounce for a short period in early April. In terms of real-world trading, it is important to clearly understand and appreciate the subtle - yet critical - difference between a "tendency" and "you can't lose trading gold futures." 

From a risk management perspective, probably the two key things to note are:

  • a 72% winning percentage (33 wins and 13 losses) is NOT the same as a 100% winning percentage
  • In one year (1981) this "strategy" lost -$6,300 (so not for the faint of heart nor the poorly capitalized

Traders not willing or able to trade gold futures can consider ETFs that track gold such as ticker IAU and GLD. 

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Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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