When investing in gold, investors frequently ask, "Is now the right time to buy?" Hindsight makes it easier to pinpoint when gold's value surged the most but does not allow making profits after the fact.
Considering gold's typically inverse relationship with stocks, interest rates, and the US Dollar, following price trends, seasonality, and large pools of capital can provide some insight into favorable investment times. That said, history shows that holding gold over the long term preserves wealth and beats inflation.
The key takeaway? It's not about perfect timing but instead staying invested. Long-term investment in gold typically delivers more substantial results than trying to predict market ups and downs. That said, having patience and investing when there are opportunities to purchase undervalued gold can increase the investor's return on investment.
Locating the next gold buying opportunity
Source: Barchart
Gold's year-to-date performance is giving many investors who missed this move the fear of missing out feeling. From the January open, gold has rallied $663 per ounce or approximately 27%. Traders may find some opportunities to buy shorter-duration trades at these levels, but investors looking for a more value-level price have some opportunities I'll discuss.
Source: Barchart
After extensive price moves, as we've witnessed recently in the gold market, it's easy to lose perspective of the big picture. The monthly gold chart above dates back to 1996. Much like the S&P 500 monthly stock index chart, the gold market is in a perpetual bull market, with only a few minor downturns. Markets that exhibit this characteristic are an investor's dream. Successful investors are willing to purchase assets and give the market time to profit.
But the monthly gold chart from 1996 only shows where you "could" have made a profit. What about the future? What tools are available to anticipate the next bullish move in gold?
Two tools that have historically found when gold prices are possibly ready to rally
Source: Moore Research Center, Inc. (MRCI)
The first source of a reliable tool for finding times of the year to invest in is seasonal patterns from MRCI. The previous chart has identified that over the past 30 years, MRCI has found that the lowest prices for gold in the calendar year tend to be approximately in early January and mid-July. The scale on the left side of the chart reflects the percentage of the yearly range the price has been on average for the past 30 years. January has been in the lowest part of gold's annual range, nearly 0%. July tends to be in the lower 25% of the yearly range for gold. The January rally tends to rally about 60% of the annual range, while July tends to rally 60-75%.
These two periods could alert investors to be more aware of possible undervalued opportunities for the gold market. This approach will keep investors from chasing market moves like the one we are in now.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading/investing choices.
The second tool is the Commitment of Traders (COT) report
The COT report is a valuable tool for tracking money flow in and out of the market and breaking down the capital flow into different groups of traders. The group we will track to assist in the timing of buying a gold investment will be the money managers, also known as large speculators on the Legacy COT report. This group of traders typically manages money and is commonly called hedge funds, commodity trading advisors, and commodity pool operators. They have a massive amount of funds under management and can push market prices up or down for extended periods, leading to profitable long-term trends to capitalize on. Money managers usually use trend-following trading styles and continue adding to positions as they become profitable.
Source: Barchart
The weekly gold price chart from 2002 also has the Legacy COT report (lower green line) showing the large speculators' net positions. The COT report subtracts the number of contracts that have been shorted from the contracts that have been bought, resulting in a net position.
The right side of the COT report scale has a zero line. When the green line is above zero, large speculators have more long positions than short (net long.) When the green line is less than zero, large speculators have more short positions than long ones (net short.)
This chart shows that large speculators have been net long in the gold market since 2002. As large speculators are trend followers, this would confirm the long-term bull market in gold.
How do we use the money manager's position to identify a time to buy gold?
Source: Barchart
Here is the secret sauce! Money managers (Disaggregated COT report, blue line) follow long-term trends. As gold prices increase, they continue adding to their long positions (dollar cost averaging on the way up.) During price corrections, they may take some profits, and therefore, their long positions decrease, causing the blue line to decline back toward the zero line. When managed money has been net short, it has usually been near long-term lows in the gold market. I've identified the opportunities and times when investors should be looking for investment opportunities in the gold market. Currently, managed money has approximately 194K of net long gold contracts. When this number turns negative again, it will be time for a possible market bottom to form. This is not a timing technique for entering the market. Once the managed money net position is negative, investors should monitor price action and use buy signals and risk management rules generated from their strategy.
If this occurs in January or July, the seasonal pattern will be another bonus supporting your buying opportunity.
In closing….
Gold has proven a reliable value store over time, often thriving when other asset classes struggle. While searching for the perfect entry point based on short-term market fluctuations is tempting, the true power of investing in gold lies in long-term commitment. Patience, not market timing, is the strategy that has consistently rewarded investors. By focusing on accumulating gold during undervalued periods rather than chasing market highs, investors position themselves to reap the benefits of gold's long-term upward trajectory.
Tools like seasonal patterns and the Commitment of Traders report offer valuable insights into potential buying opportunities. Still, they should be part of a broader strategy that includes thorough risk management and consideration of market conditions. By combining these tools with a mindset geared toward long-term growth, investors can avoid the pitfalls of emotional decision-making and maximize their chances for success in the gold market.
Futures traders could participate in these moves using the standard-size contract (GC) or the micro-size (GR) contract, and equity traders could use the exchange-traded fund (ETF) symbol (GLD).
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
