Sell Gold in May and Go Away?

Gold is currently moving in volatile times and to me at least the debate on where it is going next looks increasingly polarized. While the hot money seems to have abandoned gold and silver to ride the crude oil bandwagon (which will certainly suffer the same drop soon), the old maxim “Sell in May and go away” seems to have been pinned to gold’s lapel.

The reason given is seasonal uncertainty but this May maxim is more associated with stock markets than gold and since the two markets are generally not correlated it seems strange to apply the saying to both asset classes. So how has the gold bull market done during the summer months? The last part of the saying ends with “and don’t come back until Saint Leger’s Day” which falls on the 2^nd October.

Let us pull up the numbers between May 1^st and October 2^nd for the last 6 years.

So in the last six May periods we have gold up in five years and down in one year. The average percentage gain computes as 5.8% which is not shoddy at all for a five month period and if we exclude our negative year, it comes out at an average of 9%. So much for sell in May and go away for gold.

Now gold was at $851 at the beginning of May 2008. Applying our average of 5.8% brings gold to $900 by October. Using the 9% brings it to $927. You may not think that is good enough but if you are parking your wealth to avoid problems in other assets it may serve you well relatively speaking.

Looking at the context of May to October 2008, what could trump this scenario? Could this be a negative summer for gold like 2006? Though gold may come out positive, caution is required. I mentioned crude oil at the top and “top” may be the operative word as the world’s main commodity begins to finish forming a parabolic rise. There is only one way that parabolic rises end and that is with every one trying to hit the exit door with their profits at the same time – i.e. a sharp drop in prices.

Given gold’s historic correlation with oil, I cannot see gold forging very far ahead if oil is going through a correction similar to what we are seeing for gold and silver since mid-March. This summer may yet prove to be a period where single digits gains in gold are something to be appreciated

Comments

[CaptBob]

It's true that gold may just "loose it's luster" but I'd like a little loss of support to cement the deal. Whats likely to happen to the fundamentals??
1. The dollar will strengthen?? Fewer dollars, higher interest, robust economic turnaround, less debt??? All doubtful.

2. Oil will depreciate?? The most likely reason for this is lower demand in the private transport sector caused by some Country's lowering subsidies, pricing down demands. Drilling and large finds not likely to exceed dwindling supplies. Our stocks are not being drawn down by $4 gas, where is the denial point?? Chinese and Indian demand is like that of gold, every price drop produces more physical buyers.

3. Higher production levels at the mines?? Recent history show this to be unlikely.

4. The trillions find a more attractive yield in a safer vehicle to switch into?? All of history says NO, and if they don't like real estate at these prices--I can't think of one!.

Scuse me: My crystal ball is clouding up, guess I'll take gold for the long ride.

[Diamond Lou]

Try "sell in May and come back by August"

Gold normally rebounds in September when fabrication buyers get active again. Selling in May and going away until October doesn't work. Try the same table above buy buying back in August and you will see the wisdom of the seasonal trade if done correctly.

[User 30121]

Verrrry nice article. No "The sky is falling" in there at all! Just some food for thought. I good read...and the comments, too. Good job!

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