The Retired Investor: Precious Metals Normally Fall in September

As one of the best-performing areas of the financial markets this year, gold and silver have been added to many investors' portfolios. And while every dip has been used as an excuse to buy, bulls should hold off a bit when making any new purchases.

 

The price of gold is up more than 20 percent and silver gained over 17 percent so far this year. Despite the sector's performance, there are many portfolio managers out there who won't touch precious metals and probably never will. "Too speculative," "impossible to analyze," and "we are not in the business of gambling" are all explanations I have heard through the years.

 

Granted, gold is not for everyone, but something must be said for its appeal as a hard currency since it has functioned as such for thousands of years.

 

I am not here to proselytize, but to point out that there are investment cycles for most commodities, and we happen to be in one for precious metals. This time around, some of the typical reasons for owning gold are once again present. Geopolitical uncertainty comes to mind with actual shooting wars in Ukraine and the Middle East, either of which might trigger a more serious conflict with nuclear implications. As such, the safe-haven status of gold is an appealing reason to hedge against this geopolitical risk.

 

Purchases by central banks have been one of the biggest drivers this year with buying hitting a record in the first quarter of 2024. Bank of America estimates that gold has now surpassed the euro as the world's largest reserve asset after the U.S. dollar.

 

The threat of inflation continues to hang over the world's economies and precious metals have long been considered an inflation hedge. Governments continue to spend, especially here in the U.S., reviving fears that whoever may win the coming elections, their policies will lead to a revival in the inflation rate. If you also add fears of a falling dollar, brought on by a ballooning debt load, make gold and silver something tangible that investors can hold on to and offer an appealing alternative to a stock market at record highs.

 

While gold is the go-to precious metal most buy, silver has also been purchased for many of the same reasons. Its price has been linked to gold in the past, but to a lesser extent recently as its industrial usage climbs. About 55-60 percent of silver production is dedicated to the industrial area. This percentage is increasing with the popularity of electric vehicles where silver is in demand for its conductive qualities in EV batteries and photovoltaics. 

 

Silver is normally a byproduct of copper mining and as such its price is heavily dependent on demand for copper. Why is this important? China is the world's largest marginal buyer of copper, so Chinese demand for copper sets the price of that commodity. This year, China is battling with a slowing economy, a major real estate problem, and waning consumer demand. As such, copper demand is anemic at best, and lower copper prices reflect that situation. The price of silver, therefore, is subject to the countervailing forces of a bullish gold price and an offsetting weakening copper price. 

 

Interestingly, much of the recent demand for gold has been attributed to demand from China's central bank as well as retail buying in the form of small gold beads by Chinese investors who are wary of their stock market. Western investors have also piled into gold with physically backed gold funds and have seen three straight months of inflows.

 

Given the bullish background on gold, and to some extent silver, why do I advise caution heading into September? If one studies the 10-year seasonal trend of gold beginning on Labor Day weekend out until Sept. 28, the gold price has declined in every year of the past ten years. In the last 15 years, there were only three up years and 12 down years. Silver's record is almost as negative with four of the past five years suffering declines in September.

 

Does this mean that you should sell all your gold, silver, and the mining stocks that produce precious metals? No, but I do recommend that you just wait to add new purchases, i.e., buy the dip.

 

Remember that the Fed is expected to begin an interest rate-cutting cycle on Sept. 18. Gold futures have rallied an average of 6 percent within 30 days of the first interest rate cut after a hiking cycle begins. At the end of September, gold has rallied on average 13 out of the past 15 years. There is often a slight pause in early November (elections?) and then tends to rise from Thanksgiving into the New Year.

 

In this case, the data says gold and silver have a much better than average chance of falling in price in September. As for silver bulls, I would keep a close eye on the copper price and data coming out of China's economy.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.