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Gold favoured over stocks in August, seasonality suggests

By Jekaterina Drozdovica

12:36, 9 August 2021

Gold coins
Gold coin chart - Photo: Shutterstock

US stock markets have powered ahead through successive record highs in recent months, but August could be the start of a weak period, with investor sentiment shifting in favour of haven assets such as gold, seasonality trends suggest.

Looking at the average monthly returns of the S&P 500 in the past 25 years, August appears to be the worst-performing period followed by September and February, according to data from a trading analytics company, Seasonax. Market seasonality studies involve the observation of price trends over a year to establish recurring patterns.

In a smaller timeframe of 10 years, the seasonal trend changes, and August returns are now in the mid-range, with September being the only month in the red.

“August is typically the beginning of the worst stretch of the year for risk assets such as stocks and higher-yielding currencies,” Chris Vecchio, senior strategist at DailyFX, told Capital.com. “We’ve seen over the past five to 10 years that this window – August, September, October – produces the rockiest trading conditions.”

Pinch of salt 

Yet this year could be different, some analysts say, amid the unprecedented monetary and fiscal stimulus on the back of the pandemic-induced recession.

While market seasonality reveals patterns in the past performance of asset prices, investors should take it with a pinch of salt, especially in the year of 2021, when monetary stimulus reached unprecedented levels, according to Vecchio.

“With the Delta variant concerns surging, it’s an excuse for the US Federal Reserve and for the US government to continue to provide stimulus in some sort of manner, and financial markets like stimulus,” Vecchio said.

“If we’re seeing an extended Fed timeline where interest rates will remain low and bond purchases will continue to the end of the year, that’s a substitute of cushion for asset prices,” he added.

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Gold seasonality remains strong in August

Gold, on the other hand, is outperforming in August as the commodity is seen as a safe haven or a hedge against riskier assets.

“Gold works well in August, where in the past 15 years we see the average return at 1.6%, only surpassed by January (average return of 3.9%),” said Chris Weston, head of research at Pepperstone.

“That is clearly working well now with gold backing up a 10.9% gain in July, with a 2.1% appreciation in August,” Weston added in a note.

According to Vecchio, gold prices may get a boost from the rising US national debt, similar to how it happened in 2011 when the amount of monetary and fiscal support was also at a sky-high level.

“Part of the rationale here – at least this year – that may be a boon to gold is that we’re now entering a period where the US debt limit has been no longer suspended and we could possibly run into the debt ceiling,” Vecchio told Capital.com.

“If we do see equities rally throughout the month of August, it puts a lot more risk on the table for September as we could see a sharp correction as that debt ceiling comes into play,” Vecchio added.

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Read more: Gold falls as dollar and Treasury yields push higher

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