Will September Patterns Hold for Gold?

It was a blockbuster summer for the bulls on Wall Street. But September is historically the market’s worst-performing month, and already we’ve begun to see some sharp pullbacks. Interestingly enough, on the flip side of the coin, September is historically the best month for gold.

Editor's Note: For more on historical and forward-looking gold, see What Gold's Rally Is Telling Us.

I mentioned buying precious metals mining stocks two weeks ago. If you did, you'd have made about 14% profit so far if you diversified in many stocks (HUI Index), and about 19% if you put your money in the top 3 stocks that my leverage calculator suggests as a speculative proxy for gold.

The price of gold has risen in 16 of the 20 Septembers since 1989. And since this September began, we've already seen some tangible proof as the yellow metal makes new forays toward quadruple digits.



At the moment, gold is on course for its biggest weekly gain since late April.

While September is a good month for gold, it's historically a great month for gold stocks as measured by the NYSE Arca Gold Miners Index. After the typically weak summer months, the gold miners start to perk. Since 1993 when it was created, the GDM has been up 11 times in September and down just five times.

September is also historically a miserable month for the US Dollar -- a bullish sign for gold since gold trades at an inverse relationship to the dollar (more on that later). Looking back 39 Septembers going back to 1970, the dollar has seen negative performance 26 times -- more than any other month of the year.

So what’s behind this predictable September pattern as far as gold goes? Several gold-demand drivers converge all at the same time this month.
 

• The post-monsoon wedding season begins in India.
  
  
• The Indian festival season begins.
  
  
• American jewelers begin restocking in advance of Christmas.
  
  
• Ramadan ends in late September in the Muslim world with a period of celebration and gift-giving.
  
  
• And, in China, the week-long National Day celebration starts October 1. Already in China, gold jewelry demand increased 6% in the second quarter.

While just about everyone in the world is getting ready to celebrate, the price of gold (charts courtesy of stockcharts.com) is getting ready to perform its own celebration dance.



We've just seen a significant breakout from the gold triangle pattern to which I'd referred in the past. The move took place on a very strong volume. This is exactly the type of confirmation I like to see in a breakout.

The RSI Indicator -- proven to be a very valuable tool in timing the gold market local tops -- suggests that gold may need to take a breather before moving higher. Should that be the case, the most probable scenario is a test of the upper border of the triangle pattern.