A Bad Week For Gold (Unless you are a Buyer)

by JDH on March 22, 2014

From a peak at over $1,390 just over a week ago to a low of around $1,321 on Thursday March 20, before recovering to close the week at $1,334.50, gold has had a bumpy, mostly downward, ride in the month of March.  Should we be alarmed?  Gold started the year around $1,200, so the rise to $1,390 was an impressive gain of almost 16%, exactly as expected (and hoped) by gold bugs.  Is that it?  Will the price fade back to where it started the year, or lower?

Perhaps, but probably not, for many reasons, the most obvious of which is the seasonality of gold.

Historically March is the worst month for gold, so it’s not surprising that gold has fallen in March.  Here’s a chart I borrowed from Casey Research; you can see the original, and their commentary, in their article on Gold Is Seasonal: When Is the Best Month to Buy?

AverageGoldPerformanceSince1975

As the chart clearly indicates, over the last 38 years (since 1975, the first year that gold ownership was made legal again in the U.S.A.), the month of March has easily been the worst performing month for gold, dropping on average around 1.0%.

Of course general averages don’t tell the story every month, and the Casey article has more detailed analysis, but the chart is a good representation of what has happened so far in 2014, and may be a good predictor for the balance of the year.

January and February were very good, both this year and on the average chart, and March has been brutal.

As I have stated previously, I’m not worried.  Even after this week’s declines, my portfolio is still up about 13% on the year, so I’m fine with it.

If history repeats itself (which it never does, exactly), April will be weak, but not as week as March, and then we will bump along in the spring and summer with some gains and some loses.  The key will be to have your full position accumulated by June, so that you are well positioned to take advantage of the three strong months of the late summer and fall: August, September (easily the best month of the year) and October.

With that in mind, here’s my plan:

First, I will renew my stink bids.  I discussed stink bids recently, and the concept is simple: select a stock you want to own (or that you own but you want to buy more) and place a “stink bid” at below market levels.

FNV-March21-2014

For example, let’s say I own 1,000 shares of FNV.TO – Franco-Nevada Corp. and I want to buy another 1,000 shares over the next few months to get ready for the seasonally favorable period at the end of the summer. It touched $60 per share earlier this year, and has fallen back, so I could place stink bids as follows:

  • 300 shares at $52
  • 300 shares at $48
  • 400 shares at $40

I simply place the orders, and forget it.  (More specifically, I place the orders for a month, and then every month I review and renew the orders as appropriate).  There is a good chance my $52 order will get filled this week.  There is a good chance my $48 and $40 orders will never get filled, because the stock may not drop that low.  That’s fine, I still have a good position, so I’m happy either way.  If my stink bids don’t get filled that means the stock has gone up, which is cool.  I’m good either way.  Either I’m averaging down, or making a profit on what I own.  Either way I’m well position for a good run later in the year.

Second, I will consider covered writes.  If I expect further weakness in April, it makes sense to sell calls against the shares I own.  That strategy worked over the last two weeks.  Back on March 14 when RGL.TO – Royal Gold Inc. was trading at $80 I sold the March $80 calls for $1.50.  By expiration after the close on Friday RGL was down to $76.15, so the options expired worthless and I kept the $1.50, which helped mitigate the fact that the stock dropped in price.

I say “consider” because covered writing is only profitable if you wait until the stock has gone up for a few days and is due for a small correction, and then you cover.  There is no point in covering at the bottom, before a big uptick.

As an example, consider again the Franco-Nevada chart above.   The stock has dropped every day for the last week, dropping from $59 to $52.  A bounce upward is likely, so a covered call write makes no sense until after the bounce.

That, in simple terms, is my plan.

In practice it takes some work, since you need a list of every stock you own or want to own, and you need to review the charts to determine your stink bids.  But with an hour or two a month of analysis, you can develop a list, and place your orders, and then sit back and watch.

That’s the plan for the end of March and April.  I’ll report back as time goes on.

Thanks for reading, and see you next week.