Originally published in the September 4th 2007 edition of the Financial Post section of the National Post.

Our report on June 11^th noted that gold and gold stocks were preparing for a seasonal entry point. Lots of changes have occurred in gold and gold markets since that report was written. Where are these markets going now?

Seasonal Influences

The period of seasonal strength for gold and gold stocks is from the end of July to the end of September. The seasonal trade for gold has been profitable in eight of the past 10 periods. Average gain per period was 4.6%. The seasonal trade for the Philadelphia Gold and Silver Index also has been profitable in eight of the past 10 periods. Average gain per period was 11.1%. The seasonal trade for the TSX Gold Index also has been profitable in eight of the past 10 periods. Average gain per period was 12.4%. An important reason for gains during the July to September period is additional demand for gold by gold fabricators each summer. Additional gold is purchased to make gold jewelry for the Christmas season and the Indian wedding season late in the year. India has the largest gold market in the world. Economic growth in India is spurring demand. First quarter demand for gold in India on a year-over-year basis rose 50%. Following is a chart showing optimal seasonal entry and exit points for the Philadelphia Gold and Silver Index during the past six years:

Chart courtesy of StockCharts.com www.stockcharts.com

Fundamental Influences

Fundamentals are improving. Cash flow and earnings prospects for gold producers start to recover in the third quarter on a year-over-year basis thanks to higher gold prices. The price of gold in the third quarter last year was about $600 U.S. per ounce.

Selected stocks continue to benefit from rumors of consolidation in the industry. Last week, rumors circulated that Barrick Gold would like to acquire Newmont Mining.

Exploration and development activity by gold producers also will have a positive impact on the sector in the months to come. Producers are expanding activity primarily in existing mines where lower ore grades previously were known, but not proven. Current gold prices have boosted their economic feasibility.

Technical influences

Gold has been remarkably strong since June 11^th when its price was $650 U.S. per ounce. Gold reached a short term low late in June at $640 U.S. It subsequently bounced from its 200 day moving average and gained 6.6%. It currently is testing resistance at $688.10 U.S.. Resistance also exists at $698.00 U.S. Next technical target on a break above $698.00 U.S. is $748 U.S. Gold in Euros has formed a 10 month triangular pattern. A break above 504 Euros per ounce will complete a bullish technical pattern. Current price is 495 Euros per ounce. Gold has a high inverse correlation to the U.S. Dollar. The U.S. Dollar strengthened from mid July to mid August as the sub-prime mortgage crisis in the U.S. reached a peak. Subsequently, the U.S. Dollar weakened in anticipation of a reduction in the Fed Fund rate on September 18^th. Gold has responded to the upside. A break by the U.S. Dollar below support at 80.0 could be the trigger for a breakout by gold above the $698 U.S. per ounce level. Gold stocks significantly underperformed the price of gold from June 11^th to August 16^th. Subsequently, gold stock indices on both sides of the border have outperformed the price of gold, an encouraging technical sign for both gold and gold stocks. Last week, gold stock indices on both sides of the border recorded short term Moving Average Convergence Divergence (MACD) buy signals. Favourable seasonal influences on gold equities appeared on the charts in mid August this year, slightly later than usual.

The Bottom Line

The seasonal trade in gold and gold stocks has started. The trade lasts for a relatively short time. Enjoy it while it lasts.

Don Vialoux, Chartered Market Technician is the author of a free daily report on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca . Mr. Vialoux owns an interest in iShares on the TSX Gold Index.

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