Thanks to reader Billy for pointing out (in response to our prior post on gold’s correlation divergence) that there is a seasonal bullish tendency in gold that begins in September and for providing the following links:

http://www.321gold.com/charts/seasonal_gold.html
http://www.tradersnarrative.com/gold-seasonality-turns-positive-2909.html

We did our own analysis and confirmed this is indeed the case (see chart below).  Over 20 years, there is an expected push beginning in early to mid-September that tops in mid-February of the following year.  We can see that the predicted seasonality for the past year (red) was changed very little after adjusting to add the current year’s data (white), so seasonal factors should definitely be given weight in our analysis.  However, it is very difficult to time markets based on seasonality.  For instance, last September had a huge rally that was reversed in October, only to be reversed again (to the upside) into February.  So, while the seasonal pattern held, there was much consternation for the small and short term traders.  Accordingly, we believe it takes at least two weeks of data to confirm a seasonally-induced move.  Today may simply be the beginning.

Does all this change our previous analysis?  Only slightly because we must still wait for confirmation, but we now have a slight bias in the three three possibilities we previously outlined:

1)  Recent correlations hold and gold is simply forecasting another inflation-led [stock] rally that will begin in the next few days (meaning yesterday’s correction is not the bearish bellwether everyone thinks it is), or

2) Recent correlations hold and the move today in gold is a bull trap that will be reversed in the next few days, or

3) Recent correlations have broken and gold is decoupling from other markets, including equities.  Because correlation-changing paradigm shifts are rare, this is the least likely scenario; however, should it end up being the case, the significance is tremendous.  A break above 1,000 on a decling stock market would be definitive evidence for this scenario.

If today’s surge in gold has follow through and is the beginning of a seasonal move, then scenario 1 is most likely, which means the current stock market correction will be shallow and we will have another short covering rally that has characterized this year’s run up.  However, the if’s must be confirmed and, as we said before, all we can do is watch closely for now.