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Financial markets are influenced by relatively predictable cycles…[and should] play
a big role in one’s decision-making process just as they do in our day-to-day lives. [This article takes a look at several and discusses their relevance to one’s investment management process.]
The above introductory comments are edited excerpts from Part 1* of a series of articles by Frank Holmes (usfunds.com) entitled Managing Expectations. Go here for Part 2 and here for Part 3.
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Holmes goes on to say in further edited excerpts:
Gold Seasonal Trends – One Year Cycle
Gold is a classic example of a commodity that rotates through seasonal cycles year after year…in response to international festivals and holidays such as the Chinese New Year and Ramadan. You can look back five, 15 and 30 years to spot the patterns the precious metal dependably follows, reaching annual highs late in the year during Diwali and Christmas when gold jewelry demand spikes.
Presidential Election Cycles – Four to Eight Years
At U.S. Global we like to say that government policy is a precursor to change, and no person in the nation has more control over policy than the President. The decisions he makes and actions he takes have far-reaching consequences in markets both domestic and international, more so than perhaps even he can anticipate.
The current occupant of the White House, Barack Obama, began his presidency by injecting $700 billion into the economy…and we’ve also seen several rounds of quantitative easing (QE) to loosen money and facilitate loan-taking. Largely as a result of these policies, the S&P 500 Index during both of Obama’s terms has performed above the average four-year presidential cycle. Early last month, furthermore, the Dow Jones Industrial Average hit a record high of 17,000.
Just over the horizon are midterm elections, a time when the market historically becomes bullish. According to the most recent Stock Trader’s Almanac:
“An impressive 2.7% has been the average gain during the eight trading days surrounding midterm election days since 1934. This is equivalent to roughly 52 Dow points per day at present levels. There was only one losing period in 1994 when the Republicans took control of both the House and the Senate for the first time in 40 years.”
Lifecycle of a Mine – Multiple Years
Not only is it important for us to understand the seasonality of the commodity itself, it’s equally important to be aware of the stages a mine must proceed through before it becomes operational. As I write in The Goldwatcher: Demystifying Gold Investing:
“We strongly believe in using cycles to better manage risks and expectations, and we see this as a way for others to manage their emotions when it comes to investing. Knowing where a company is on the mine lifecycle can be a tremendous asset to an investor in gold equities who seeks to minimize risk and optimize performance. It’s one more tool the investor can use to try to manage volatility and his own market expectations.”
Take a look at the graphic below. Years can, and do, divide the time when a mine is discovered and when production begins. It’s imperative to know which stage of its lifecycle it’s in to make a better-informed decision on whether to invest, withdraw or wait.
When a mine is first discovered, excitement raises the price of the stock. This is when investment is most speculative since only one in 2,000 companies finds at least a 1 million-ounce deposit. Once reality sets in and miners are faced with the notion that the metal or mineral—assuming there is any—probably won’t be exhumed for some time, prices tumble. Years later, after production finally begins, stocks see another uptick. This is when the equity is at its lowest risk factor. To manage risk and expectations, it’s critical for us to know where we are in the cycle of the mine.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.usfunds.com/investor-library/frank-talk/the-importance-of-cycles-in-the-investment-management-process/#.U_D1JFV0zIU
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