In past decades gold has experienced positive and statistically significant gold price changes in September and November. This finding was first popularized by economics and finance professor Dirk Baur. He called it the “Autumn Effect.”

His research examined daily gold returns (spot and futures) over a 30-year period from January 1981 until December 2010. The data showed that September generated an average return of 2.2% and that November generated an average return of 1.8%.

In fact, since becoming legal to own in December of 1974, gold bullion in U.S. dollar terms has risen 1.8% in September. This gain is more than four times its average return of 0.4% in the other 11 months of the year. Of course, for most investors, the only September that matters is this September. Will the trend continue?

Will the Autumn Effect Continue?

The September performance of gold has been underwhelming in recent years. The price of gold dropped in September of 2018, and 2020-2022. In 2019, gold only notched a modest gain of about 0.68%. But this doesn’t necessarily mean the Autumn Effect is dead.

The price of gold may be positioned to rise in the coming months as China’s central bank continues to add to its gold reserves. By the end of June of this year, the People’s Bank of China brought their gold reserves up to 1,926 tons, marking the eighth consecutive month of increases.

This trend is visible beyond China. India, Singapore, Turkey, and the EU have all increased their gold reserves in recent months. Even last year central banks purchased a massive $70 billion of gold. This is the highest figure since 1950. Many have cited geopolitical tensions, and global economic uncertainty as the two main reasons for such big purchases. Additionally, some speculate that emerging market banks have been buying gold in an effort to diversify away from the dollar.

What Are Possible Causes of the Autumn Effect?

Baur’s research offers no definitive explanation of the effect. However, he does offer a few theories.

First, he suggests that investors buy gold during September and November because these months have been historically weak for stocks. Consider that starting in 1975, the Dow Jones Industrial Average lost an average of 1.0% in September compared to an average gain of 1.0% in all other months. In fact, since the creation of the index in 1896 stocks have dropped, on average by 1.1% in September compared to an average gain of 0.8% during the other months. As Barron’s reports, September’s “return rank relative to the other 11 months is below average in every decade since 1900 but one.”

Baur also suggests that consumer gold purchases might be strong in these months due to the festival season in India and the pre-Christmas season in several developed countries. Finally, he theorizes that investors suffering from the “winter blues” may feel a drop in confidence in the equity market and seek out safe haven investments.

Where Does Gold Go from Here?

Gold has had a good year so far in 2023 rising about 6% YTD. There are reasons to believe that it could go higher.

Recent headlines about failing US banks have weakened confidence in traditional financial institutions. This may prompt more to seek the globally recognized value of gold. Additionally, recession fears, which persist, tend to lead to a rise in gold buying. Moody’s Analytics stated that the world recession risk was elevated as recently as January 2023.

While the Autumn Effect has been less evident in recent years, the long-term picture suggests that now is the time to buy gold.

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Many investors use gold as a way to limit portfolio losses during down markets. This approach, however, begs one question: What portion of the holdings should be gold in order to provide protection without sacrificing a return? Researchers at the Lancaster University Management School decided to find out.

The researchers examined annual real returns for hypothetical portfolios consisting of equities, bonds, and gold. Their analysis was designed to allow all three investments to compete “head-to-head in a multi-asset portfolio context to empirically examine their ability to serve investors’ need for downside risk protection.”

They started their research with a review of gold’s performance as a safe haven asset and concluded that “gold would have served as a safe haven in some 76% of the observed down markets in equities.” However, they are quick to remind investors that this protection carries a cost because gold is down half of the time that stocks are up.

Nevertheless, data going back to 1975 shows that even a small allocation to gold within a portfolio of equities and bonds lessens the risk of capital losses by about 10% across many different equity-bond allocations. Moreover, the researchers discovered that downside risk can be mitigated even further when investors choose low-volatility equities to replace part of their bond allocation. This defensive mix consists of 10% gold and 45% low-volatility equities and bonds. This allocation represents the “nose” of the efficiency frontier resulting in a downside volatility to 3.7%.

Source: SSRN

These results were based on a 12-month investing timeline but the researchers also wanted to know how effective these allocations are over a wider range of periods. They analyzed results ranging from 1 month up to 36 months. They learned that the downside risk mitigation is stronger during longer time horizons. They also found that a 30/70 equity-bond portfolio generated an average return of 5.0% while the 45/45/10 defensive mix portfolio generated an average return of 6.2%.

The key takeaway for investors is that empirical research shows that the expected loss and downside volatility of a portfolio can be reduced with a small allocation to gold. Investors can further benefit from this approach by choosing low-volatility stocks for the equity portion of their holdings and setting their sights on a lengthy time horizon.

What makes this research so beneficial is the fact that it is so easy to execute. Most investors can easily update their allocations to match the recommended 45/45/10 blend. However, it is also important to note that these results were based on the assumption that the investor holds real gold rather than gold ETFs. As explored in other articles, gold ETFs fail to offer some of the basic characteristics that make gold such an attractive investment for so many. For example, gold ETFs introduce counterparty risk into the equation.

As uncertainty weighs on so many investors, it is important to remember that just one small adjustment to a portfolio can have protective effects over the long term.

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Almost half of Vanguard 401(k) investors—over the age of 55 who manage their own money— hold over 70% of their portfolios in stocks. That’s up from 38% in 2011.

At Fidelity Investments, nearly 40% of investors between the ages of 65-69 invest about 67% of their portfolios in the stock market.

Are older investors becoming too aggressive? Many experts say yes. By any measurement owning 70% or more of your portfolio in stocks for folks over 55 is considered aggressive—and few professional money managers would invest in such a fashion.

Typically as investors age, professional money managers trim down their exposure to stocks, which are considered risky investments, and shift more to acceptable safe alternatives like gold and silver bullion, bonds, and cash.

According to the time-honored formula of 100 minus your age, investors who are at least 55 years old should invest a maximum of 45% of their assets in the stock market. Why does this matter?

Access to Your Money When You Need It

Investing too heavily in the stock market later in life can put you at risk if the stock market goes into a downturn or even a crash. Older Americans who need cash might have no choice but to pull money out of the stock market at a significant loss.

While the U.S. stock market rebounded quickly from the Covid pandemic bear market, that was not normal. History shows that, on average, bear markets since WWII took the S&P 500 about three years to recover to a break-even point based on stock price. If you need money before that three years is up, you’d be selling stocks at a loss.

Even when you think you may not need the money you have in the stock market, health issues can arise. A 65-year-old couple can expect to spend an average of $315,000 on medical expenses during retirement, according to a Fidelity Investments study. It pays to have access to liquid investments—like gold—so you can access your money when you may need it unexpectedly, without having to sell stock investments at a loss.

Why Are Older Americans Holding So Much Stock?

There are a couple of reasons that older Americans may be so heavily invested in stocks. The first is that some Americans did not save enough money for retirement throughout their working years. These older investors are rolling the dice in the hopes they can play “catch-up” with outsized stock market returns.

Another explanation is that people, especially those who are managing their own money, forget to rebalance their portfolios at least once a year. It’s easy for allocations to get out of whack unless you make a concerted effort to rebalance on a regular basis.

Rebalancing simply means selling a portion of your stock allocation and buying more of other asset classes like gold. When you rebalance at least once a year, it allows you to maintain your desired asset allocation level appropriate for your risk tolerance level and time horizon.

Retirees with Too Much Stock Could Benefit from the Safety of Gold

If you are one of those older Americans with too much stock exposure, it could be time to consider rebalancing and increasing your allocation to precious metals.

Gold and silver bullion in physical form is an appropriate asset for a portion of any properly diversified investment portfolio and we recommend investing up to 10% of your overall portfolio in gold, depending on your financial goals and risk tolerance levels.

Want help? Call one of our Blanchard portfolio managers today for a customized portfolio review. We can provide personalized investment guidance based on your financial goals, risk tolerance, and time horizon. We’ve been helping Americans invest in the safety of gold and silver since 1975 and we can help you too.

Learn more about rebalancing your portfolio in this article: Your Mid-Year Portfolio Check-Up in Four Easy Steps.

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In 2022, central banks purchased a staggering amount of $70 billion in gold, the most since 1950, as governments around the globe clamored to add more precious metals to their coffers. This year, the gold buying hasn’t let up.

The world’s global central banks—led by the People’s Bank of China—were back in the market to buy gold in June, adding a total of 55 tonnes of the precious metal to their vaults.

Overall, in the first half of 2023, central bank gold buying was widespread among both developed and emerging market nations and hit a first-half record at 387 tonnes, according to the World Gold Council.

What exactly are Central Banks?

Central banks are government institutions that are charged with managing the money supply of their respective countries and controlling monetary policy, like official interest rate levels. In most countries, they are tasked to manage price stability (inflation), while in other countries, like the United States, they are also required by law to support full employment. Examples of central banks include the European Central Bank (ECB), the Bank of Japan (BOJ), the People’s Bank of China, and, of course, the U.S. Federal Reserve.

Why do Central Banks Buy Gold?

Central banks buy the world’s most trusted “safe haven” investment for the same reason that individual investors, family offices, pension funds, and mutual funds buy gold.

The reasons include diversification, a hedge against inflation, and a store of value. Gold retains its value no matter if paper currencies rise or fall in value.

Notably, central banks are also purchasing gold now in an attempt to diversify away from the U.S. dollar—as gold can be swapped into any currency around the world, like the European euro, Chinese yuan, Japanese yen, or even the New Zealand dollar or Swiss franc.

Increasing Geopolitical Tensions

China has been leading the pack in purchasing gold in recent months. From December through May, the People’s Bank of China purchased 2,076 tonnes of gold, alongside a number of other central banks who were buying including Turkey, India, and Singapore. China in particular has been seeking to wean its country off the U.S. dollar amid rising political tensions with Washington D.C. policymakers.

The Bank of Russia has also accumulated gold over the past year, with its bullion purchases up 1 million ounces as of March, to a total of 74.9 million ounces. Russia leaned into its gold purchases in an attempt to avoid Western sanctions related to its war in Ukraine.

Gold Outlook

In a recent research note, JP Morgan projects the price of gold will average around $2,175 an ounce by the fourth quarter of 2024.

That marks a 15% increase from the current gold price.

“We’re in a very prime place where we think gold ownership and long allocation to gold and silver is something that acts as both a late cycle diversifier and something that will perform as we look to the next sort of 12, 18 months.”

The firm also pointed to continued central bank buying as a hedge against geopolitical risk and to diversify away from the dollar as a factor boosting the price of gold in the months ahead.

In fact, 24% of central banks plan to add more gold to their reserves in the next 12 months, according to the 2023 Central Bank Gold Reserve Survey released by the World Gold Council,

An argument could be made that the world’s global central bankers are some of the savviest, smartest investors around. If they plan to buy more gold, it begs the question, should you consider buying more too?

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