Seasonal Sector Trades: Looking for Coffee and Gold to Bounce By: Christopher Mistal & Jeffrey A. Hirsch | August 04, 2015 | Email | Print

Coffee typically tends to start a seasonal bottoming process before distributors begin buying ahead of anticipated demand in the upcoming cold winter months. This is the time to cover the best seasonal trade short position from May. It is also a time to look for a short-term trade opportunity on the long side. 

 

Traders can look to enter a new long position on or about August 18 and hold this position until about September 4. The trade usually ends right around Labor Day (yellow shaded box below), but coffee prices can continue to head higher as they did last year. This trade has worked 27 times in the last 41 years, for a success rate of 65.9%. After posting a gain every year from 1986 to 1997, this trade has had a spotty record of late, successful in just nine of the last 17 years.

 

 

Coffee has increased in popularity on an international scale in the last few decades. Most consumption has been from the United States, parts of Europe, and Canada. Many Europeans have switched from tea to coffee and with the introduction in late 2005 of Starbucks coffee in Europe and in Asia. Demand is improving, especially for higher grade and quality coffee. With increasing global consumption habits, if there are threats of supply disruptions or production declines for higher grade coffee, the futures market can be prone to extreme price moves.

 

Coffee was the top-performing commodity in 2014 as weather and disease combined to threaten supplies. Those concerns eased in October last year and coffee’s price has been falling since and is currently trading right around its 52-week low which is not far above its multi-year lows touched in November of 2013. A strong U.S. dollar and a weak Brazilian real (top coffee producer and exporter) are also keeping coffee’s price in check for now, so this time around coffee’s seasonal move higher could be muted. 

 

 

Outside of the futures market several choices exist to trade coffee’s seasonal move. iPath DJ-UBS Coffee Sub-Idx TR ETN (JO) is the top choice. Unlike an ETF, JO is an exchange-traded note that is designed to track the DJ-UBS Coffee Subindex Total Return which reflects the potential returns available through an unleveraged investment in futures contracts on coffee. JO has sufficient liquidity trading around 160,000 shares per day over the past three months with a market capitalization of right around $100 million. A long position in JO could be considered on dips below $20.60. If purchased, a stop loss at $19.10 is suggested. For tracking purposes, this trade idea will appear in the Almanac Investor ETF Portfolio.

 

 

 

Seasonally, there is a strong price period for gold (shaded in yellow in chart below) from late August until late September or early October as demand increases when jewelers again stock up ahead of a the seasonal wedding event in India and also, when investors return from summer vacations. Entering long positions on or about August 26 and holding until October 1 has worked 23 times in the last 40 years for a success rate of 57.5%. In the 18 years since 1996, this trade has been profitable 13 times with a cumulative potential profit of $18,640 per single futures contract. Sizable losses were suffered in 2011, 2013 and 2014; however this trade’s best performance ever was in 2012.

 

 

Gold got off to a great start early in 2015, briskly rallying from under $1200 per ounce to over $1300 in just three weeks, but the move was short-lived and gold was back under $1200 by early March. From then until early July that is where gold remained until collapsing through $1100 at the end of July. Gold is now at its lowest price since early 2010. Because of recent price declines investment demand is weak however, physical demand appears to be holding up with numerous gold coin and bullion collecting friends reporting that they have been taking advantage of the lower price to increase their own stockpiles. Perhaps a similar scenario will unfold this upcoming holiday season. 

 

 

SPDR Gold (GLD) is an easy and cost effective way to execute this trade. It has over 21 million ounces of gold worth over $23 billion backing it and tracks in excess of 5 million shares daily. Stochastic, relative strength and MACD indicators applied to GLD appear to be turning led by a buy signal in MACD. GLD can be considered at current prices up to a buy limit of $104.75. If purchased, an initial stop loss of $99.95 is suggested. This trade idea will also be tracked in the Almanac Investor ETF Portfolio.