What is a Santa Claus Rally, and How Could Gold Benefit?

A 'Santa Claus Rally' refers to the common occurrence of a stock market rise during the last week of December and the first two trading days of Jan. There are a few reasons for this and one that you may not read about anywhere else.

The U.S. stock market (SP 500) has historically risen higher roughly three times out of four since the 60s. The quite obvious reasons for this include the increased spending on Christmas gifts, and workers spending their bonuses. Getting slightly more technical, trading volume is drastically reduced, making the effects of each trade more powerful.

So, people are spending more money. There are other holidays too, aren't there? Also, if trading volume is low and the market is easier to move, why wouldn't it move down more easily too?

Here's a major hidden cause of Santa Claus Rallies:

The overwhelming majority of trading volume in markets comes from institutional investors, making them a culprit for many trends like this one. These investors are putting through billions of dollars of trades and spend day and night monitoring data and trends. These same institutional investors are also accountable for nearly all of the short-selling done in markets. In other words, they make money by pushing markets down.

What might happen over Christmas break when these massive short-sellers leave their desks on Wall Street to have their exotic Christmas getaways? Not only is the volume disappearing, but so is the largest source of short-selling.

This leaves the typically 'buy only' investors to jump online and begin buying, racing each other upward in a frenzy. Buy orders can rise higher and higher, unimpeded by the corporate world which needs to let its workers have a Christmas break.

The Connection Between the Santa Claus Rally and Gold

During a Santa Claus Rally, increased investor confidence often leads to higher equity prices. This broader market optimism can lead investors to diversify their portfolios by allocating some profits into alternative assets, including gold. In times of prosperity, gold isn't just a hedge against risk—it's a way to preserve and grow wealth alongside stocks.

A Santa Claus Rally can sometimes coincide with a softer U.S. dollar. As investors seek higher returns on riskier assets, demand for the dollar may decline slightly. This is obviously good for gold.

Institutional investors and large funds typically rebalance their portfolios towards the end of the year. This rebalancing can lead to a flow of capital into gold, especially if equities have outperformed significantly during the year (sound familiar?). If they had a great run in the stock market and are worried about Trump’s inauguration and other political events, they may want to shift towards safety.