The
gold miners’ stocks have surged dramatically this summer, catapulted
higher by gold’s major bull-market breakout. That atypical strength
bucking the normal summer-doldrums slump has carried this sector
right back to its traditional strong season. That begins with a
robust autumn rally starting in late summers. This year’s
autumn-rally setup is very unusual, but investment buying could
still fuel further gains.
Seasonality is the
tendency for prices to exhibit recurring patterns at certain times
during the calendar year. While seasonality doesn’t drive price
action, it quantifies annually-repeating behavior driven by
sentiment, technicals, and fundamentals. We humans are creatures of
habit and herd, which naturally colors our trading decisions. The
calendar year’s passage affects the timing and intensity of buying
and selling.
Gold stocks
exhibit strong seasonality because their price action mirrors that
of their dominant primary driver, gold. Gold’s seasonality
generally isn’t driven by supply fluctuations like grown commodities
see, as its mined supply remains
relatively steady
year-round. Instead gold’s major seasonality is demand-driven,
with global investment demand varying considerably depending on the
time in the calendar year.
This gold
seasonality is fueled by well-known income-cycle and cultural
drivers of outsized gold demand from around the world. Starting
in late summers, Asian farmers begin to reap their harvests. As
they figure out how much surplus income was generated from all their
hard work during the growing season, they wisely plow some of their
savings into gold. Asian harvest is followed by India’s famous
wedding season.
Indians believe
getting married during their autumn festivals is auspicious,
increasing the likelihood of long, successful, happy, and even lucky
marriages. And Indian parents outfit their brides with beautiful
and intricate 22-karat gold jewelry, which they buy in vast
quantities. That’s not only for adornment on their wedding days,
but these dowries secure brides’ financial independence within their
husbands’ families.
So during its
bull-market years, gold has always tended to enjoy major autumn
rallies driven by these sequential episodes of outsized demand.
Naturally the gold stocks follow gold higher, amplifying its gains
due to their profits leverage to the gold price. Today gold stocks
are once again back at their most-bullish seasonal juncture, the
transition between the usually-drifting summer doldrums and big
autumn rallies.
Since it is gold’s
own demand-driven seasonality that fuels gold stocks’ seasonality,
that’s logically the best place to start to understand what’s likely
coming. Price action is very different between bull and bear years,
and gold remains in a younger bull market. After falling to
a 6.1-year secular low in mid-December 2015 as the Fed kicked off
its latest
rate-hike cycle, gold powered 29.9% higher over the next 6.7
months.
Crossing the +20%
threshold in March 2016 confirmed a new bull market was underway.
Gold corrected after that sharp initial upleg, but normal healthy
selling was greatly exacerbated after Trump’s surprise election
win. Investors
fled gold to chase the taxphoria stock-market surge. Gold’s
correction cascaded to monstrous proportions, hitting -17.3% in
mid-December 2016. But that remained shy of a new bear’s -20%.
Gold rebounded
sharply from those anomalous severe-correction lows, nearly fully
recovering by early September 2017. But gold failed to break out to
new bull-market highs, then and several times since. That left
gold’s bull increasingly doubted, until June 2019. Then gold
surged to a major
decisive breakout confirming its bull remains alive and well!
Its total gains grew to 37.5% at best in
mid-July, still small for gold.
Gold’s last mighty
bull market ran from April 2001 to August 2011, where it soared
638.2% higher! And while gold consolidated high in 2012, that
was technically a bull year too since gold just slid 18.8% at worst
from its bull-market peak. Gold didn’t enter formal bear-market
territory until April 2013, thanks to the crazy
stock-market
levitation driven by extreme distortions from the Fed’s QE3 bond
monetizations.
So
the bull-market years for gold in modern history ran from 2001 to
2012, skipped the intervening bear-market years of 2013 to 2015, and
resumed in 2016 to 2019. Thus these are the years most relevant to
understanding gold’s typical seasonal performance throughout the
calendar year. We’re interested in bull-market seasonality,
because gold remains in its younger bull today and bear-market
action is quite dissimilar.
Prevailing gold prices varied radically throughout these modern
bull-market years, running between $257 when gold’s last secular
bull was born to $1894 when it peaked a decade later. All these
years along with gold’s latest bull since 2016 have to first be
rendered in like-percentage terms in order to make them
perfectly comparable. Only then can they be averaged together to
distill out gold’s bull-market seasonality.
That’s accomplished by individually indexing each calendar
year’s gold price action to its final close of the preceding year,
which is recast at 100. Then all gold price action of the following
year is calculated off that common indexed baseline, normalizing all
years regardless of price levels. So gold trading at an indexed
level of 105 simply means it has rallied 5% from the prior year’s
close, while 95 shows it’s down 5%.
This
chart averages the individually-indexed full-year gold performances
in those bull-market years from 2001 to 2012 and 2016 to 2018. 2019
isn’t included yet since it remains a work in progress. This
bull-market-seasonality methodology reveals that late summers
are when gold’s long parade of big seasonal rallies gets underway.
And that starts with the major autumn rally which is born in gold’s
summer doldrums.
During these modern bull-market years, gold has enjoyed a strong and
pronounced seasonal uptrend. From that prior-year-final-close 100
baseline, it has powered 14.8% higher on average by year-ends!
These are major gains by any standard, well worth investing for.
While this chart is rendered in calendar-year terms since these
increments are easiest for us to grasp, gold’s seasonal year
actually starts in the summers.
Remember this whole concept of seasonality relies on blending many
years together, smoothing away outliers to reveal core underlying
tendencies. Seasonally gold tends to bottom in mid-June, but then
still largely drifts sideways in its
summer doldrums
until early July. Gold sure bucked its weakest season this year,
blasting sharply higher in June to that huge
decisive
bull-market breakout! But seasonals remain relevant.
Tremendous buying
was necessary to negate gold’s summer doldrums in the last couple
months, which largely came from gold-futures speculators. But that
nearly exhausted their capital firepower available to buy, leaving a
high selloff risk.
They could rapidly unwind their excessively-bullish bets if the
right catalyst convinces them to exit. The resulting
quickly-cascading gold-futures selling would kill gold’s autumn
rally.
But
gold’s bull-breakout momentum carrying it to its best levels in 6.2
years by mid-July could stave off the bearish mean reversion in spec
gold futures. Seeing gold hold over $1400 again has unleashed
new-high psychology, which powerfully motivates investors to
buy. Investment capital inflows could grow and feed on themselves,
amplifying gold’s upside during its autumn-rally span. We still
have to consider these seasonals.
Interestingly at gold’s typical mid-June summer-doldrums lows that
birth its major autumn rallies, it has still been 5.8% higher
year-to-date on average. On that same trading day this year, gold
had already been rallying but was still only up 4.6% YTD! So gold
remained relatively low this summer compared to seasonal
precedent when its autumn rallies normally get underway. There was
lots of room for seasonal buying.
Gold’s autumn rallies generally start grinding higher in Julies,
which have seen modest average gains of 0.5% in these modern
bull-market years per this dataset indexed from prior-year closes.
They accelerate considerably in Augusts, which is when that Asian
harvest buying kicks into full swing. Gold averaged big 1.9% gains
in Augusts, which is its 4th-best month seasonally! So
traders need to be long gold by late Julies.
The
upside momentum in gold’s strong autumn rallies only builds from
there. From 2001 to 2012 and 2016 to 2018, Septembers enjoyed hefty
additional average gains of 2.5%! That makes for gold’s 3rd best
month of the year, only behind Januaries’ 3.1% and Novembers’ 2.7%.
Gold’s autumn rallies generally running from mid-Junes to late
Septembers have enjoyed sizable 5.7% average gains in these
bull years!
That’s certainly a nice run higher in just 3.4 months. For
comparison the US benchmark S&P 500 stock index has averaged 8%
annual returns historically. So gold surging almost 3/4ths that
much in just over 1/4th the time is impressive. And these autumn
rallies are only the first third of gold’s strong season,
which includes the much-larger
winter rallies
averaging big 9.3% gains and smaller
spring rallies
running 3.3%.
Together gold’s troika of autumn, winter, and spring rallies carve
its strong seasonal uptrend rendered in this chart. These
sequential seasonal rallies begin right after gold’s weakest time of
the year, normally those summer doldrums which were short-circuited
this year. Speculators and investors alike can ride gold’s strong
bull-market seasonality in physical bullion or the leading GLD SPDR
Gold Shares gold ETF.
But
the gold miners’ stocks well outperform gold’s underlying
seasonal gains, amplifying gold’s trio of big seasonal rallies. The
gold stocks enjoy powerful sentimental and fundamental boosts when
gold rallies materially. Higher gold prices shock traders out of
their usual apathy for this small contrarian sector, restoring
capital inflows. The resulting gold-stock gains start shifting
sentiment back to bullish, fueling more buying.
And
that is fundamentally-justified, as gold-mining profits really
amplify underlying gold gains. The higher gold prices flow directly
through to bottom lines, as production costs are largely fixed when
mines are being planned. Gold miners’ profits leverage to gold
is important to understand, illuminating why gold stocks are the
best way to ride gold’s seasonal uptrend. The latest real-world
data drives home this point.
The
leading gold-stock investment vehicle is the GDX VanEck Vectors Gold
Miners ETF. It includes the world’s biggest and best major gold
miners. Every quarter I analyze the latest financial and
operational results from GDX’s elite gold stocks. While this
current Q2’19
earnings season is well underway, it won’t be finished until
mid-August. So the latest full results available are still Q1’19’s,
which proved quite robust.
The
GDX gold miners reported average all-in sustaining costs of
$893 per ounce,
which is what it costs them to produce and replenish each ounce of
gold. AISCs don’t change much regardless of prevailing gold prices,
as mining still requires the same levels of infrastructure,
equipment, and employees quarter after quarter. From Q2’18 to
Q1’19, the GDX gold miners’ AISCs averaged $856, $877, $889, and
$893.
That
makes for $879 AISCs over the past year. Gold-mining profits are
the difference between prevailing gold prices and AISCs. Q1’19’s
$1303 average gold price and average AISCs yielded industry profits
of $410 per ounce. So far in Q3’19, gold has averaged $1415 which
is a hefty 8.5% higher! Assuming gold holds these levels and
past-year AISCs persist like usual, gold miners are earning about
$536 this quarter.
That
is big 30.7% earnings growth on a mere 8.5% gold rally, making for
3.6x upside leverage! This core fundamental relationship
between mining profits and gold prices is why major gold stocks tend
to amplify gold’s gains by 2x to 3x. That leverage can grow much
larger after gold stocks are really undervalued and out of favor.
In roughly the first half of 2016, GDX skyrocketed 151.2% on a 29.9%
gold upleg for 5.1x upside!
So
gold stocks’ own strong bull-market seasonality is fully justified
fundamentally. This next chart applies this same seasonal
methodology to the flagship HUI NYSE Arca Gold BUGS Index. We can’t
use GDX for this study since its price history is insufficient, it
was only born in May 2006. But since GDX and the HUI hold most
major gold miners in common, they
closely mirror
each other. Gold stocks see big autumn rallies.
During these same
modern gold-bull-market years of 2001 to 2012 and 2016 to 2018, the
gold stocks as measured by the HUI enjoyed average gains of 9.3%
between late Julies to late Septembers. Augusts and Septembers are
actually this sector’s second-strongest 2-month span, averaging big
respective gains of 3.7% and 3.5%. Speculators and investors need
to be fully deployed before Augusts, just like in gold.
The gold stocks’
9.3% average autumn rally only leverages gold’s 5.7% one by 1.6x,
behind the 2x to 3x expected. But that evens out over the winter
and spring rallies, where gold stocks climb another 14.9% and
12.2%. That works out to 1.6x and 3.7x upside leverage to gold. In
full-calendar-year terms, the gold stocks’ bull-market seasonal
gains averaging 25.9% amplified gold’s 14.8% by 1.8x. That
was still short of 2x to 3x.
Prior to this
summer’s dazzling gold breakout, gold stocks had
underperformed
the metal they mine for years. With gold unable to hit new bull
highs, investors largely forgot about it and its miners’ stocks.
That has dragged down gold stocks’ average upside relative to gold.
But it has picked up dramatically with gold’s decisive bull-market
breakout starting to wake up traders. Recent gold-stock gains well
outpaced gold’s.
At
best in mid-July, GDX had rocketed 30.8%
higher summer-to-date! That was
2.9x gold’s own 10.7% gain over that span. Gold stocks’ powerful
counter-seasonal summer surge extended GDX’s upleg-to-date
gains to 60.8% over 10.2 months by
mid-July. That also proved 2.9x upside leverage to gold’s own 20.7%
upleg over that same time frame. That’s at the high side of
that historical 2x-to-3x outperformance range.
Since gold stocks
mirror and amplify underlying moves in gold, their autumn-rally
setup this year is very similar. Rather than drifting like usual in
June and July, gold-stock prices soared higher on gold’s decisive
bull-market breakout. That’s left them relatively high
heading into their normal autumn-rally span. While that increases
the risks of a counter-seasonal selloff slaughtering this year’s
autumn rally, it all depends on gold.
Gold stocks will
follow and leverage gold in the next couple months, whether the
metal retreats or keeps rallying. Again
gold faces a
major selloff if gold-futures selling starts snowballing,
rapidly unwinding the speculators’ excessively-bullish bets. But if
investors entranced by the alluring new-high psychology keep buying,
gold will continue powering higher. Gold stocks’ near-term fortunes
depend on gold investment demand.
This final chart
slices up gold-stock seasonals into calendar months instead of
years. Each is indexed to 100 at the previous month’s final close,
and then all like calendar months’ indexes are averaged together
across these same modern bull-market years of 2001 to 2012 and 2016
to 2018. Again gold’s autumn rally makes Augusts and Septembers
gold stocks’ second-best 2-month span after Januaries and
Februaries.
There’s no doubt gold-stock seasonals are very favorable in these
next couple months. Gold miners only enjoy strong back-to-back
months a couple times a year, and this autumn-rally span is one of
them. Late summers offer the best seasonal buying
opportunities of
the year to deploy capital in gold stocks. That’s when they
transition from seasonally-weak summers to seasonally-strong
autumns, winters, then springs.
That being said,
seasonality reveals mere tendencies. The primary drivers of gold
and its miners’ stocks are sentiment, technicals, and fundamentals.
Seasonality reflects how these average out across calendar years
over long spans, but they can easily override seasonals in
any given year. This summer so far is a key case in point. The
usual summer doldrums failed to materialize as gold surged on the
Fed pivoting dovish.
This year’s
autumn-rally setup is well on the bearish side with
gold-futures speculators effectively all-in long upside bets and
all-out short downside bets. Their buying
firepower is nearing exhaustion, leaving vast room to sell
and hammer gold and thus gold stocks lower. That remains a serious
risk if the right catalyst arises to ignite cascading selling. But
the power of new-high psychology to attract investors is strong.
Investment capital
inflows can drive gold higher for many months or even years,
regardless of what gold-futures speculators are doing. The higher
gold rallies, the more investors want to own it. The more they buy,
the higher gold climbs. Buying begets buying, and nothing
fuels this virtuous circle like new secular highs. So while we need
to remain wary entering the autumn rally relatively high, it could
certainly still happen.
Exactly a year ago gold’s setup heading into its autumn-rally span
was incredibly bullish. As I explained in
last year’s
essay updating this research thread, extreme gold-futures
selling had pushed spec shorts to
all-time-record
highs. Spec longs were really low too, leaving lots of room to
buy and push gold much higher. Yet what happened? Speculators kept
on aggressively shorting anyway, battering gold even lower!
Gold
was trading at $1302 in mid-June when its summer seasonal low tends
to be hit. It fell hard from there, hitting $1224 at the end of
July. Then it plunged even lower still to $1174 by mid-August, and
only rebounded modestly to $1199 by late September when the autumn
rally tends to end. Gold had terrible autumn-rally performance in
2018 despite the super-bullish setup. Strong momentum tends to
build on itself.
Last
year bearish psychology grew even more bearish in August and
September, leading to even more selling beyond normal limits. This
year we could see self-reinforcing bullish sentiment as
gold’s best prices in years fuel greed. That new-high psychology
motivating investors to return could gradually push gold higher as
they buy. The resulting high resilient gold prices could retard the
big overhang
of gold-futures selling.
Regardless of what happens in August and September, gold and its
miners’ stocks are entering their strong season which runs until
late next spring. So material selloffs can be used to accumulate
positions in gold and silver miners with superior fundamentals. But
make sure to protect your capital with trailing stop losses, as
speculators’ excessively-bullish gold-futures bets still have to
normalize via selling sooner or later.
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contrarian. That means buying low when few others are willing, so
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The bottom line is
gold and gold stocks are entering their strong
season, starting with their autumn rally. In modern bull-market
years, Augusts and Septembers have averaged out to the second-best
couple-month span. This is normally fueled by Asian seasonal gold
demand coming back online, driving this metal considerably higher.
Gold stocks’ profits leverage to gold enables them to nicely amplify
its gains.
This
year’s autumn-rally setup is very unusual, as gold skipped its
summer-doldrums slump after breaking out to major new bull-market
highs. That was driven by massive gold-futures buying, leaving
speculators’ positioning quite bearish. But rare new-high
psychology is a powerful motivating force for investors to buy.
Sustained capital inflows from them could easily overpower or retard
gold-futures selling for months. |