The
gold miners’ stocks were whacked hard earlier this summer on a
Fed-rate-hikes scare. That serious anomaly really damaged
sentiment, spawning exceptionally-weak seasonal performance in this
contrarian sector. But the bruised gold stocks and the metal they
mine have trudged through, making it back to the start of their
traditional strong season. That begins with robust autumn rallies
that usually start marching now.
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 usually 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 typically-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 middle-aged bull market. After falling
to a 6.1-year secular low in mid-December 2015 as the Fed kicked off
its last
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 serious proportions, hitting -17.3% in
mid-December 2016. But that remained shy of a new bear’s -20%.
Gold rebounded
sharply from those severe-correction lows, nearly fully recovering
by early September 2017. But it failed to break out to new
bull-market highs, then and several times after. That left gold’s
bull increasingly doubted, until June 2019. Then gold surged
to a major
decisive breakout confirming its bull remained alive and well!
Its total gains grew to 96.2% over 4.6
years by early August 2020, still modest.
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,
then resumed in 2016 to 2021. 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 latest bull today and
bear-market action is quite dissimilar.
Prevailing gold prices varied radically through these modern bull
years, running between $257 when gold’s last secular bull was born
to August 2020’s latest record high of $2,062. All those long years
with that vast range of gold levels 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 is down 5%.
This
chart averages the individually-indexed full-year gold performances
in those bull-market years from 2001 to 2012 and 2016 to 2020. 2021
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 really gets
underway. That starts with the major autumn rally which is born in
gold’s summer
doldrums.
2020
proved an amazing year for gold, with this leading
alternative investment blasting 25.1% higher! At gold’s August-2020
all-time-record peak before the subsequent healthy correction, this
metal had soared a huge 35.9% year-to-date. And from March 2020’s
stock-panic-driven low to that last upleg topping, gold clocked in
with a giant 40.0% gain in just 4.6 months! Any way you slice it,
gold enjoyed a phenomenal year.
Such
outsized performance really skews the indexed seasonal average, even
though 2020 was the 17th year added to this modern-gold-bull span.
So I included a new data series in these charts, the light-blue
lines showing pre-2020 seasonality before last year entered
the mix. Gold’s huge gains during that crazy pandemic year really
shifted its seasonal average considerably higher, which certainly
doesn’t happen often.
Overall across these last 17 gold-bull calendar years, gold averaged
major 15.6% gains. With this kind of growth rate compounded,
it takes less than five years for gold prices to double. That has
held true during gold’s current bull too, as gold powered from
$1,051 in December 2015 to $2,062 in August 2020. That’s up 1.96x
in 4.6 years! Gold’s strong seasonals are the impetus behind gold
stocks’ powerful seasonal rallies.
Gold’s autumn rally technically starts with its summer-doldrums
bottoming in mid-June. But summers for gold have often been
sideways-grindy affairs. 2019 and 2020 both proved exceptions,
seeing strong gold surges on momentum-fueled investment demand.
This current summer 2021 had plenty of potential to see that summer
strength flare again, but an absurd Fed-rate-hike scare in mid-June
initially scuttled that.
The
Fed’s Federal Open Market Committee met for another monetary-policy
meeting then, and changed nothing. The FOMC kept its
hyper-easy zero-interest-rate policy and $120b of monthly
quantitative-easing money printing in place indefinitely. There
were no hints at all of rate hikes or tapering QE bond buying. But
top Fed officials’ individual projections of future rates came in
slightly more hawkish than expected.
Just
a third of those guys thought the Fed might need two quarter-point
rate hikes way out into year-end 2023. Not only is that an
eternity away in the markets, the Fed chair himself warned to take
that so-called dot plot “with a big grain of salt.” Even though it
has proven notoriously inaccurate at forecasting future
federal-funds-rate levels, prospects for distant-future rate hikes
scared speculators into dumping gold futures.
That
hammered gold 5.2% lower in just three trading days after that
nothingburger FOMC decision! Gold soon bounced and recovered into
mid-July, but remained well below pre-hawkish-dots-scare levels. So
though this year’s gold autumn rally got off to a slow start, it
actually has bigger upside potential launching off such anomalous
lows. Gold’s tendency to mean revert higher after sharp selloffs
should fuel bigger gains.
During these modern gold-bull years, gold’s autumn rally averaged
strong 6.4% gains between mid-June to late September. But those
certainly weren’t linear over that span, tending to cluster around
August. In June, July, and August proper, gold’s average gains from
2001 to 2012 and 2016 to 2020 weighed in at +0.5%, +1.1%, and
+2.1%. Gold’s autumn rally tends to accelerate as summers mature,
especially in August.
That’s certainly good news this year after gold’s
Fed-gold-futures
purge in mid-June. Late summers are when massive Indian
seasonal gold demand starts mounting, from both post-harvest and
pre-wedding buying. And that could be considerably bigger than
usual in this imminent August 2021. Not only are gold prices
relatively-low which attracts shrewd price-conscious Indians, but
there is catch-up buying to do.
Indian gold dealers reported demand all but vanished in May, due to
soaring COVID-19 cases then and new lockdowns in response. Indians
even ignored a big mid-month Hindu festival that usually drives
outsized gold demand. So Indian gold experts expect to see large
catch-up buying unfold during gold’s autumn rally. Indian
gold-jewelry demand is the second-largest in the world after China,
utterly massive.
That
alone should push gold prices higher between now and that
late-September autumn-rally peak. As gold continues recovering and
mean reverting higher, that will attract capital inflows from the
two groups of American traders who dominate gold’s short-term
fortunes. They are the gold-futures speculators who drove gold’s
hawkish-Fed-dots plummeting, and gold investors who have largely
been ignoring gold ever since.
The
specs puked out the equivalent of an enormous 89.7 metric tons of
gold in the week of that FOMC decision, and another 22.6t the
following week! That left their total longs and shorts running 0%
and 79% up into their past-year trading ranges. The
most-bullish-possible near-term setup for gold is 0% longs and 100%
shorts, indicating selling exhaustion. These guys have room for
massive buying to normalize their positions.
At
that point specs needed to buy the gold-futures equivalent of 404.0t
of gold to push their bets back to levels where major gold selloffs
grow increasingly likely! For comparison, gold’s young upleg
interrupted by those hawkish Fed dots powered 13.5% higher between
early March to early June on just 125.3t of spec gold-futures
buying. As of the latest weekly positioning report, they still have
room to buy another 300.0t!
Gold
getting pounded on that leveraged gold-futures selling really
impaired psychology, shifting investors’ gold outlook more to the
bearish side. The best high-resolution daily proxy for gold
investment demand is the combined physical-gold-bullion holdings of
the dominant American GLD SPDR Gold Shares and IAU iShares Gold
Trust gold ETFs. They were largely flat in June straddling the
FOMC, edging up 0.4% or 6.8t.
But
investors started worrying more in early July, after gold didn’t
quickly and fully bounce back from that anomalous rate-hike-fear
plunge. So by the middle of this week, GLD+IAU holdings have
slumped 1.4% or 21.4t summer-to-date. Investors love chasing
momentum, so they need sustained meaningful gold advances to
entice them back in. The normal Indian autumn demand along with
catch-up buying ought to help.
Gold
powered dramatically higher in the last couple summers bucking the
doldrums because investment demand was so strong. Across
June, July, and August 2019, GLD+IAU holdings soared 17.4% or
178.7t! And during the summer of 2020, these leading and dominant
gold ETFs enjoyed another mighty holdings build of 192.0t or 12.3%!
Big investment buying needs to return to fuel an outsized autumn
rally this year.
And
it really ought to given the soaring price inflation increasingly
ravaging the US economy. Gold is the ultimate inflation hedge, as
its mined supply only grows on the order of 1% annually. So as
central banks print money, relatively much more has to chase
relatively much less gold bidding up its price. The Fed is
inflating like there is no tomorrow, unleashing the epic deluge
of new money rapidly forcing prices much higher.
Since that March 2020 stock panic, the Fed has ballooned its balance
sheet by a radically-unprecedented 91.1% or $3,929b! That’s no
typo, this profligate FOMC has recklessly chosen to nearly double
the US dollar supply in just 16.3 months. As more investors
start to understand this and its dire implications, they’ll really
want to up their still-super-low gold portfolio allocations. That
could start accelerating in August.
So
despite this year’s autumn rally kicking off with gold’s anomalous
low on that distant-future-rate-hikes scare, big upside potential
remains. A merely-average 6.4% autumn rally would mean revert this
metal back up near $1,874. But stronger Indian gold demand,
speculators normalizing lopsided gold-futures bets, and investors
increasingly returning as inflation worsens could easily fuel a
much-larger autumn rally.
This
next chart applies this same modern-gold-bull-year seasonality
methodology to gold stocks. Since GDX was born later in May 2006,
its price history is insufficient for longer-term studies. Thus the
classic HUI gold-stock index is used instead. GDX and the HUI
closely track
each other, they are functionally interchangeable containing
most of the same large gold stocks. Gold’s gains fuel their own
autumn rally.
The
major gold stocks have averaged a nice 11.2% autumn rally in 2001 to
2012 and 2016 to 2020. The timing of that naturally closely
parallels gold, launching in mid-June before running into late
September. Gold stocks’ autumn rally ends the summer-doldrums drift
and kicks off this sector’s strong season, which runs all the way to
the following June. This contrarian sector’s overall seasonal
uptrend is incredibly strong.
On
average across these 17 gold-bull-market years, gold stocks have
powered 27.2% higher! That is an extraordinary gain through
such a long secular span. While gold stocks aren’t very popular
outside of the usual contrarian circles, they certainly should be.
With average annual gains at that scale, speculators and investors
can double their capital in major gold stocks in less than 3 years!
That’s hard to beat anywhere.
Yet
out of gold stocks’ three major seasonal rallies that mirror gold’s,
the autumn one is the most anemic. It is the smallest on average
with those 11.2% HUI gains, compared to 13.8% in the subsequent
winter rally and 13.2% in the later spring rally. Those run
parallel to gold’s +6.4%, +8.9%, and +3.8% in its own autumn,
winter, and spring rallies. Thus gold stocks’ autumn-rally upside
leverage to gold has only run about 1.8x.
That
lags GDX’s normal gold outperformance of 2x to 3x, but is still
better than the winter rally’s worse upside leverage near 1.6x.
Gold stocks amplify gold’s gains best in their spring rally, which
clocks in way up at 3.5x! But their autumn rally is still well
worth trading even with relatively-poor upside leverage to gold on
average. That is skewed low by weak autumn-rally years where gold
and gold stocks fall sharply.
But
in strong autumn-rally years where elevated gold investment demand
pushes the yellow metal higher, gold stocks really amplify its
gains. Summer 2019 was a great case in point. Between late May to
early September that year, roughly the autumn-rally span, GDX soared
51.6% on a 21.4% gold run! That made for much-better 2.4x upside
leverage. When gold rallies strongly during summer, gold stocks
still really outperform.
So
if gold investment demand strengthens as it ought to this August and
September, the gold stocks should see much-bigger autumn-rally gains
than usual. August has proven gold stocks’ second-best month of the
year seasonally, enjoying excellent average 4.1% gains! September
is no slouch either averaging +2.0%. These months combined are one
of major gold stocks’ strongest two-month seasonal spans.
That
is more apparent in this final chart that slices gold-stock
seasonals into calendar months. Each is indexed to 100 at the
previous month’s final close, then all like months’ indexes are
averaged together. These same modern-gold-bull years of 2001 to
2012 and 2016 to 2020 are included. The next couple months are
usually an important time to be fully deployed in gold stocks
in order to ride their autumn rally.
Gold-stock seasonals are certainly very favorable in these next
couple months. Late summers heading into August before gold’s and
gold stocks’ autumn rallies usually accelerate offer an excellent
seasonal buying opportunity. While not quite as good as the
earlier summer-doldrums lows, late summers are just before gold
stocks transition into their seasonally-strong autumns, winters, and
springs. Those enjoy major gains.
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. But this year’s autumn-rally setup still looks
really bullish, partially because of that Fed-gold-futures purge and
mean reversion higher.
On average at
their autumn-rally topping in late September, the major gold stocks
of both the HUI and GDX have powered up 27.2% year-to-date in these
modern-gold-bull years! But thanks to mid-June’s hawkish-Fed-dots
scare, as of this week GDX is still
down 5.1% YTD. That is largely the result of that
post-FOMC plunge, as in mid-May GDX was tracking up 10.2% this year
compared to a +12.0% seasonal average.
To mean revert
back up to those average 27% YTD gains by the end of today’s autumn
rally, GDX would have to soar to $45.82.
That’s another 34% higher than this week’s levels, big
potential upside well worth trading. With the major gold stocks’
typical 2x-to-3x leverage to gold, it
would only need to power 11% to 17% higher to fuel a full gold-stock
seasonal mean reversion. These relatively-modest gains are
totally doable.
In gold-stock
terms, that would extend GDX’s total upleg since its last correction
bottomed in early March to 48.3%. The first four uplegs of this
gold-stock bull averaged massive gains of 99.2% over 7.6
months each! So seeing this battered sector mean revert back up to
seasonal norms in the next couple months of this autumn-rally span
isn’t a stretch. All it would take is gold normalizing after that
Fed-rate-hike-scare purge.
And this leading
alternative investment’s bullish backdrop certainly favors that.
Late-summer Indian gold demand is likely to be bigger than usual on
catch-up buying. Speculators’ gold-futures positioning is still
very bullish for gold after their violent selling purge on that
Fed-rate-hike scare. And
investors haven’t
fled gold on that anomalous weakness, so they’ll likely chase
coming upside momentum amplifying gold’s gains.
While we took our
lumps on gold-stock stoppings on that post-FOMC gold-futures puking,
we redeployed in fundamentally-superior
mid-tier and
junior gold miners to keep our newsletter trading books full.
With gold stocks battered down to
really-oversold
levels relative to GDX’s 200-day moving average and
really-undervalued levels compared to gold, their upside
potential in the rest of this autumn rally looks amazing.
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The bottom line is
gold and gold stocks are entering their strong season, starting with
their autumn rally mostly in August and September. That is normally
fueled by Asian seasonal gold demand ramping back up. But this
year’s setup is much more bullish than usual. Gold-futures
speculators need to do big buying to normalize their positioning
after their violent exodus in the wake of mid-June’s
distant-future-rate-hikes scare.
And while that
anomalous event left gold investment demand anemic this summer, it
will likely ramp up fast as gold mean reverts higher. Investors
love chasing gains to ride momentum, which amplifies gold’s upside.
Gold portfolio allocations should soar too on the raging inflation
unleashed by the Fed nearly doubling the money supply since March
2020’s stock panic. This is a great setup for a big gold-stock
autumn rally. |