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The gold miners’
stocks have already enjoyed a phenomenal year, blasting higher with
gold’s new bull market. This sector’s market-dominating performance
has been amazing. Yet incredibly, the gold stocks are only now
entering their strongest time of the year seasonally. Historically
during bull-market years the gold stocks have enjoyed massive autumn
rallies on average, starting right about now which is very bullish.
Gold-stock
performance is highly seasonal, which certainly sounds odd.
The gold miners produce and sell their metal at relatively-constant
rates year-round, so the temporal journey through calendar months
should be irrelevant. Based on these miners’ revenues, there’s no
reason investors should favor them more at certain times of the year
than others. Yet history proves that’s exactly what happens in this
sector.
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 isn’t
driven by supply fluctuations like grown commodities experience, as
its mined supply remains pretty steady all year. Instead gold’s
major seasonality is demand-driven, with global investment
demand varying dramatically depending on the time within 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 now in late
summer, 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 secures brides’ financial independence within
their husbands’ families.
After that comes
the Western holiday season, where gold-jewelry demand surges for
Christmas gifts for wives, girlfriends, daughters, and mothers.
Following year-end, Western investors figure out how much surplus
income they earned after getting bonuses and paying taxes. Some of
this is invested into gold just like the Asian farmers do. Then big
Chinese New Year gold buying flares up heading into February.
So during its
bull-market years, gold has always tended to enjoy massive 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 right at their most-bullish seasonal juncture, the transition
between the usually-drifting
summer doldrums
and big autumn rallies.
Since it’s gold’s
own demand-driven seasonality that fuels the gold stocks’
seasonality, that’s the best place to start to understand what’s
likely coming. Price action is very different between bull years
and bear years, and gold is absolutely in a new bull market.
Between the 6.1-year secular low it suffered in mid-December and
early July, gold powered 29.9% higher easily exceeding that +20%
new-bull threshold.
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 slid 18.8% at worst from its
bull-market peak. Gold didn’t enter formal bear-market territory at
-20% until April 2013, thanks to the near-miraculous
stock-market
levitation driven by
extreme
distortions from the Fed’s bond monetizations.
So the modern
bull-year seasonality relevant to this new bull year in 2016 ran
from 2001 to 2012, before the Fed-induced bear-market years
between 2013 to 2015. This first chart distills down gold’s
bull-year seasonal tendencies, by averaging gold prices indexed
within each calendar year. This methodology is essential because it
renders price percentage moves perfectly comparable despite
differing prevailing gold prices.
Gold’s close on
the final day of each preceding year is recast at a level of 100,
with all the following year’s daily gold closes indexed off that.
An indexed level of 110 simply means gold was up 10% year-to-date
at that point. Each calendar year’s individually-indexed gold
prices are then averaged together to arrive at this gold-bull
seasonality. Gold has always had a strong tendency to enjoy
major autumn rallies.
During its last
bull-market years from 2001 to 2012, gold’s major autumn rally
started on average in late July. While gold seasonals
technically bottomed in mid-June, that was just part of gold
drifting listlessly sideways in the summer doldrums between late May
and late July. Gold’s major autumn rally averaging hefty 7.5% gains
between mid-June and early October didn’t actually break out to the
upside until early August.
And that’s exactly
where we are today! Gold is on the verge of once again seeing
outsized demand from those key seasonal income-cycle and cultural
drivers that ignite in this late-summer period and then run well
into autumn. Note above how August and September together saw
gold’s strongest seasonal gains on average during its last secular
bull. These next couple months are among gold’s top-performing
calendar ones.
Gold averaged
gains of 2.5% in Augusts and 3.3% in Septembers between 2001 to
2012, making those its 4th- and 2nd-best calendar months
respectively. While Novembers take the title with 4.0% average
gains, no other couple-month span outperforms August and September!
Gold is just entering its strongest stretch of the year in seasonal
terms, which is a very bullish near-term omen for it and gold-stock
prices.
While that’s
definitely exciting, this year does face some unique risk factors
that could dampen gold’s usual seasonal strength. A merely average
7.5% rally from gold’s $1286 levels in mid-June would take it to
$1382 by early October. But obviously gold already almost got
there! 2016 saw gold blast higher during the summer doldrums in a
rare counter-seasonal breakout. This proved a
record summer
rally for this metal.
Between the end of
May and early July, gold rocketed 12.3% higher! That is radically
better than bull-years’ seasonal average summer-to-date performance
of -1.1% by that point. This incredible surge was driven by a
combination of
massive buying by both investors and gold-futures speculators.
The former is great and not a problem at all, as investors are
strong hands looking to own gold outright for the longer term.
But unfortunately
futures speculators’ frenzied buying was the dominant force fueling
gold’s radically-unprecedented summer rally. Speculators grew
exceedingly bullish, ramping their upside bets on gold to towering
record levels. But these hyper-leveraged gold-futures
contracts are exceedingly risky, since relatively-small adverse
moves in gold prices can result in total losses of the capital
speculators risked.
Gold’s record
summer rally this year may have borrowed from its strong autumn
gains, effectively pulling some of that autumn buying forward into
summer. That hinges on whether investors resume buying gold
aggressively or not. And the record gold-futures longs accumulated
by speculators leave gold with a
near-record
futures selling overhang heading into autumn. This remains a
serious near-term risk for gold.
If some news or
market event spooks the uber-bullish speculators, they will be
forced to exit their wildly-excessive long positions en masse.
This heavy gold-futures selling will drive down gold fast, forcing a
snowballing number of speculators to liquidate or face catastrophic
losses due to futures’ extreme leverage. So until speculators’
collective gold-futures positions normalize, a cascading gold
selloff is possible any time.
I suspect gold’s
strong autumn seasonals will ultimately prevail, as Asian farmers
and Indian parents are not going to postpone their usual large gold
buying due to extreme gold-futures positions in American markets.
Nevertheless given the wildly-anomalous summer setup leading into
this year’s autumn gold rally, odds are it is going to prove far
more volatile than normal. Caution is in order this year, not
complacency.
Gold’s strong
autumn seasonals are why gold stocks enjoy strong autumn seasonals
of their own. Gold stocks amplify gold’s price action
because gold-mining profitability leverages it. This next chart
uses the same bull-market seasonal methodology applied to the
flagship HUI
gold-stock index. The gold stocks are now entering their best
couple-month span of the year seasonally, a very bullish portent for
this sector.
As of this week,
the gold stocks as measured by the HUI have already skyrocketed
181.7% higher since their 13.5-year secular low in
mid-January! That very week I pointed out the
fundamental
absurdity of those gold-stock prices given prevailing gold
levels, and aggressively bought and recommended many new gold stocks
in our newsletters. Once gold-stock bulls get underway, they grow
to immense proportions.
Between November
2000 and September 2011, this leading HUI gold-stock index soared an
astounding 1664.4% higher! That epic secular bull covered the vast
majority of gold’s bull-market years between 2001 to 2012, so we can
use those for gold-stock seasonals as well. And on average during
that span of mighty bull years, the gold stocks bottomed seasonally
in late July. And then massive autumn rallies erupted.
On average between
late July and late September in those last modern bull years, the
HUI rocketed 15.0% higher! A similar rally today from this index’s
late-July low would boost the HUI to 286, and like gold we are
already there in early August. Just like gold, gold stocks
enjoyed a super-anomalous
record summer
rally this year. So they too may have seen much autumn buying
pulled forward into summer.
If gold gets hit
by cascading gold-futures selling as speculators are forced to
rapidly unwind their still-near-record longs, gold stocks are going
to fall in sympathy and amplify gold’s losses. Considering the
HUI’s staggering gains, not far from a triple in just a half-year, a
healthy bull-market correction wouldn’t be surprising at all. The
setup leading into this year’s autumn rally is radically different
than in normal years.
But while that
portends much-greater coming volatility than usual just like in
gold, it shouldn’t negate gold stocks’ entire autumn rally. If gold
climbs on balance in the coming months as it ought to with all that
outsized Asian gold demand coming online again, the gold stocks
will follow it higher. Gold stocks have some aces up their
sleeves as well, which could lead to investment demand really
accelerating.
No other sector in
all the markets is even remotely close to challenging gold stocks’
commanding performance supremacy this year. Professional investors
including hedge-fund managers are really taking notice. They are
having a tough time performing this year in these frustratingly-fake
central-bank-levitated markets. They need to find some winners soon
to salvage their years, and the momentum is in gold stocks.
Gold and
gold-stock excitement is mounting after their record summers, and
gold’s strong autumn seasonality is well-known. So there’s a
good chance much more investment capital than usual will flood into
both gold and its miners’ stocks this autumn. And these inflows
will accelerate dramatically when the lofty stock markets inevitably
roll over, as gold is the ultimate portfolio diversifier since it
moves counter to stocks.
Thus gold’s
near-record futures selling overhang and its downside threat to
gold-stock prices may very well be mitigated or even negated by
exceptional investment demand this autumn. It’s been years
since investors got excited about gold and gold stocks, and that’s
just starting to build as evidenced by all the bullish comments on
the precious metals in the mainstream financial media. This autumn
could prove remarkable.
Just like in their
primary driver gold, gold stocks’ best couple-month span of the year
seasonally comes in August and September. This next chart breaks
down gold-stock bull-year seasonality per the HUI into more-granular
monthly form. Each calendar month between 2001 to 2012 is
individually indexed to 100 as of the previous month’s final close,
and then all like calendar months’ indexes are averaged together.
Gold stocks
enjoyed big average gains in Augusts and Septembers in the
bull-market years between 2001 and 2012 of 6.7% and 4.8%. These
coming couple months happen to be gold stocks’ 2nd- and 4th-best
months of the year! Those are the same relative rankings as gold’s
monthly bull-year seasonality, but reversed. No other time of the
year has a higher probability of witnessing major gains in the gold
stocks.
With such massive
seasonal tailwinds starting to blow, it’s hard not to be heavily
long gold stocks this time of the year regardless of how far and
fast they got here. With gold stocks’ epic performances this year
winning growing popularity even among mainstream investors and
speculators, there’s no better time for a new rush of capital to
flood into them than late summer and early autumn. That’s really
bullish.
But it’s important
to remember that seasonals are mere tendencies, not sure
things. Just like in weather, long-term averages can mask
considerable extremes. This year has already seen gold stocks buck
their seasonality in record ways. April is a relatively-weak month
seasonally, with the HUI averaging modest 0.5% losses in bull
years. Yet this past April the gold stocks greatly defied
seasonality with a huge 31.0% rally!
April’s weakness
is followed by May, which weighs in as gold stocks’ strongest month
of the year seasonally. Its average 6.9% HUI gain between 2001 to
2012 edged out August’s 6.7%. This May the HUI plunged 13.8%
as gold stocks mean reverted to give back some of April’s incredible
gains! So it’s important to realize that gold stocks certainly
haven’t behaved in line with seasonal norms in recent months.
This July saw the
HUI surge another 11.2% higher, vastly greater than the bull-year
average of a 1.9% loss. While that’s nothing like the extreme
gold-stock rally seen in April, it still pressures this year’s
August to diverge down from normal years’ average performance.
Seasonality is important to consider, but it doesn’t actually drive
anything. It just quantifies what’s caused by sentiment,
technicals, and fundamentals.
While gold stocks
face greater downside risk than normal in the coming weeks thanks to
that extreme near-record futures selling overhang looming over gold,
their sentiment, technicals, and fundamentals are still arguing for
an exceptional autumn rally. Mainstream investors and speculators
are getting more excited, but they aren’t yet euphoric and remain
woefully under-deployed in this small contrarian sector.
Technically the
gold stocks look super-bullish, with incredible strength even in the
summer when there shouldn’t be much if any. And fundamentally the
gold stocks remain very low relative to gold, their primary
driver. This is easiest expressed through
the HUI/Gold
Ratio, which I last wrote about a month ago. Between 2009 to
2012, the last normal years before the Fed-spawned gold bear, the
HGR averaged 0.346x.
Even this week as
the gold stocks climbed to a new bull record of 283.7 on the HUI,
the HGR was still only running 0.206x. Thus merely to regain
post-stock-panic normal-year average levels relative to today’s
prevailing gold prices in the $1350s, the HUI still has to rally
another 68% higher from here! That implies a HUI trading near
470, so there are great gains still to be won in gold stocks even at
these gold levels.
As always
investors and speculators can play the likely coming autumn rally
with the leading GDX gold-stock ETF, which
closely mirrors
the HUI’s performance. But a carefully-handpicked portfolio of the
elite gold miners with the best fundamentals will see gains
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The bottom line is
gold-stock seasonals argue this sector is right on the verge of a
major autumn rally. August and September are the best couple-month
span of the year for gold stocks seasonally in bull-market years.
This is driven by a parallel autumn gold rally fueled by outsized
Asian demand coming back online. Gold stocks naturally amplify
gold’s gains since their profits leverage gold’s price moves.
While this year’s
autumn-rally setup isn’t as clean as usual, gold stocks still have
great potential to surge in the coming months. Futures speculators
drove a record summer gold rally, leaving gold with a near-record
selling overhang that could cascade anytime. But mainstream
excitement is growing for the red-hot gold stocks, so much bigger
capital inflows are likely coming. And there’s no better time of
the year to buy.
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