The
gold miners’ stocks have mostly been consolidating sideways over
this past half-year. They’ve been held down by periodic bouts of
heavy gold-futures dumping on Fed-tightening fears. But as those
traders exhaust their selling firepower, gold stocks have formed a
strong technical base that is birthing their next major bull-market
upleg. And a stiff tailwind is mounting as gold stocks enter their
strongest season of the year.
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. Like
clockwork these power major spring, autumn, and winter seasonal
rallies in gold and thus its miners’ stocks. Interestingly market
forces behind the former are the least-understood out of all gold’s
seasonal surges. Maybe that’s why this imminent spring rally has
also proven gold’s weakest.
Yet surprisingly
gold stocks still enjoy their best seasonal outperformance
relative to their metal during these same coming months! So gold
stocks’ spring rally has proven their strongest seasonal one during
gold’s modern bull-market years. This contradictory mismatch
between gold’s worst seasonal rally and its miners’ best one offers
an important clue on the spring rally’s motivating impetus,
sentiment is the key.
Traders’
psychology exceedingly influences their capital-allocation
decisions. They won’t buy gold or gold stocks or anything unless
they are optimistic prices will climb on balance. After dark cold
winters in the northern hemisphere where the vast majority of the
world’s traders live, spring naturally breeds optimism. Its
glorious expanding sunshine and warming temperatures universally
buoy the spirits of nearly everyone.
The lengthening
daylight hours and improving weather from March to May bring
joyful anticipation of the summer vacation season. That’s such
a wonderful contrast to January and February, which often seem like
nose-to-the-grindstone months of relentless busyness. With things
looking up and traders generally feeling happier during springs,
their optimism makes them more bullish on much including gold and
gold stocks.
This
glass-half-full sentiment leaves traders more willing to deploy
capital to chase expected gains. And their optimistic buying feeds
on itself, fueling virtuous circles of strength. The more traders
buy gold and its miners’ stocks, the more they rally. Those
resulting gains attract in still-more traders, accelerating the
upside. Spring is exceptionally-favorable for nurturing this
positive psychological feedback loop in markets.
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 previous
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 2022. 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 110 simply means it has rallied 10% 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 2021. 2022
isn’t included yet since it remains a work-in-progress. This
bull-market-seasonality methodology reveals that gold’s spring rally
is its last push higher before the
summer doldrums
arrive. While this is gold’s smallest seasonal rally of the year,
the gold stocks greatly leverage it.
Gold’s 2021 performance was relatively-weak, with this metal
ultimately drifting 3.6% lower in a high consolidation. Early on
last year gold remained in a healthy correction after a pair of
massive bull-market uplegs crested in 2020. Then during the past
half-year or so starting mid-summer, gold was slammed by periodic
bouts of heavy-to-extreme gold-futures selling on Fed-tightening
fears. That left gold really out of favor.
Before 2021, gold averaged excellent 15.6% annual gains in these
modern bull-market years. This pre-2021 seasonality is rendered in
light-blue in this chart. But last year’s major seasonal
underperformance dragged down the average to the dark-blue
dotted line. That’s a rather-large drop, especially considering
this data series is fully 18 years averaged together. But gold’s
strong bull seasonality remains very much intact.
Including last year’s Fed-tightening-fear-stunted gold action, this
metal still averaged hefty 14.5% yearly gains across this
long secular span. Those remain very impressive, enough to double
investors’ capital every five years. Gold’s average indexed
seasonal performance from 2001 to 2012 and 2016 to 2021 formed a
tight seasonal uptrend. Gold’s trio of major seasonal rallies
pushed it higher within that rising channel.
Chronologically those start with gold’s spring rally, again the
weakest averaging 4.1% gains between mid-March to early June. I
suspect this is the case because this seasonal rally is driven
more by sentiment than fundamentals. That ethereal spring
market optimism seems to push gold higher during the coming months.
Gold’s other two seasonal rallies are directly fueled by large
bullion buying from Asia and the West.
The
autumn rally
enjoys larger 5.8% average gains in these modern gold-bull years,
from mid-June to late September. Indian-wedding-season jewelry
buying is its main driver. Then gold’s subsequent
winter rally
from late October to late February grows much bigger, averaging fat
8.3% gains more than doubling the spring rally! Big Western jewelry
buying heading into Christmas then later Chinese New Year buying
contribute.
But
gold’s spring rally is nothing to sneeze at, as 4.1% average gains
over just 2.7 months annualize out to +18.2%. That’s
considerably better than that 14.5% seasonal gold advance in these
modern bull-market years. Gold’s spring rally is the fastest of
these seasonal ones, giving the yellow metal less time to power to
bigger gains. The autumn and winter rallies unfold over 3.4 and 4.1
months, helping them grow larger.
April is the heart of gold’s spring seasonal rally, averaging strong
calendar-month gains of 1.9% during this span. That ranks as this
metal’s third-best month seasonally, behind January’s massive 2.8%
and August’s big 2.0%. So these spring months have proven an
important and profitable time to be deployed in gold. And this
imminent 2022 gold spring seasonal rally has much-better upside
potential than usual.
Multiple major
bullish drivers are converging that should fuel an accelerating
bull-market upleg. In recent essays I analyzed each in turn. Gold
just made a major
upside breakout from a gigantic chart formation, a bullish
pennant pattern! That is working wonders to attract legions of
gold-futures speculators, who love chasing upside momentum.
Their buying will drive gold high-enough for long-enough to entice
back investors.
Big
investment buying is necessary to fuel major gold uplegs, since
investors’ vast pools of capital dwarf gold-futures speculators’.
Investors have
already started returning to gold, as evident in the holdings of
its leading and dominant gold exchange-traded funds. American
stock-market capital is migrating back into gold through the GLD
SPDR Gold Shares and IAU iShares Gold Trust ETFs, a bullish omen for
this metal.
Gold
investment demand will see a massive boost from the raging inflation
unleashed by this profligate Fed. Despite being
intentionally-lowballed, the latest US Consumer Price Index print
soared 7.5% year-over-year! That was its hottest read since
February 1982! These fast-rising prices are fueled by the Fed
expanding its balance sheet an insane 114.3% or $4,752b in just 23.7
months since March 2020’s stock panic!
During the last similar serious inflation spikes in the 1970s, gold
tripled during the first and more than quadrupled in the
second! Gold should at least double before this current inflation
spike runs its course, this ultimate inflation hedge can’t keep
dramatically
lagging inflation for long. Radically-more money has been
force-fed into the system, competing for and bidding up the prices
on far-slower-growing goods and services.
Gold-futures speculators’ deep fears of rate hikes are
highly-irrational. The Fed has executed fully
twelve rate-hike
cycles since 1971. Gold averaged 29.2% gains across the exact
spans of all dozen. It rallied during eight, averaging huge
49.0% absolute gains! In the other four, gold only fell an
asymmetrically-small 10.5% on average. Gold fared best when it
entered rate-hike cycles relatively-low and they were gradual.
That
means no more than one quarter-point hike per regularly-scheduled
FOMC meeting. Gold is low technically today after grinding lower to
sideways since August 2020, and the Fed can’t risk hiking too fast.
That would tank these extreme QE-levitated stock markets trading at
dangerous bubble valuations. And the Fed has
caved on past
tightenings once stock markets threaten new bears at 20%+ total
losses.
So
gold investment demand should strengthen considerably in this usual
spring-rally timeframe, really amplifying those seasonal gains.
American stock investors have vast room to buy, since they remain
radically-underinvested in gold. Exiting January, total GLD+IAU
gold-bullion holdings were only worth $87.3b. That was just 0.2% of
the elite S&P 500 stocks’ collective $39,866.7b market cap,
effectively zero!
Naturally the gold miners’ own seasonality is directly driven by
gold’s. The GDX VanEck Gold Miners ETF remains the leading
gold-stock benchmark and trading vehicle. It tends to amplify
material gold-price moves by 2x to 3x. That means an
outsized gold spring rally should translate into way-larger
gold-stock gains. Gold stocks’ young upleg growing on mounting
upside momentum in gold will attract traders back in.
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 still 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 major gold miners. Their spring rally is fueled by
gold’s.
That
spring optimism driving gold higher proves much more potent for gold
miners’ stocks. Between mid-March to early June in these same
modern gold-bull years of 2001 to 2012 and 2016 to 2021, the HUI
averaged outstanding 13.5% gains! That makes for gold
stocks’ biggest and fastest seasonal rally of the year, way
outperforming the metal that drives their profits. Spring
gold-stock upside leverage to gold runs a big 3.3x!
That
doubles the subsequent autumn and winter seasonal rallies’ upside
leverage of 1.6x each. The best time seasonally to be long gold
stocks is during this imminent spring rally. That’s when this
sector wins the biggest fraction of its annual gains. And those
have been extraordinary, averaging fantastic 25.0% yearly gains
during these gold-bull years! Compounding such hefty returns
doubles capital in just three years.
And
that’s after gold stocks’ average seasonal trajectory was dragged
down last year by very-weak price action. In 2021 GDX dropped
11.1%, amplifying gold’s loss by 3.1x. Prior to that, gold-stock
seasonality was stronger as seen in this light-blue line. The HUI
averaged incredible 27.2% annual gains over the 17 gold-bull years
prior to 2021! That’s why contrarian traders are willing to
tolerate this sector’s big volatility.
When
gold is really running, gold miners’ big inherent profits
leverage to it help drive far-larger outsized gains. The last
example was in spring 2020, which proved exceptionally-extreme due
to that pandemic-lockdown stock panic. From mid-March to late May,
GDX skyrocketed an astonishing 95.8% higher on a parallel massive
18.7% gold surge! That won’t happen this spring, but gold-stock
gains should still be ample.
As
always their fortunes depend on gold’s. If gold doubles its usual
spring strength to power 8% higher on all those bullish drivers, GDX
should amplify that upside by 2x to 3x. That implies 16% to 24%
gold-stock gains, much better than their gold-bull average. But if
Fed rate hikes and quantitative tightening hammer these lofty stock
markets hard enough, gold’s spring gains could grow larger boosting
gold stocks’.
A
strong mean-reversion component could come into play too. Gold
stocks’ recent
technical basing has left them really out of favor. Midweek,
GDX was trading at just 108.4 in seasonally-indexed terms. Just to
mean revert to their average early-June indexed topping of 116.9,
GDX would have to rally 7.8% from here. And since mean reversions
tend to see opposing proportional overshoots, gold stocks
could double that.
Gold
stocks’ strong spring seasonals are also apparent at a finer monthly
scale. From 2001 to 2012 and 2016 to 2021, the HUI averaged weak
0.1% gains in March, big 3.6% surges in April, and massive 4.9%
catapultings in May before spring rallies peter out to 1.3% average
June gains. April and May together form gold stocks’ strongest
seasonal streak of the year, ranking third and first out of all
the calendar months!
That’s clear in this next chart, which slices gold-stock seasonals
into calendar months instead of years. This uses the same
methodology discussed above, but applied to months rather than
years. Each calendar month is individually indexed to 100 as of the
previous month’s final close, then all like-months’ indexes are
averaged together. This more-granular analysis confirms spring is
the best time to own gold stocks.
After gold stocks’ post-winter-rally seasonal slump bottoms in
mid-March, this sector tends to blast nearly straight higher
until early June. No other two-calendar-month span comes close to
the average upside the gold stocks have achieved in April and May.
That optimistic spring psychology that affects broader stock
markets has proven particularly influential over the gold stocks.
Traders love this sector this time of year!
Still seasonality is merely a secondary driver, tendencies that
provide tailwinds or headwinds to gold stocks’ primary drivers of
sentiment, technicals, and fundamentals. So if popular greed
reigned in gold stocks and had just driven them up to
very-overbought levels without supporting earnings jumps, GDX would
face a correction despite spring seasonals. But the polar opposite
is true heading into this spring 2022.
Battered for over eight months now by periodic bouts of
heavy-to-extreme gold-futures selling on irrational Fed-tightening
fears, the gold stocks are seriously out of favor. This poor
sentiment has been fueled by them falling then grinding sideways
near lows for most of that span since Fed-rate-hike fears initially
flared in mid-June. That has left this sector deeply-undervalued
fundamentally, trading at dirt-cheap valuations.
In
recent months plenty of gold stocks have been sporting
incredibly-low trailing-twelve-month price-to-earnings ratios in
the teens and even single-digits! Their low stock prices don’t
reflect them earning money hand-over-fist with these high prevailing
gold prices. So gold stocks’ very-bullish sentiment, technicals,
and fundamentals are closely aligned for this coming spring rally.
Its seasonal tailwind should boost upside.
Leading into this seasonally-strongest span of the year is a great
time to get deployed in fundamentally-superior
mid-tier and
junior gold miners. With better output growth and lower market
capitalizations, their stock-price gains as gold powers higher
well-outperform the GDX majors. Our newsletter trading books are
full of these high-potential gold stocks. The earlier traders get
deployed, the more upside they can ride.
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The bottom line is
gold stocks often experience a strong spring rally seasonally. This
is driven by gold’s own seasonality, where outsized investment
demand arises at certain times during the calendar year. Gold
usually enjoys a solid spring rally likely fueled by the universal
optimism this season brings. And since gold drives gold miners’
profitability, their stock prices naturally follow it higher and
amplify its gains.
That infectious
spring exuberance has proven exceptionally-potent for gold stocks.
This time of year their gold outperformance far exceeds that seen in
their autumn and winter rallies. This sector’s spring rally is its
strongest of the year seasonally. And 2022’s has excellent
potential to grow much larger than normal. Gold stocks should surge
dramatically, leveraging big gold gains on raging inflation and
rolling-over stock markets. |