The gold miners’
stocks have certainly had a wild ride this year. After initially
skyrocketing out of deep secular lows into a mighty new bull market,
they recently suffered a massive correction climaxing in an extreme
plummet. This coincided with gold stocks’ major seasonal low in
October. That heralds their strongest seasonal rally of the year
heading into and through winter, a very bullish omen for coming
months.
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 long. 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. And the biggest
seasonal surge of all is just now getting underway heading into
winter. As the Indian-wedding-season gold-jewelry buying that fuels
this metal’s big
autumn rally winds down, the Western holiday season is ramping
up. The holiday spirit puts everyone in the mood to spend money.
Men splurge on
vast amounts of gold jewelry for Christmas gifts for their wives,
girlfriends, daughters, and mothers. The holidays are also a big
engagement season, with Christmas Eve and New Year’s Eve being two
of the biggest proposal nights of the year. Between a quarter and a
third of the entire annual sales of jewelry stores come in
November and December! And jewelry historically dominates overall
gold demand.
According to the
World Gold Council, jewelry accounted for 58% of total global gold
demand in 2014 and 57% in 2015. That works out to about 4/7ths of
annual gold demand. The first half of 2016 proved a historic
exception, as
gold investment demand trumped jewelry demand for two
consecutive quarters for the first time ever. Nevertheless
jewelry demand still ran 40% even in H1’16’s young investment-driven
gold bull.
This outsized
Western jewelry buying heading into winter shifts to pure investment
demand after year-end. That’s when Western investors figure out how
much surplus income they earned during the prior year after bonuses
and taxes. Some of this is plowed into gold in January, driving it
higher. Finally the big winter gold rally climaxes in late February
on major Chinese New Year gold buying flaring up over there.
So during its
bull-market years, gold has always tended to enjoy major winter
rallies driven by these sequential episodes of outsized demand.
Naturally the gold stocks follow gold higher, amplifying its gains
due to their great profits leverage to the gold price. Today gold
stocks are once again just heading into their strongest seasonal
rally of the year driven by this robust winter gold demand.
That’s super-bullish.
Since it’s gold’s
own demand-driven seasonality that fuels the 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 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 just 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 crazy
stock-market
levitation driven by
extreme
distortions from the Fed’s QE3 bond monetizations.
So the modern
bull-year seasonality relevant to this new bull year of 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 is 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 winter
rallies.
During its last
bull-market years from 2001 to 2012, gold’s major winter rally
started on average in late October. Technically gold’s major
seasonal bottom averaged being carved on that month’s 16th trading
day, which happened to be October 24th this year. From there gold
surges into its strongest seasonal rally of the year. Between late
October and late February in its last bull years, gold blasted 10.1%
higher on average!
These big
winter-rally seasonal gains are much larger than the 4.3% and 7.5%
averages seen in gold’s other major seasonal rallies in spring and
autumn! That makes late October one of the best times of the year
to deploy capital into gold. That Western holiday gold-jewelry
buying fuels such outsized demand that November has long
proved gold’s best calendar month of the year with average bull-year
gains of 4.0%.
While this bullish
gold seasonality really moderates in December with an average 0.8%
bull-year gain, it soon accelerates again in January on that
surplus-income gold investment buying. The 2.7% average gain gold
enjoyed in January during those bull years between 2001 to 2012
makes for this metal’s third best month of the calendar year. This
winter-rally span is when gold enjoys its peak seasonal tailwinds.
Unfortunately the
great majority of speculators and investors remain wary of deploying
into gold to ride its strong seasonal winter rally. Just like last
year, the former are terrified of the next Fed rate hike once again
arriving in mid-December. Gold-futures speculators in particular
have spent recent years fooling themselves into believing Fed rates
hikes are gold’s mortal nemesis, despite history proving that
totally false.
The record is
crystal-clear, gold actually
thrives during
Fed-rate-hike cycles! Before today’s there have been 11 since
1971, and gold has averaged impressive 26.9% gains across the exact
spans of all these Fed-rate-hike cycles. In the majority 6 of these
where gold actually rallied, its average gains were a staggering
61.0%! In the other 5 where gold retreated, its average losses
were an asymmetrically-light 13.9%.
Gold blasted
higher during Fed-rate-hike cycles when they started with gold
relatively low and unfolded at a gradual pace. Gold not only
entered today’s current farce of a rate-hike cycle at major secular
lows, the Fed under uber-dove Janet Yellen has never been slower in
raising rates. With at least an entire year between hikes, it’s
hard to imagine any more gradual. This snail-like rate-hike setup
is very bullish for gold.
During its last
rate-hike cycle between June 2004 to June 2006, the FOMC hiked at 17
consecutive meetings for a total of 425 basis points! That more
than quintupled the federal-funds rate to 5.25%, an
inconceivably-high level today. Even though that was an
extremely-aggressive rate-hike cycle, gold still managed to power
49.6% higher over that exact span! Rate hikes are no threat to
gold’s strong winter seasonals.
Meanwhile
investors remain distracted by the Fed’s ludicrous stock-market
levitation, which is retarding gold investment demand. When stock
markets remain near record highs and drenched in complacency,
investors aren’t interested in prudently diversifying into gold.
Since gold tends to move counter to the stock markets,
investment demand only surges when stocks weaken. That’s what
ignited 2016’s gold bull.
As the Fed’s
surreal stock-market levitation cracked early this year, American
stock investors flocked to gold via shares in the flagship GLD SPDR
Gold Shares gold ETF. When they buy its shares faster than gold
itself is being bought, this ETF’s managers must issue sufficient
new shares to offset all this excess demand and maintain gold
tracking. The proceeds from these GLD-share sales are used to buy
gold bullion.
Thus GLD holdings
builds show stock-market capital migrating into gold. In
Q1’16, GLD’s enormous 176.9-metric-ton build represented an
incredible 80.6% of total worldwide demand growth in gold
year-over-year. In Q2’16, GLD’s 130.8t build accounted for a
colossal 93.6% of the total global increase in gold demand! The
reason gold’s
bull stalled in Q3’16 is because GLD’s holdings actually
suffered a 2.1t draw.
When these lofty
Fed-levitated stock markets inevitably roll over again,
differential GLD-share buying will surge again for prudent
portfolio diversification into gold. That will really add to gold’s
strong winter seasonals, amplifying its rally in the coming months.
And gold’s strongest seasonal rally doesn’t even need to be kick
started by GLD demand resuming, as it relies on November’s strong
holiday gold-jewelry demand.
So neither
speculators’ Fed-rate-hike fears nor investors’ current apathy
towards gold thanks to near-record stock markets are likely to short
circuit gold’s strong winter rally this year. And if gold’s
bull-market seasonals again prevail, that’s super-bullish for gold
stocks in the coming months. They also enjoy strong winter
seasonals thanks to gold’s, because gold miners’ profitability and
thus stock prices
leverage gold’s price action.
This next chart
applies this same bull-market-seasonality methodology to the leading
benchmark HUI NYSE Arca Gold BUGS Index. Naturally gold-stock
seasonals closely mirror gold’s, so the miners are also just
entering their strongest seasonal rally of the year. On
average in those last bull-market years from 2001 to 2012, the HUI
powered a whopping 15.9% higher between late October and late
February!
Gold stocks’
strong 15.9% average winter rally bests their 13.7% and 15.0%
rallies heading into spring and autumn. On average gold stocks’
major seasonal bottoming heading into their winter rally arrives on
October’s 15th trading day, which translates into October 21st this
year. Like their primary driver gold, gold stocks tend to rally
strongly in November, moderate in December, and then surge again in
January and February.
And given the
sentimental, technical, and fundamental setups for gold stocks
entering this year’s winter rally, the usual seasonal tailwinds are
likely to help propel them much farther than usual. Just
like gold and because of it, gold stocks entered a mighty new bull
market early this year as well. Between mid-January and early
August, they skyrocketed 182.2% higher in just 6.5 months! It was a
wildly-profitable run.
That left gold
stocks overbought in the middle of summer, their weakest time of the
year seasonally. So as I warned in early July,
gold stocks’
record summer surge soon rolled over into a major correction.
That quickly ballooned to massive proportions exceeding 20%, the
threshold for new bear markets in general stocks. Then gold stocks
started grinding higher again in September, but were slammed by gold
futures in October.
Early this month
the HUI plummeted 10.1% in a single trading day, one of its worst
losses ever, after
gold-stock stops were run. That was sparked by cascading forced
stop-loss selling in gold futures as gold slipped below $1300. By
the time the dust settled, the gold stocks’ total correction per the
HUI had mushroomed to a staggering
30.9% in 2.2 months! Such an enormous selloff naturally
spawned great bearishness.
So the gold
stocks are now entering their seasonally-strongest
period of the year universally despised and very low technically.
These are
screaming buy signals within ongoing bull markets, greatly
upping the odds gold stocks’ next major upleg is just getting
underway. Add the winter rally’s strong seasonal tailwinds to
exceptionally-bullish sentiment and technicals, and gold stocks’
coming gains should prove exceptional.
The gold miners’
fundamentals also powerfully line up with the winter seasonal
strength this year, really boosting the bullish outlook. These
companies’ third-quarter operating results will be fully released by
mid-November. And they are highly likely to reveal more big gains
in operating profits despite gold’s recent weakness. Improving
gold-mining fundamentals will entice in more investors, magnifying
seasonal gains.
Gold averaged
$1185 in Q1’16 and $1259 in Q2’16. That 6.3% quarter-on-quarter
gain in average gold prices led to enormous surges in operating
profitability of the elite gold miners. They are represented by
the leading gold-stock ETFs, the GDX VanEck Vectors Gold Miners ETF
for the majors and its sister GDXJ VanEck Vectors Junior Gold Miners
ETF for the juniors. These ETFs’ component stocks are excellent.
Each quarter I
analyze the operating performances of the individual gold stocks
included in these top ETFs. Their cash flows generated from
operations are a great proxy for current profitability. In Q2’16 on
that 6.3% average-gold-price increase, the top 34 component
companies of GDX
saw their operating cash flows surge 32.3% higher
quarter-on-quarter. And
GDXJ’s
skyrocketed an incredible 51.1% higher QoQ!
Q3’16’s average
gold price climbed another 6.0% QoQ from Q2 to $1334,
despite gold’s big recent pullback. So
those elite gold miners of GDX and GDXJ are very likely to
soon report another major surge in operating profitability!
It wouldn’t surprise me to again see big gains approaching Q2’s,
which would certainly spark great trader interest. Improving
fundamentals aligning with seasonals portends big upside.
If the gold stocks
were entering this winter-rally period drenched in greed after a
powerful upleg, the seasonal tailwinds probably couldn’t overcome
the healthy correction tendency. If the gold miners’ fundamentals
were deteriorating, that would likely prove too much heavy lifting
for seasonals. But with the strong winter-rally seasonals aligning
with very bullish sentiment, technicals, and fundamentals, gold
stocks should surge.
This last chart
breaks down gold-stock seasonality into more-granular monthly
forum. 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. While this
November-to-February winter-rally period doesn’t encompass most of
gold stocks’ strongest months, it does enjoy the most-consistent
gains.
On average in
bull-market years, November enjoys the third-best gold-stock
gains of the calendar year at 6.3% in HUI terms. That’s not far off
the best months of May and August, which have averaged rallies of
6.9% and 6.7%. But unlike the flat-or-lower months surrounding
those other strong months, November is followed by December’s 2.3%,
January’s 2.7%, and February’s 3.5% average bull-market-year gains.
This
unparalleled consistency is what makes gold stocks’ winter-rally
seasonals so impressively strong. Continuing to march higher on
balance ultimately yields better upside than the
two-steps-higher-one-step-back action throughout the rest of the
calendar year. There are no significant gold-stock selloffs in
seasonal-average terms at all between November and February, which
facilitates exceptional winter gains.
Of course the
standard seasonality caveat applies that these are mere
tendencies, not primary drivers of gold or gold stocks.
Seasonal tailwinds can be easily drowned out by bearish sentiment,
technicals, and fundamentals. May and August this year are perfect
cases in point. Instead of rallying 6.9% and 6.7% in line with
seasonal averages in 2016, the HUI plunged 13.8% and 19.2% in May
and August to shred seasonals!
Seasonality
doesn’t always work, especially when it doesn’t align with
the primary drivers of sentiment, technicals, or fundamentals in
that order. Gold stocks entered both May and August this year up at
very-overbought levels, at new bull-market highs stretched far above
the HUI’s 200-day moving average. After rocketing 31.0% higher in
April and surging up 11.2% in July, performance mean reversions were
due.
Gold stocks’
resulting massive
correction in August bucked the seasonal trends. While
September saw a 4.3% HUI gain in line with normal +4.8% bull-market
seasonality, early October’s plummet on stops being run was
extremely excessive compared to normal October pullbacks. Thus gold
stocks are unloved and oversold heading into this year’s
winter-rally span, which is a super-bullish omen for outsized
seasonal gains.
The serious
gold-stock upside coming as bullish sentiment, technicals, and
fundamentals align with seasonal tailwinds can certainly be played
with those popular GDX and GDXJ ETFs. But because they
hold so many gold
stocks, their gains can only pace the HUI at best. A carefully
hand-picked portfolio of elite individual stocks with superior
fundamentals will really amplify sector gains, dwarfing the ETFs’
performances.
At Zeal we’ve
spent literally tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to
trade and when. This has resulted in 851 stock trades recommended
in real-time for our newsletter subscribers since 2001. Their
average annualized realized gains including all losers are running
way up at +24.1% as of the end of Q3! Why not put our expertise to
work for you?
We’ve been
super-aggressively adding gold-stock and silver-stock trades since
that anomalous gold-stock plummet in early October. These new
trades are already detailed in our popular
weekly
newsletter, and coming soon in our
monthly one.
Both draw on our vast experience, knowledge, wisdom, and ongoing
research to explain what’s going on in the markets, why, and how to
trade them with specific stocks.
Subscribe today!
For just $10 an issue, you can learn to think, trade, and thrive
like a contrarian.
The bottom line is
gold stocks are just entering their seasonally-strongest period of
the year. Their big winter rally is fueled by gold’s own, which is
driven first by outsized demand from holiday jewelry buying and
later new-year investment buying. So both the metal and its miners’
stocks have strong tendencies to rally between late October and late
February in bull-market years. It’s the best calendar span to own
gold stocks.
And this year’s
coming winter rally looks exceptionally bullish because the seasonal
tailwinds won’t be overpowered by bearish sentiment, technicals, or
fundamentals. All of these primary drivers are bullish today and
closely aligned with the strong seasonals, making for a powerful
united force to propel gold stocks dramatically higher. Speculators
and investors alike should be fully deployed for the coming months. |