Gold’s incredible strength this summer is very unusual, as early
summers are the weakest times of the year seasonally for gold,
silver, and their miners’ stocks. With traders’ attention diverted
to vacations and summer fun, interest in and demand for precious
metals normally wane. So this entire sector tends to suffer a
seasonal lull, along with the general markets. This June’s
bull-market breakout is a momentous anomaly.
This
doldrums term is very apt for gold’s usual summer
predicament. It describes a zone in the world’s oceans surrounding
the equator. There hot air is constantly rising, creating
long-lived low-pressure areas. They are often calm, with little or
no prevailing winds. History is full of accounts of sailing ships
getting trapped in this zone for days or weeks, unable to make
headway. The doldrums were murder on ships’ morale.
Crews had no idea when the winds would pick up again, while they
continued burning through their limited stores of food and drink.
Without moving air, the stifling heat and humidity were suffocating
on these ships long before air conditioning. Misery and boredom
were extreme, leading to fights breaking out and occasional
mutinies. Being trapped in the doldrums was viewed with dread, it
was a very trying experience.
Gold
investors can somewhat relate. Like clockwork nearly every summer,
gold starts drifting listlessly sideways. It often can’t
make significant progress no matter what the trends looked like
heading into June, July, and August. As the days and weeks slowly
pass, sentiment deteriorates markedly. Patience is gradually
exhausted, supplanted with deep frustration. Plenty of traders
capitulate, abandoning ship.
Thus
after decades of trading gold, silver, and their miners’ stocks,
I’ve come to call this time of year the summer doldrums.
Junes and Julies in particular are usually desolate sentiment
wastelands for precious metals, totally devoid of recurring seasonal
demand surges. Unlike much of the rest of the year, these summer
months simply lack any major income-cycle or cultural drivers of
outsized gold investment demand.
The
vast majority of the world’s investors and speculators live in the
northern hemisphere, so markets take a back seat to the great joys
of summer. Traders take advantage of the long sunny days and kids
being out of school to go on extended vacations, hang out with
friends, and enjoy life. And when they aren’t paying much attention
to the markets, naturally they aren’t allocating much new capital to
gold.
Given gold’s dull summer action historically, it is never wise to
expect too much from it this time of year. Summer rallies can
happen, but they aren’t common. So expectations need to be
tempered, especially in Junes and Julies. That early-1990s Gin
Blossoms song “Hey Jealousy” comes to mind, declaring “If you don’t
expect too much from me, you might not be let down.” The markets
are ultimately an expectations game.
Quantifying gold’s summer seasonal tendencies during bull markets
requires all relevant years’ price action to be recast in
perfectly-comparable percentage terms. That is accomplished by
individually indexing each calendar year’s gold price to its
last close before market summers, which is May’s final trading day.
That is set at 100, then all gold-price action each summer is
recalculated off that common indexed baseline.
So
gold trading at an indexed level of 105 simply means it has rallied
5% from May’s final close, while 95 shows it is down 5%. This
methodology renders all bull-market-year gold summers in like
terms. That’s necessary since gold’s price range has been so
vast, from $257 in April 2001 to $1894 in August 2011. That span
encompassed gold’s last secular bull, which enjoyed a colossal
638.2% gain over those 10.4 years!
Obviously 2001 to 2011 were certainly bull years. 2012 was
technically one too, despite gold suffering a major correction
following that powerful bull run. At worst that year, gold fell
18.8% from its 2011 peak. That was not quite enough to enter formal
bear territory at a 20%+ drop. But 2013 to 2015 were definitely
brutal bear years, which need to be excluded since gold behaves very
differently in bull and bear markets.
In
early 2013 the Fed’s wildly-unprecedented open-ended QE3 campaign
ramped to full speed, radically distorting the markets.
Stock markets
levitated on the Fed’s implied backstopping, slaughtering demand
for alternative investments led by gold. So in Q2’13 alone, gold
plummeted 22.8% which proved its worst quarter in an astounding
93 years! Gold’s bear continued until the Fed started hiking
rates again in late 2015.
The
day after that first rate hike in 9.5 years in mid-December 2015,
gold plunged to a major 6.1-year secular low. Then it surged out of
that irrational
rate-hike scare, formally crossing the +20% new-bull threshold
in early March 2016. Ever since, gold has remained in this
current bull. At worst in December 2016 after gold was crushed
on the post-election Trumphoria
stock-market
surge, it had only corrected 17.3%.
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 2019. Thus these are the years most
relevant to understanding gold’s typical summer-doldrums
performance, which is necessary for managing your own expectations
this time of year. This spilled-spaghetti mess of a chart is fairly
simple and easy to understand.
The
yellow lines show gold’s individual-year summer price action indexed
from each May’s final close for all years from 2001 to 2012 and 2016
to 2017. 2018’s is rendered in light blue. Together these
establish gold’s summer trading range. All those past bull-market
years’ individual indexes are averaged together in the red line,
revealing gold’s central summer tendency. 2019’s indexed action is
superimposed in dark blue.
While there are outlier years, gold generally drifts listlessly in
the summer doldrums much like a sailing ship trapped near the
equator. The center-mass drift trend is crystal-clear in this
chart. The vast majority of the time in June, July, and August,
gold simply meanders between +/-5% from May’s final close. This
year that equated to a probable summer range between $1240 to
$1370. Gold tends to stay well within trend.
Obviously this year has proven a huge exception to that normal
summer rule, with gold rocketing higher to a
major bull-market
breakout! Gold blasted to its best early-summer performance
ever seen in all modern bull-market years. Comparing this current
summer’s dark-blue line to past years’ price action certainly drives
home how unique, exceptional, and special gold’s breakout surge to
major new secular highs has been.
Still, understanding gold’s typical behavior this time of year is
important for traders. Sentiment isn’t only determined by outcome,
but by the interplay between outcome and expectations. If
gold rallies 5% but you expected 10% gains, you will be disappointed
and grow discouraged and bearish. But if gold rallies that same 5%
and you expected no gains, you’ll be excited and get optimistic and
bullish. Expectations are key.
History has proven it is wise not to expect too much from gold in
these lazy market summers, particularly Junes and Julies.
Occasionally gold still manages to stage a summer rally, like this
year’s monster. But most of the time gold doesn’t veer materially
from its usual summer-drift trading range, where it is often adrift
like a classic tall ship. With range breakouts either way uncommon,
there’s often little to get excited about.
In
this chart I labeled some of the outlying years where gold burst out
of its usual summer-drift trend, both to the upside and downside.
But these exciting summers are atypical, and can’t be expected very
often. Most of the time gold grinds sideways on balance not
far from its May close. Traders not armed with this critical
knowledge often wax bearish during gold’s summer doldrums and exit
in frustration, a real mistake.
Gold’s summer-doldrums lull marks the best time of the year
seasonally to deploy capital, to buy low at a time when few
others are willing. Gold enjoys
powerful seasonal
rallies that start in Augusts and run until the following Mays!
These are fueled by outsized investment demand driven by a series of
major income-cycle and cultural factors from around the world.
Summer is when investors should be bullish, not bearish.
The
red average indexed line above encompassing 2001 to 2012 and 2016 to
2018 reveals gold’s true underlying summer trend in bull-market
years. Technically gold’s major seasonal low arrives relatively
early in summers, mid-June. On average through all these modern
bull-market years, gold slumped 0.9% between May’s close and that
summer nadir. But seasonally that’s still on the early side to
deploy capital.
Check out the yellow indexed lines in this chart. They tend to
cluster closer to flatlined in mid-June than through all of July.
The only reason gold’s seasonal low appears in mid-June
mathematically is a single extreme-outlier year, 2006. The
spring seasonal
rally was epic that year, gold rocketed 33.4% higher to a
dazzling new bull high of $720 in just 2.0 months between mid-March
to mid-May! That was incredible.
Extreme euphoria had catapulted gold an astounding 38.9% above its
200-day moving average, radically overbought by any standard. That
was way too far too fast to be sustainable, so after that gold had
to pay the piper in a sharp mean-reversion overshoot. So over the
next month or so into mid-June, gold’s overheated price plummeted
21.9%! That crazy outlier is the only reason gold’s major summer
low isn’t later.
There were 15 bull-market years from 2001 to 2012 and 2016 to 2018.
That is a big-enough sample to smooth out the trend, but not large
enough to prevent extreme deviations from skewing it a bit. Gold
sees a series of marginally-higher lows in late June, early July,
and even late July. In this dataset they came in 0.0%, 0.3%, and
0.8% higher than mid-June’s initial low. And that last late-July
one arrives over 6 weeks later.
So
generally there’s no hurry to deploy capital right at that initial
mid-June seasonal low. Gold tends to drift nearly flatlined over
the next several weeks into early July, trying traders’
patience. Buying within a few trading days of the US Independence
Day holiday seems to have the best odds of catching gold near its
summer-doldrums lows. Investment capital inflows usually begin
ramping back up after that as traders return.
On
average in these modern bull-market years, gold slipped 0.4% in
Junes before rallying 0.7% in Julies. After July’s initial lazy
summer week, gold tends to gradually start clawing its way back
higher again. But this is so subtle that Julies often still feel
summer-doldrumsy. By the final trading day in July, gold is still
only 0.3% higher than its May close kicking off summers. That’s too
small to restore damaged sentiment.
Since gold exited May 2019 at $1305, an average 0.3% rally by July’s
end would put it at $1309. That’s hardly enough to generate
excitement after two psychologically-grating months of drifting.
But the best times to deploy any investment capital are when no
one else wants to so prices are low. Gold’s summer doldrums
come to swift ends in Augusts, which saw hefty average gains of 1.9%
in these bull-market years!
And
that’s just the start of gold’s major
autumn seasonal
rally, which has averaged strong 5.7% gains between mid-Junes to
late Septembers. That is driven by Asian gold demand coming back
online, first post-harvest-surplus buying and later
Indian-wedding-season buying. June is the worst of gold’s summer
doldrums, and the first half of July is when to buy back in.
It’s important to be fully deployed before August.
These gold summer doldrums driven by investors pulling back from the
markets to enjoy their vacation season don’t exist in a vacuum.
Gold’s fortunes drive the entire precious-metals complex,
including both silver and the stocks of the gold and silver miners.
These are effectively leveraged plays on gold, so the summer
doldrums in them mirror and exaggerate gold’s own. Check out this
same chart type applied to silver.
Since silver is much more volatile than gold, naturally its
summer-doldrums-drift trading range is wider. The great majority of
the time, silver meanders between +/-10% from its final May close.
That came in at $14.56 this year, implying a summer-2019 silver
trading range between $13.10 to $16.02. While silver suffered that
extreme June-2006 selling anomaly too, its major seasonal low
arrives a couple weeks after gold’s.
Given gold’s spectacular bull-market-breakout surge last month,
silver’s summer performance this year has been utterly dismal.
Normally silver amplifies gold upside by at least 2x. But silver
has been bombed out and languishing for so long that investors and
speculators still want nothing to do with it. Silver often acts as
a gold sentiment gauge, and gold hasn’t been over $1400 long
enough yet to shift psychology to bullish.
On
average in these same gold-bull-market years of 2001 to 2012 and
2016 to 2018, silver dropped 4.1% between May’s close and late
June. That is much deeper than gold’s 0.9% seasonal slump, which
isn’t surprising given silver’s leverage to gold. Silver’s summer
performances are also much lumpier than gold’s. Junes see
average silver losses of 3.2%, but those are more than erased in
strong rebounds in Julies.
Silver’s big 3.6% average rally in Julies amplifies gold’s gains by
an impressive 5.1x! But unfortunately silver hasn’t been able to
maintain that seasonal momentum, with Augusts averaging a modest
decline of 0.7%. Overall from the end of May to the end of August,
silver’s summer-doldrums performance tends to drift lower. Silver
averaged a 0.4% full-summer loss, way behind gold’s 2.2% gain
through June, July, and August.
That
means silver sentiment this time of year is often worse than
gold’s, which is already plenty bearish. The summer doldrums are
more challenging for silver than gold. Being in the newsletter
business for a couple decades now, I’ve heard from countless
discouraged investors over the summers. While I haven’t tracked
this, it sure feels like silver investors have been
disproportionally represented in that feedback.
Since gold is
silver’s primary driver, this white metal is stuck in the same
dull drifting boat as gold in the market summers. Silver usually
leverages whatever is happening in gold, both good and bad. But
again the brunt of silver’s summer weakness is borne in Junes.
Fully expecting this seasonal weakness and rolling with the punches
helps prevent getting disheartened, which in turn can lead to
irrationally selling low.
The
gold miners’ stocks are also hostage to gold’s summer doldrums.
This last chart applies this same methodology to the flagship HUI
gold-stock index, which mostly closely mirrors
that leading GDX
VanEck Vectors Gold Miners ETF. The major gold stocks tend to
amplify gold’s gains and losses by 2x to 3x, so it is not surprising
that the HUI’s summer-doldrums-drift trading range is also twice as
wide as gold’s own.
The gold miners’
stocks share silver’s center-mass summer drift running +/-10% from
May’s close. This year the HUI entered the summer doldrums at
157.1, implying a June, July, and August trading range of 141.4 to
172.8. While gold stocks’ GDX ETF is too young to do long-term
seasonal analysis on, in GDX terms this summer range translates to
$19.43 to $23.75 this year. That’s based off a May 31st close of
$21.59.
Thanks to gold’s dazzling bull-market breakout, gold stocks have
defied these weak summer seasonals this year to soar to their own
major decisive
breakout! This
high-potential contrarian sector has enjoyed its best early-summer
performance ever witnessed in gold’s modern bull-market
years. While I hope this incredible outperformance persists, the
summer doldrums could still reassert themselves if gold retreats.
Like gold, the
gold stocks’ major summer seasonal low arrives in mid-June. On
average in these gold-bull-market years of 2001 to 2012 and 2016 to
2018, by then the HUI had slid 2.1% from its May close. Then gold
stocks tended to more than fully rebound by the end of June,
making for an average 0.6% gain that month. But there is no
follow-through in July, where the gold stocks averaged a modest 0.5%
loss.
Overall between
the end of May and the end of July, which encompasses the dark heart
of the summer doldrums, the HUI proved dead flat on average.
Again two solid months of grinding sideways on balance is hard for
traders to stomach, especially if they’re not aware of the
summer-doldrums drift. The key to surviving it with minimum
psychological angst is to fully expect it. Managing expectations in
markets is essential!
But also like
gold, the big payoff for weathering the gold-stock summer starts in
August. With gold’s major autumn rally getting underway, the gold
stocks as measured by the HUI amplify it with good average gains of
3.1% in Augusts! And that’s only the start of gold stocks’
parallel autumn
rally with gold’s, which has averaged 9.3% gains from late
Julies to late Septembers. Gold-stock upside resumes in late
summers.
Like
much in life, withstanding the precious-metals summer doldrums is
less challenging if you know they’re coming. While outlying years
happen, they aren’t common. So the only safe bet to make is
expecting gold, silver, and the stocks of their miners to
languish in Junes and Julies. Then when these drifts again come
to pass, you won’t be surprised and won’t get too bearish. That
will protect you from selling low.
The
precious-metals sector radically bucked its seasonal-slump trend
this year, surging to a record start. Gold began blasting
higher on May’s final trading day, and that sharp rally carried into
early June. New trade-war tariff threats were ramping up market
fears, driving the US stock markets to selloff lows following late
April’s all-time record highs. So traders remembered diversifying
with gold and flocked back to it.
In
mid-June gold’s gains accelerated after the Fed reversed its
future-rate outlook from hiking back to cutting. That propelled
gold to its first new bull-market highs in 3.0 years, with it
surging to a 5.8-year secular high on that late-June breakout day.
That momentum fed on itself and carried gold back over $1400 for the
first time since early September 2013. Those awesome $1400+ levels
have mostly held since.
The
gold miners’ stocks naturally leveraged gold’s gains, enjoying their
own epic early-summer action. The precious-metals sector is doing
wildly better than last summer, when gold rolled over in mid-June on
a sharp US dollar rally. Hyper-leveraged gold-futures speculators
watch the dollar’s fortunes for trading cues. Hopefully gold’s huge
early-summer gains can hold, and it consolidates sideways in coming
weeks.
Gold’s massive and exceptional June rally was mostly fueled by
speculators
buying enormous quantities of gold futures. That has largely
exhausted their available capital firepower, and left their
collective bets on gold exceedingly bullish. These positions must
be partially unwound with selling, which forces gold into a high
consolidation at best and a sharp selloff at worst. So gold isn’t
out of the summer-doldrums woods yet.
The
inevitable coming gold-futures selling could be largely offset by
investment buying. Investors are radically underinvested in gold
after the second-largest and first-longest stock bull in US history,
giving them big room to buy to reestablish normal portfolio
allocations. Since they love chasing winners, gold’s powerful
new-high psychology is starting to attract them back. Their
return could dwarf gold-futures selling.
Given gold’s long-established lackluster summer-doldrums performance
record, it is probably not prudent to chase this rally with
gold-futures speculators effectively all-in longs and all-out
shorts. But the metal and its miners’ stocks can be accumulated
aggressively on any significant weakness. All portfolios need a
10% allocation in gold and gold stocks! Far-more upside is
coming after recent overboughtness is worked off.
One
of my core missions at Zeal is relentlessly studying the gold-stock
world to uncover the stocks with superior fundamentals and upside
potential. The trading books in both our popular
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Mostly added in recent months as gold stocks recovered from
selloffs, their unrealized gains were already running as high as
+105% this week!
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The
bottom line is gold, silver, and their miners’ stocks usually drift
listlessly during market summers. As investors shift their focus
from markets to vacations, capital inflows wane. Junes and Julies
in particular are simply devoid of the big recurring
gold-investment-demand surges seen during much of the rest of the
year, leaving them weak. Investors need to expect lackluster
sideways action on balance this time of year.
This
summer has proven an epic exception, with gold rocketing to its
first major bull-market breakout in years! That has catapulted both
the metal and its miners’ stocks to their best early-summer
performances in gold’s modern bull-market years. But the summer
doldrums could still reassert themselves as specs’
excessively-bullish gold-futures bets are bled off. So enjoy these
big anomalous gains, but remain wary. |