Gold, silver, and their miners’ stocks suffer their weakest
seasonals of the year in early summers. With traders’ attention
normally diverted to vacations and summer fun, interest in and
demand for precious metals usually wane. Without outsized
investment demand, gold tends to drift sideways dragging silver and
miners’ stocks with it. Feared as the summer doldrums, sometimes
unusual catalysts short-circuit them.
This
doldrums term is very apt for gold’s 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 heading into most
summers, gold starts drifting listlessly sideways. It often
can’t make significant progress no matter what 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.
June
and Julies in particular are often desolate sentiment wastelands for
the precious metals, devoid of recurring seasonal demand surges.
Unlike most of the rest of the year, the summer months simply lack
any major income-cycle or cultural drivers of outsized gold
investment demand. Summer 2019 proved an exception on a major
gold-bull breakout, and summer 2020 is looking like another on
extreme Fed money printing.
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!
While that mighty gold bull ran from 2001 to 2011, 2012 was
technically a bull year too since a 20%+ drop back into formal bear
territory wasn’t yet seen. That finally came in Q2’13, where gold
plummeted 22.8% in its worst quarterly performance in 93 years. The
Fed’s unprecedented open-ended QE3 campaign was ramping to full
speed, levitating
stock markets which slaughtered demand for alternative
investments led by gold.
The
resulting gold-bear years ran from 2013 to 2015, which need to be
excluded since gold behaves very differently in bull and bear
markets. That ultimately pounded gold to a 6.1-year secular low in
December 2015, which helped birth today’s gold bull. It has
gradually powered higher on balance ever since, never suffering any
bull-slaying 20%+ selloffs. So 2016 to 2020 have proven gold-bull
years to add into this analysis.
When
all gold’s summer price action from these modern gold-bull years is
individually indexed and thrown into a single chart, this
spilled-spaghetti mess is the result. 2001 to 2012 and 2016 to 2018
are rendered in yellow. Last summer’s action is shown in light blue
for easier comparison with this summer. Seeing all this
perfectly-comparable indexed summer price action at once reveals
gold’s center-mass-drift tendency.
These summer seasonals are further refined by averaging together all
16 of these gold-bull years into the red line. Finally gold’s
summer-to-date action this year is superimposed over everything else
in dark blue, showing how gold is performing compared to its
seasonal mean. So far in summer 2020 gold has been meandering
roughly in line with seasonal expectations, although a couple big
catalysts could change that.
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 equates to a probable summer range between $1645 to
$1818. Gold tends to remain within trend.
Interestingly “gold summer doldrums” is increasingly a misnomer as
more gold-bull years slowly reshape the seasonal average. Gold’s
summer seasonal low statistically has been gradually pushed all the
way back to mid-June. On June’s 11th trading day, which translated
to June 15th this summer, gold has tended to carve its summer
seasonal low. The worst of gold’s weak seasonals pass quickly in
early summers!
At
that mid-June nadir, gold has only been down an average of 0.7% from
May’s close. From there this metal actually tends to start climbing
again into July and especially August. In average indexed terms,
gold has tended to eke out 0.1% gains in Junes. They’re the real
doldrums. Gold’s momentum starts building to 0.7% gains in
Julies, then really accelerates into summer-ends with hefty 2.3%
gains in Augusts!
Between that average seasonal low in mid-June and the end of August,
gold has averaged impressive 3.8% summer rallies in these
modern bull-market years. The summer doldrums have been compressed
into a shorter time frame by a couple outlier years in today’s
secular gold bull. They are its maiden 2016 summer and last
summer. Those gold outperformances prove that catalysts can fuel
counter-seasonal demand.
Summer 2016 was this gold bull’s first, where gold enjoyed strong
upside price momentum and bullish psychology heading into the summer
doldrums. Investors love chasing winners, and kept on piling
into gold as it carved major new secular highs. By early July, gold
had soared 12.3% summer-to-date! But that left gold
super-overbought so those gains faded, yet this metal still surged
7.7% in that whole summer.
Gold
bucked the summer doldrums in 2016 because gold investment demand
was exceptionally strong. Several weeks ago I wrote an essay
explaining why the best daily proxy for global gold investment is
the
physical-gold-bullion holdings of the leading and dominant
American GLD SPDR Gold Shares gold ETF. When stock investors are
flooding into gold via GLD shares chasing momentum, their buying
forces gold higher.
Gold
blasted up 12.3% from the end of May into early July 2016 because
American stock investors were buying GLD shares much faster than
gold itself was being bought. Their differential demand forced
GLD’s holdings 13.1% higher in roughly that same early-summer span.
Out of 24 summer trading days into early July, 18 saw GLD-holdings
builds averaging a sizable 0.7% each! Investment capital was
pouring in.
Gold
ETFs like GLD and the American IAU iShares Gold Trust, the
second-largest gold ETF in the world after GLD, are designed to
track the gold price. This is only achievable if they shunt all
excess ETF-share demand and supply into the underlying world gold
market. When gold-ETF shares are being bought faster than gold,
ETF-share prices threaten to decouple from gold to the upside and
fail their tracking mission.
So
gold-ETF managers must offset excess demand by issuing enough new
gold-ETF shares. Then they use the proceeds from these sales to buy
more physical gold bullion to hold in trust for their shareholders.
So when gold-ETF holdings are rising, it shows stock-market capital
is flowing into gold. While that is unusual during market
summers, it does happen if gold enjoys a sufficient catalyst to
attract investors’ interest.
Summer 2019 proved another great example of this. After that
initial investment-fueled bull-market peak in early-July 2016, gold
failed to climb to more new bull-market highs for several years.
But late last June, gold finally managed its next
decisive
bull-market breakout after dovish Fed interest-rate projections
hammered the US dollar. The resulting new gold-bull highs really
excited investors, who piled in to chase the upside.
So
last summer as the light-blue line shows, gold rocketed 16.7% higher
in one of its best performances out of all gold-bull summers!
Investors flooded into gold because it was rallying fast, enticing
in even more investment capital in an awesome virtuous circle of
buying. Again summer 2019’s counter-seasonal gold investment
demand was evident in GLD’s holdings. They soared a massive 18.2%
higher last summer!
And
gold’s upside potential this summer is far greater than normal
due to this same momentum-chasing investment phenomenon.
Gold investment
soared after mid-March’s stunning stock panic on the dire
economic impact of governments’ draconian lockdowns to slow the
spread of COVID-19. That drove gold to major new bull-market highs
challenging $1750 by late May. So investors piled in to ride gold’s
big gains.
The
major gold ETFs continued to enjoy strong differential share
demand in June, with GLD and IAU seeing major holdings builds of
5.0% and 3.2% last month! That came during one of gold’s weakest
months seasonally, and is likely to grow as gold strengthens in July
and August. Gold being driven to new highs by investment demand is
self-feeding, the higher gold rallies the more investors want to buy
to participate.
And
it’s not just the rapidly-improving seasonals in July and August
that bode well for gold. This summer has a couple of unusual
catalysts which ought to spawn outsized investment demand.
The first and most-important is the Fed’s radically-unprecedented
extreme monetary inflation unleashed to goose stock markets out of
their deep panic lows. The Fed feared the resulting negative wealth
effect would spawn a depression.
So
between mid-March to early June, the Fed’s balance sheet
skyrocketed 66.2% higher in just 2.8 months! That blasted the
US-dollar supply an astounding $2,853.3b higher. With 2/3rds more
dollars just conjured out of thin air to bid up prevailing price
levels on shrinking pools of goods and services, there’s never been
a more-important time to own gold. Prudent investors are buying
with that inflation tsunami hitting.
Gold
investment demand also surges when stock markets are weakening or
expected to weaken. Gold is the ultimate portfolio diversifier
since it is negatively correlated with material stock selloffs. So
as what looks like a monster bear rally in US stocks driven
by the Fed’s near-hyperinflation inevitably rolls over, gold
investment demand should strengthen considerably. Gold has a
very-bullish setup in this summer of 2020!
For
many years I’ve thrown in silver and the gold miners’ stocks in my
gold-summer-doldrums analyses. Gold’s fortunes drive the entire
precious-metals complex. Silver and precious-metals miners’ stocks
are effectively leveraged plays on gold. Their summer
behavior mirrors and amplifies whatever is happening in gold. So if
gold enjoys outsized gains this summer, silver and their miners’
stocks ought to do even better.
This
silver-summer-seasonals methodology is the same as gold’s, showing
how it has fared during gold’s modern bull-market years. With a
far-smaller global market, silver is much-more volatile than gold.
So its center-mass summer drift is wider, running +/-10% from May’s
final close. That implies a summer range between $16.04 to $19.60
this year. But silver’s summer seasonals have proven weaker
overall than gold’s.
Silver’s summer-doldrums seasonal low tends to arrive a couple weeks
after gold’s in late June. That is averaging June’s 20th trading
day, which translated to June 26th this year. And that saw silver
being down 3.5% summer-to-date, much worse than gold’s 0.7% average
droop at its own summer seasonal low. Silver’s overall seasonal
performance in market summers is considerably worse than gold’s too.
On
average in 2001 to 2012 and 2016 to 2019, silver merely edged up
1.3% between the end of May to the end of August. That is dwarfed
by gold’s far-superior 3.1%! Silver’s big relative
underperformance in summers is likely sentiment-related.
Investors usually don’t flock to silver unless gold itself is
running in an exciting and noticeable way. And gold’s average
gradual summer rallies don’t usually rise to that standard.
When
gold enjoyed outsized summer surges like in those summers of 2016
and 2019, silver responded with great 16.8% and 25.8% summer
rallies! But when gold just grinds modestly higher like summer
2017’s 4.2% gain, that doesn’t garner enough investor attention for
silver to amplify its upside. That year the white metal lagged with
a little 1.4% summer gain. Silver needs big gold uplegs to
entice major capital inflows.
Thankfully the gold stocks aren’t so picky, tending to leverage
gold’s summer gains whether they prove big and outsized or small and
uninspiring. For gold-stock summer seasonals, I’m using the older
HUI gold-stock index which closely mirrors the
GDX VanEck
Vectors Gold Miners ETF more popular today. Since GDX was only
launched in May 2006, it has insufficient price history to match
these modern gold-bull years.
This
same summer-seasonality methodology applied to the HUI shows gold
stocks track and amplify gold’s fortunes far better than silver.
The more-volatile gold stocks also have a wider center-mass-drift
summer trading range of +/-10% from May’s final close. In HUI terms
that runs from 246.0 to 300.7 this year. Applied to GDX, that
equates to a likely summer-2020 trading range running from $30.89 to
$37.75.
Interestingly gold stocks’ average summer-doldrums low is on June’s
10th trading day, which shook out to June 12th this year. That is
right in line with gold’s own summer seasonal low. The gold stocks
per the HUI tend to slump 1.3% by then from May’s close, which
amplifies gold’s early-summer weakness by 1.9x. The
major gold stocks
of the HUI and GDX generally tend to leverage material gold moves
by 2x to 3x.
On
average from 2001 to 2012 and 2016 to 2019, the gold stocks have
rallied 2.0% in Junes, slumped 0.3% in Julies, and then finished
summers strong with big 4.0% surges in Augusts. This compares to
+0.1%, +0.7%, and +2.3% for gold in these same market-summer
months. Overall from the end of May to the end of August, the HUI
has averaged 5.8% summer gains. That’s again 1.9x gold’s 3.1% mean
rally.
Like
silver to a lesser extent, the gold stocks fare best during market
summers when gold is surging fast enough to generate excitement.
That entices traders enjoying summers’ many pleasures back to
markets to buy in and chase those gains. During gold’s
outperforming summers of 2016 and 2019 driven by that strong
investment demand, the HUI rallied 10.1% and a massive 45.3% on
gold’s 7.7% and 16.7% gains!
That
made for 1.3x and 2.7x upside leverage to gold in those summers of
2016 and 2019. The latter is excellent, showing how important it is
to own gold miners when gold is enjoying counter-seasonal strong
summer investment demand. The former is only light because gold and
thus gold stocks peaked in mid-summer 2016 before slumping into its
end. By early August 2016, the HUI had soared 41.4% summer-to-date!
That
made for far-more-impressive 3.4x amplification of gold’s summer
surge by its miners’ stocks. The gold stocks have generally
performed fairly well during modern gold-bull summers. They’ve
enjoyed a solid average summer rally seasonally, but surge
dramatically when gold is being bid higher by strong investment
demand. So the gold summer doldrums usually don’t live up to their
fearsome reputation.
These weak gold seasonals don’t encompass entire market summers, but
have been compressed into early Junes on average. From those
mid-month seasonal lows, gold and the gold stocks tend to start
marching higher into summer-ends leading into their
big autumn
rallies. Silver isn’t as responsive, but still follows this
seasonal pattern to a lesser extent. Summer seasonal weakness in
precious metals is usually modest.
And
summer 2020 has good potential for outsized gold gains again.
Following March 2020’s brutal stock panic and subsequent
crazy-extreme Fed money printing, gold investment demand
proved very
strong leading into summer. And it has remained strong through
its first third, or June. So it’s probably a decent time to add to
positions in fundamentally-superior gold and silver miners’ stocks
if you aren’t sufficiently deployed.
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Use this typical summer
lull to mirror our many winning trades before gold stocks start
surging again.
The bottom line is
the gold summer doldrums in modern bull years have usually proven
much milder than feared. The seasonal weakness tends to be
compressed into early June, with gold and its miners’ stocks carving
summer lows in mid-June on average. From there gold and gold stocks
usually rally on balance in July and August, with gains really
accelerating into summer-end. That’s heading into gold’s big autumn
rally.
And summer 2020
has excellent potential to see outsized gold gains on big
counter-seasonal investment demand. Gold’s strong upside momentum
to major new secular highs in the wake of March’s stock panic has
generated major investment-capital inflows. And investors are
likely to keep buying on balance with the Fed’s near-hyperinflation
and resulting precarious stock-market extremes. That’s really
bullish for gold. |