Gold’s recent
weakness has dampened bullish sentiment, but the entire
precious-metals complex has actually enjoyed record early-summer
strength. The summer doldrums have always been a vexing time for
gold, silver, and the stocks of their miners. Without any recurring
seasonal demand surges in June and July, sideways-to-lower drifts
are common in this seasonally-weakest time before big autumn
rallies.
Traders’
sentiment, their collective greed and fear, drives nearly all
short-term price action. Most of the time, sentiment is heavily
influenced by expectations. If gold rallies 5% in a month
where traders expected 10% gains, disappointment and bearishness
will flare. But if gold rallies that same 5% when the outlook was
for no gains, traders will grow excited and bullish. Performance
versus expectations colors reality.
Gold entered the
summer of 2016 with high expectations for strong continuing gains.
Between its mid-December 6.1-year secular low the day after the
Fed’s first rate hike in 9.5 years and the end of April, gold
blasted 23.1% higher. These gains were driven by
massive
investment buying at levels not seen in many years. Huge
capital inflows catapulted gold into its first new bull market
since way back in 2011.
Most traders had
no reason not to believe this young-bull-market strength would
continue into summer, and it really has in a lot of ways. But even
within the strongest bulls, June and July together are the weakest
time of the year seasonally for gold. When I think of gold in
summers, that early-1990s Gin Blossoms song “Hey Jealousy” comes to
mind. “If you don’t expect too much from me, you might not be let
down”.
After decades of
trading gold, silver, and the stocks of their miners, I’ve come to
call this time of year the summer doldrums. June and July
are usually a desolate sentiment wasteland for precious metals
totally devoid of recurring seasonal demand surges. These summer
months simply lack any major income-cycle or cultural drivers of
outsized gold demand like those seen throughout much of the rest of
the year.
So expectations
for precious metals’ summer performances should always be tempered
by what they’ve actually done in past summers, even within
mighty secular bulls. Gold’s last secular bull ran from April 2001
to August 2011, a 10.4-year span that saw gold power 638.2% higher!
Gold was the world’s best-performing asset class, trouncing the
lauded S&P 500 stock index’s miserable 1.9% loss over that exact
span.
While gold peaked
in late August 2011, it didn’t formally enter bear-market territory
at a 20% loss until much later in April 2013. That was when the
gross market
distortions from the Fed’s unprecedented open-ended QE3
bond-monetization campaign were really mounting. So gold’s
great-bull-market years ran from 2001 to 2012. It’s important to
see how gold fared in them with 2016 being the first bull-market
year since.
Quantifying gold’s
summer seasonal tendencies during bull markets requires all relevant
years’ price action to be recast in perfectly-comparable percentage
terms. That’s easily accomplished by individually indexing
each calendar year’s gold price to its last close before summer,
which is May’s final trading day. That’s set at 100 and then all
gold-price action that year is calculated off that common indexed
baseline.
So gold trading at
an indexed level of 105 simply means it’s up 5% from May’s close,
while 95 shows it’s down 5%. This methodology renders all gold
summers in like terms regardless if gold was near $300 or
$1900. These charts distill down all this seasonal data, first for
gold then later silver and the flagship HUI gold-stock index.
Understanding precious metals’ summer seasonals helps maintain
realistic expectations.
These charts show
gold’s price action indexed to May’s final close for the bull-market
years between 2001 to 2012, and 2016 summer-to-date. The yellow
spilled-spaghetti mess is all years between 2001 and 2012. While
individual summers are unfollowable in this format, far more
important is the central tendency of all summers combined.
All these past bull-market summers are averaged in the red line.
Superimposed on
top is this summer’s gold action so far in blue. Gold has actually
enjoyed a record bull-market early-summer advance this year! The
yellow metal has never before rallied so far so fast in June during
all the modern bull-market summers. This anomalous strength is a
double-edged sword, revealing how strong gold investment demand
remains but ramping odds for a mean reversion lower.
Gold’s summer
doldrums are very real even within the mightiest bull markets, which
is why I’m wary of getting excited about gold in June and July.
Between 2001 and 2012, gold’s average performance in June from the
end of May was a 0.8% loss. While that summer-to-date loss narrowed
to a -0.1% average by the end of July, that’s still weak summer
performance. Boring sideways grinds dominate gold summers!
Thankfully this
summer-doldrums phenomenon is limited to June and July. Gold starts
gathering steam in August as its major autumn rally gets underway.
Gold’s average full-summer performance since the end of May surged
to +2.4% by then between 2001 and 2012, the vanguard of a
major seasonal
rally averaging 7.5% gains by early October. August is when key
Asian-harvest gold buying starts kicking in.
That’s one of the
major recurring seasonal surges of outsized gold demand fueled by
income-cycle or cultural drivers. They also include
Indian-wedding-season buying, Western Christmas buying, Western
surplus-income buying after year-end, and Chinese New Year buying.
I’ve explained all these recurring gold-demand-spurring events in
great depth in
past essays, but they’re beyond the scope of this essay.
My focus today is
2016’s anomalous precious-metals strength. The blue line shows that
gold has never enjoyed early-summer action anywhere close to the
powerful surge witnessed in the first half of June. By June 17th,
gold had rocketed 6.8% higher since the end of May! That compared
to 2001-to-2012 average June performance as of that same day of a
0.6% loss. Gold has enjoyed record
early-summer strength!
Any price action
way outside of historical norms demands traders consider both why it
has happened, and whether or not it’s likely to be sustainable.
Gold’s incredible early-summer gains this year are the result of a
fascinating interplay between mean reversions and Fed-rate-hike
expectations. This great gold strength has been directly fueled by
major buying on them by both investors and gold-futures speculators.
Gold entered the
summer of 2016 after an uncharacteristically-weak May. Last month
gold plunged 6.1% on mounting expectations for another Fed rate hike
at the FOMC’s mid-June meeting. That itself was odd. During
all 11 previous Fed-rate-hike cycles since 1971,
gold enjoyed
average gains of 26.9%! Gold’s biggest gains, averaging a
staggering 61.0% in 6 of these rate-hike cycles, emerged with two
conditions.
Gold had to be
relatively low in a secular sense when these Fed-rate-hike
cycles started, and they had to be gradual. Of course both
these have been met in spades in our current joke of a rate-hike
cycle. So market history shatters futures speculators’
widely-believed myth that Fed rate hikes are somehow gold’s
nemesis. Just the opposite is true, but these hyper-leveraged
traders won’t take the time to understand this.
Last month’s big
6.1% gold plunge was counter-seasonal, defying average
strength between 2001 to 2012 that made May one of gold’s stronger
months of the year with average gains of 1.4%. So after an
abnormally-weak May, a mean reversion higher despite the summer
doldrums isn’t a huge surprise. All throughout the global financial
markets, big down periods are followed by big up periods and vice
versa.
As the blue line
shows, May 2016 was nearly the weakest out of all the gold-bull
years between 2001 to 2012. So the case can be made that gold’s
record early-June strength was simply a mean reversion out of an
exceptionally-weak lead-in to the market summer. If that’s it,
gold’s summer downside risk from here is likely modest. Still,
summer doldrums shouldn’t be discounted before late July’s major
seasonal low.
But unfortunately
more is going on this summer than a mere mean reversion out of May
weakness. The overwhelmingly-dominant reason gold has enjoyed a
major counter-seasonal bid this month is traders’ growing
expectations that more Fed rate hikes aren’t coming anytime
soon. This started on June’s first Friday when May’s US monthly
jobs report was a horrendous miss, just 38k jobs created versus
+164k expected!
That led traders
to believe the Fed’s hands were tied on that mid-June rate hike it
had recently started to lay the expectation groundwork for. So gold
blasted 2.7% higher on June 3rd as that terrible jobs report
reset Fed-rate-hike expectations to dovish. This popular dovish
bias grew as the FOMC’s June 15th meeting neared, propelling gold
even higher heading into it. Then the FOMC proved more dovish than
expected.
The FOMC gave no
hints of a coming rate hike at its next meeting in late July. The
hawkish regional-Fed presidents didn’t dissent, the mid-June
decision not to hike was unanimous. And the collective projections
of federal-funds-rate levels in future years by top Fed officials
fell rather sharply. Yellen’s uber-dovish Fed somehow managed to
come across as even more dovish than traders had previously
thought!
So gold continued
rallying after that FOMC decision too, soon hitting its first new
bull-market high in nearly 7 weeks last Friday. But gold faces two
major risks after its biggest early-summer rally witnessed in modern
times if not ever. Both dovish-Fed expectations and American
speculators’ near-record gold-futures long positions can’t go
much higher, so the odds overwhelmingly favor them reversing
sharply.
The Fed has long
been itching to hike rates, and it hates this situation it finds
itself in with virtually no credibility with global markets. After
crying hawk so many times, traders simply no longer believe
the Fed will carry through on any rate hikes it implies. As of the
middle of this week, the federal-funds-futures-implied odds of rate
hikes at the FOMC’s next 3 meetings were at rock-bottom at just 10%,
31%, and 33%!
With traders’
expectations so lopsided towards no more rate hikes anytime soon,
there’s a high chance they will mean revert the other way between
now and the end of the summer doldrums in late July. Top Fed
officials will either resume their 2016 modus operandi of talking
tough and hawkish between FOMC meetings, or some US economic
data will surprise to the upside so traders’ implied rate-hike odds
will surge.
That’s not likely
to be kind to gold. Since it was extreme Fed dovishness that drove
gold’s record early-summer gains, the inevitable coming Fed
hawkishness will likely unwind some of them. This selling will be
exacerbated by gold-futures speculators’ near-record long
positions just witnessed in mid-June. These ultra-short-term
hyper-leveraged traders live and die by the Fed, so hawkishness will
really spook them.
Unwinding their
excessive near-record longs will require much gold-futures selling,
which is certainly an ominous portent. Not only does futures
selling tend to quickly cascade, but there are no recurring gold
demand surges in the summer doldrums to absorb mass futures
liquidations. Heavy selling by the leveraged futures speculators
will quickly overwhelm even the strong ongoing gold investment
demand.
American stock
traders have been
aggressively buying GLD shares far faster than gold itself is
being bought. While this very-atypical strong investment demand in
the summer doldrums will mitigate the adverse price impact of
gold-futures selling, it will still be temporarily overpowered.
Futures speculators can dump the equivalent of 150+ tonnes of gold
in a single week, while GLD’s June-to-date build is only
47.2t.
So if you’re
itching to add gold exposure to your portfolio via this leading GLD
SPDR Gold Shares gold ETF, the near-term downside risks remain
abnormally high in these summer doldrums. Odds are you will get a
better entry price sometime around late July after futures
speculators’ near-record longs have some time to be whittled back
down on rising Fed hawkishness or at least waning dovishness. Be
patient here.
Naturally silver
and the precious-metals miners’ stocks are closely slaved to gold,
simply mirroring and amplifying the yellow metal’s price action. So
since the summer doldrums as well as this year’s record early-summer
strength apply to gold, they must also apply to silver and that
leading HUI gold-stock index. Record early-summer strength this
year has indeed been witnessed in these favorite derivative gold
plays.
Since silver tends
to leverage gold’s action, silver’s early-summer-strength anomaly
this year is even more extreme than gold’s. Silver has rocketed as
high as 9.9% above its May close in 2016, peaking on a day where
silver’s average summer loss between 2001 to 2012 was 4.1%!
And silver has less of a mean-reversion-rally case in June than
gold, as May 2016 wasn’t even among the top-3 worst Mays in this
dataset.
On average in the
summer doldrums between 2001 to 2012, silver ended June, July, and
August at 4.9%, 1.2%, and 1.0% losses relative to its final
close in May. With silver so abnormally strong this June thanks to
gold, anything that forces gold back into more-normal
summer-doldrums behavior is going to hammer silver. This includes
not only more Fed hawkishness and gold-futures selling, but
silver-futures selling.
Like gold futures,
speculators’ silver-futures longs are way up near record levels. So
if anything spooks these hyper-leveraged traders to rush for the
exits en masse to limit their losses, silver is going to get hit
hard. So just like gold, if you want to add silver positions the
odds favor you waiting until the end of the summer doldrums in late
July. And silver’s major seasonal low even comes after that,
actually in mid-August.
This year’s
anomalous summer-doldrums situation in the gold stocks and silver
stocks naturally mirrors gold’s. The HUI gold-stock index, which is
effectively tracked by the leading
GDX VanEck
Vectors Gold Miners ETF, started soaring higher on Friday June
3rd after that colossal jobs-report disaster. That day the HUI
skyrocketed an astounding 11.6% higher, which was gold stocks’
biggest daily rally in 7.5 years!
At best this June,
the HUI was up a wildly-unprecedented 16.8% from its May close.
That came on the June trading day where this flagship gold-stock
index had averaged a 1.7% summer-to-date loss between those same
bull-market years of 2001 to 2012. 2016’s record early-summer
performance is far beyond anything witnessed in gold stocks’ epic
1664.4% secular bull run over 10.8 years ending in September 2011.
On average between
2001 to 2012, the HUI suffered a 0.6% summer-to-date loss in June
which soon deepened to -2.5% by the end of July. It was only in
August that gold stocks started recovering in gold’s big seasonal
autumn rally, with the HUI’s average summer-to-date gains surging to
3.9%. That’s why late July has long proven the optimal time
seasonally to buy gold stocks in the middle of any calendar year!
Since gold stocks
remain radically
undervalued relative to prevailing gold prices, I remain
super-bullish on them for the rest of 2016 and the next couple
years. But long, hard experience has taught me to be wary of the
summer doldrums. And since gold stocks soared so anomalously in
June, there is a much-higher risk than normal that they will mean
revert back down to typical summer-doldrums performance soon.
When gold
inevitably gets hit by a mass exodus of speculators from their
near-record gold-futures longs, likely on market-implied
Fed-rate-hike odds rising, gold stocks are going to get sucked into
that selling maelstrom. And in the market summer when investors’
interest is low as their attention is diverted to vacations and
leisure, sellers will likely easily overwhelm buyers. You can’t
expect much in summer doldrums.
So there remains a
good-if-not-high chance that the gold stocks will get pushed back
down to normal bull-market summer-doldrums levels between now and
late July. If the HUI is driven back down to flat on the summer,
we’re looking at a steep 11.5% loss to 201.3. If the HUI is forced
back down to normal average 2.5% summer losses by late July, that
rises to a 13.7% loss to 196.3. That’s serious short-term risk!
Thus it seems
prudent to wait until late July before deploying any
significant new capital into the gold stocks and silver stocks. We
may get lucky this summer, with speculators’ gold-futures selling
being slow enough to be absorbed by the big investment buying.
Maybe the gold stocks will remain high all summer, bucking their
weak seasonals. But the odds certainly favor a summer selloff,
which could be large.
Gold stocks’
upside after June’s record early-summer performance seems modest at
best, while their downside risk to revert to normal summer-doldrums
behavior is considerable. So make sure you have stop losses on any
current precious-metals-stock positions you own. And given the
great asymmetry in near-term risks, you ought to hold off on new GDX
or individual-stock buying until the summer doldrums have passed.
At Zeal we’ve long
studied all kinds of market cycles so we can leverage them to big
gains instead of foolishly fighting them. The summer doldrums are
simply a fact of life in the precious-metals realm, and can be used
advantageously to time buying with major seasonal lows. Thriving in
the markets requires staying informed and gaming probabilities, not
blindly trading and hoping for the best. We’re here to help.
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The bottom line is
gold, and therefore silver and their miners’ stocks, have always
suffered the summer doldrums even during the strongest secular
bulls. June and July are simply devoid of the big recurring gold
demand surges seen during much of the rest of the year, leaving them
weak. The entire precious-metals realm tends to grind sideways to
lower in June and July before gold’s autumn rally accelerates in
August.
This year the
summer doldrums still present considerable downside risk. Extreme
Fed dovishness and futures buying catapulted gold, silver, and their
miners’ stocks to record early-summer performances in 2016. But
with Fed hawkishness due to mean revert higher and futures
speculators having to soon unwind their near-record longs, there’s
plenty of risk of mean reversions lower to normal summer-doldrums
levels.
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