Gold
has spent most of June grinding lower on balance, damaging sentiment
and vexing traders. Usual selling leading into the Fed’s latest
rate hike contributed, but the summer doldrums are also in play.
Gold has typically suffered a seasonal lull this time of year, on
waning investment demand as vacations divert attention from
markets. But these summer doldrums offer the best seasonal buying
opportunities of the year.
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 even weeks, unable to make any 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 precious 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.
June and July in particular are usually desolate sentiment
wastelands for precious metals, totally devoid of recurring seasonal
demand surges. Unlike 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’s never wise to
expect too much from it this time of year. Summer rallies can
happen, but they are rare. So expectations really need to be
tempered, especially in June and July. 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’s 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’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 has rallied
5% from May’s final close, while 95 shows it’s down 5%. This
methodology renders all bull-market-year gold summers in like
terms. That’s critical 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!
So
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. In Q2’13 alone, gold
plummeted by 22.8% which proved its worst quarter in an astounding
93 years! Gold’s bear continued until the Fed’s initial rate
hike of this cycle in 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 started
rallying sharply 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 young
bull. At worst last December after gold was crushed on the
post-election Trumphoria
stock-market
surge, it had merely 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, and
resumed in 2016 to 2017. 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 actually 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. That collectively establishes gold’s summer trading range.
All those bull-market years’ individual indexes are then averaged
together in the red line, revealing gold’s central summer tendency.
Finally the indexed current-year gold action for 2017 is
superimposed in 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 equates to a probable summer range between $1205 and
$1332. Gold has stayed well within trend.
Gold
surged as high as $1293 in early June on a couple key events. On
June’s first Friday, the headline May read on US monthly jobs came
in at just +138k actual versus +185k expected. On top of that major
miss, the internals were even worse with another -66k in past-month
revisions! So gold powered 0.9% higher that day on gold-futures
speculators’ hope such weak data would dampen the Fed’s hiking
enthusiasm.
Just
a couple trading days later, gold surged another 1.0% on a serious
geopolitical rift opening between Qatar and its Arab neighbors.
That early-summer strength was actually atypical, on the high side
of all the modern bull-market years. And indeed it soon faded on
mounting Fed-rate-hike fears leading into last week’s fourth rate
hike of this cycle.
Pre-rate-hike
gold-futures selling is typical, as I just explained last week.
By
this Tuesday gold had dropped 3.9% in just a couple weeks, really
demoralizing traders and feeding bearish sentiment. But despite
this volatility, gold hasn’t veered materially from its
average of past bull-market years’ June price action. As long as
gold remains well within its usual +/-5% summer-drift trading range,
there’s nothing to get excited about either way. Gold is trapped
adrift in the summer doldrums like a tall ship.
Understanding gold’s typical behavior this time of year is very
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’s wise not to expect too much from gold in
these lazy market summers, particularly June and July. Occasionally
gold still manages to stage a big summer rally, which is a bonus.
Last year was a great example. In June 2016 gold first soared on an
utterly-huge US-monthly-jobs miss, and later on that surprise
UK-Brexit-vote outcome. Those anomalies early in a new bull made
for an exceptional gold summer.
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 unusual, 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 grave 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 August and run until the
following May! 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 most bullish,
not bearish.
The
red average indexed line above encompassing 2001 to 2012 and 2016
reveals that gold stealthily carves a major seasonal low in
mid-June. After that gold soon starts gradually grinding higher
through July and August, before surging in September as gold’s usual
autumn rally accelerates. Although this coming climb within gold’s
summer-drift trend is subtle, it illustrates why June is the best
time to deploy capital.
Gold’s momentum actually builds throughout the summers within
the context of that +/-5% trading range off May’s final close. Gold
averaged a nearly-dead-flat 0.1% loss in Junes between 2001 to 2012
and 2016. In July that reversed to a 0.8% average gain. And then
in August as Asian buying starts coming back online, gold powered an
average of 2.1% higher which is considerable. June is the worst of
the doldrums.
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.
Like gold, silver remains firmly in trend this year with nothing
atypical going on. Interestingly silver’s major seasonal low
arrives a couple weeks after gold’s in late June. And not
surprisingly it is considerably deeper than gold’s.
Again using these red average lines, silver tends to drop 4.3% from
the end of May to late June. That’s much greater than the 1.0%
average gold loss from May’s final trading day to its own seasonal
low in mid-June. So silver sentiment this time of year is often
worse than gold’s, which is plenty bearish. Being in the newsletter
business, I’ve heard from countless discouraged investors over the
decades during the summers.
While I can’t quantify it, anecdotally it feels like silver
investors are disproportionately represented in this bearish
summer-doldrums feedback. Silver usually amplifies whatever is
happening in gold, both good and bad. But again the brunt of this
is borne in June, where silver averaged 3.2% losses during these
bull-market years. Month-to-date this June, silver is down 5.1%
which is roughly in line with past precedent.
Weathering June without waxing too bearish is the key to surviving
the silver summer doldrums. Those June losses reversed sharply in
July, which enjoyed a big 4.3% average rally! And those gains
largely held in August, with a mere 0.6% average loss. Since gold
is silver’s
primary driver, this white metal is stuck in the same drifting
boat as gold in the market summers. Fully expecting this prevents
being disheartened.
The
gold miners’ stocks are also hostage to gold’s summer doldrums.
This last chart applies this same analysis to the flagship HUI
gold-stock index, which is closely mirrored by
that leading GDX
VanEck Vectors Gold Miners ETF. The major gold stocks tend to
leverage gold’s gains and losses by 2x to 3x, so it’s not surprising
that the HUI’s summer-doldrums-drift trading range is also twice as
wide as gold’s own.
The
gold stocks’ trading action this summer has closely mirrored and
amplified gold’s, surging in early June before slumping hard in the
past couple weeks. Yet the HUI still remains near the middle of its
usual summer-doldrums-drift trading range of +/-10% from May’s final
close. As you can see, the gold stocks indeed trade within this
range the vast majority of the time during modern bull-market summer
years.
The
red average of these individually-indexed gold-stock summers behaves
very similarly to gold’s. The HUI tends to bottom in mid-June on
the very day gold does seasonally. The average loss by that point
is 2.3% since the end of May. By this week the HUI was down 4.0%
month-to-date, also roughly in line with that summer-doldrums
precedent. This typical June weakness tends to damage prevailing
gold-stock sentiment.
But
just like in gold, this early summer-doldrums hit for the gold
stocks marks their best seasonal buying opportunity of the
year! These gold miners
tend to rally
strongly on balance between August and the following May. So
it’s important to weather the June weakness without getting bearish
enough to flee. And that’s a whole heck of a lot easier if you
fully expect the summer doldrums and prepare psychologically.
On
average in modern bull-market Junes, the HUI has actually climbed
1.2%. A similar performance this year would put it at 194.8 by
month-end, up 3.7% from this week’s levels. Gold stocks then tend
to drift in July, with modest 0.7% losses on average. But in August
as gold starts powering higher again on big Asian buying, the gold
stocks accelerate to considerable 3.9% average gains. Late summer
gets much better.
Like
everything in life, withstanding the precious-metals summer doldrums
is much less challenging if you know they’re coming. While outlying
years happen, they are fairly rare. So the only safe bet to make is
expecting gold, silver, and the stocks of their miners to
languish in June and July. 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.
Gold, and therefore silver and their miners’ stocks, are actually
looking very bullish this year. Gold’s new bull market ignited
by that first Fed rate hike of this cycle in December 2015 remains
very much alive and well. Gold rallied strongly out of the first
three Fed rate hikes of this cycle, and as I
outlined last
week it’s very likely to rally out of the recent fourth.
Unfortunately the doldrums have delayed this post-hike surge.
But
it’s still coming after this usual seasonal lull passes. Investors
worldwide are
radically underinvested in gold after the extreme Trumphoria
stock-market surge since the election. Gold is a unique asset that
tends to move counter to stock markets, making it the
ultimate portfolio diversifier. Thus gold investment demand wanes
when stock markets are near record highs, then surges when they
inevitably roll over again.
With
today’s massive Fed-goosed stock bull the second-longest and
nearly-third-largest ever seen in US history, a day of reckoning is
nearing. Sooner or later this extreme bull will yield to a major
correction-grade selloff or more likely the
long-overdue
subsequent bear. As stock markets inevitably weaken, gold will
catch a major bid as investment capital floods back in to attempt to
diversify today’s stock-heavy portfolios.
Smart investors, including billionaire hedge-fund managers, have
been accumulating gold positions in anticipation of this coming huge
demand surge. As the summer doldrums pass in the coming weeks and
gold starts grinding higher again, gold investment buying will pick
up whether or not stock markets have started to weaken. The usual
Asian harvest
buying will start in late July regardless of what’s going on
here.
Gold
and especially its miners’ stocks remain deeply undervalued
today, with powerful mean reversions higher ready to continue after
their summer-doldrums pauses. The coming big seasonal gold rallies
after this typically-weak spell can be played with major ETFs like
GDX. But the individual stocks of elite gold miners with superior
fundamentals will really outperform their sector, offering
amazing upside
potential.
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The
bottom line is gold, and therefore silver and their miners’ stocks,
usually drift listlessly during market summers. As investors shift
their focus from markets to vacations, capital flows wane. June and
July in particular are simply devoid of the big recurring gold
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.
So
there’s no reason to be bearish on the precious-metals complex today
despite the recent weakness. Gold, silver, and their miners’ stocks
remain well within their usual summer-doldrums-drift trends this
year. This June weakness is actually the best time of the year
seasonally to buy low and get long, ahead of the major autumn,
winter, and spring gold and gold-stock rallies. Don’t fear the
summer doldrums, embrace them! |