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Traders
beware, the dreaded precious-metals summer doldrums are now upon us! Summers
are barren sentiment wastelands for the entire PM complex. Gold, silver, and
the PM stocks tend to grind listlessly sideways to lower, vexing traders who
aren't psychologically prepared to weather this slow season.
A
variety of factors drive this phenomenon during the financial-market summers,
which run from Memorial Day to Labor Day. The primary one is the same summer
psychology that affects all the financial markets, vacation season.
Traders flee the markets in droves during these lazy summer months, enjoying
the bountiful sunlight, long warm days, and precious family time while their
kids are out of school.
Naturally
this reduces the collective focus on the financial markets. Speculating and
investing take a back seat to vacationing and relaxing, leading to
much-reduced trading volume globally. Gold, which is the primary driver of
silver and the PM stocks, is certainly not immune. Waning interest in the
financial markets as a whole bleeds into this metal, robbing these summer
months of compelling buying catalysts.
Since
nothing moves gold prices like large spikes in investment demand, it mostly
just drifts sideways in June, July, and August. The major income-cycle and
cultural factors that drive big gold demand spikes between Labor Day and
Memorial Day simply don't exist in the summer months. This makes summer the
weakest time of the year by far for gold seasonals.
Gold's
surprisingly-strong seasonality is purely demand-driven, as its newly-mined
supply is nearly constant throughout the entire calendar year. Summer lacks
the investment-demand spikes seen between September and May. Summer has no
Asian harvest, no Indian wedding season, no Western holiday shopping, no
end-of-year income-surplus investing, and no Chinese New Year.
The
result is the PM summer doldrums, leaving the precious metals drifting along
listlessly like a great tall ship trapped in the oceans' infamous doldrums.
So to avoid frustration and discouragement, traders really shouldn't expect
much from the PMs during these lazy summer months. On the bright side, this
season's grinding ultimately leads to the best seasonal buying opportunity of
the entire year.
Unfortunately
this phenomenon is not as widely-understood as it ought to be. As prices
march higher on charts during secular bulls, earlier years' price action
becomes distorted. Moves that were important in summers past when gold was
much lower barely even register visually on a current chart culminating in
today's higher prevailing prices. This makes it hard to view past summers in
comparable terms, obscuring the doldrums.
The
solution is to build a spreadsheet that renders every summer in
perfectly-comparable percentage terms. Each year's final pre-summer close,
the last trading day of May, is indexed at 100. And then each summer's daily
trading action after that is converted to this common percentage baseline. So
whether gold entered a summer at $500 or $1500, a 5% move looks identical on
these indexed charts.
Averaging
every indexed summer since 2000, just before today's secular gold bull was
born, clearly reveals this metal's grinding summer-doldrums tendency. But
averages can obscure extremes, and offer no insights into how tight or
dispersed the underlying data is. The tighter the raw data fed into an
average, the higher the probability that average is meaningful and important
for predicting future price action.
So
in addition to the red average line below, I included each summer's raw
indexed data in yellow. While it looks like a bowl of spaghetti was thrown at
this chart, these individual years' performances illustrate the average's
underlying building blocks. In addition, gold's current action in this year's
young summer is rendered in blue for comparison. The PM summer doldrums are
well-established technical fact.
 
The
vacation season and lack of investment-demand spikes for gold lead to the
summer-doldrums drift seen on this chart. On average, gold tends to meander
through the market summers flatlined, but with a
definite downside bias. At best this average only climbs 0.7% above gold's
May close, and at worst falls 1.5% below it. This
listlessness is no big deal if you expect it, but can be quite frustrating if
you don't.
The
center-mass downtrend encompassing all the individual indexed summers in
yellow is definitely down. The trend lines drawn above capture the vast
majority of the past decade's gold price action. While there were a few years
where gold broke out above or below this downtrend, such moves were
relatively-rare and always short-lived. This sideways-to-lower drift has a
magnetism that can't be resisted for long.
Gold's
upside-exception summers were 2005 and 2008. Back in 2005, gold's autumn
rally started early as this metal caught a bid in late July and surged in
early August. This was way back near the end of the old Stage One
days of this gold bull, when this metal's every upleg
and correction was directly driven by opposing US dollar moves. In just a
couple of weeks that summer, the US Dollar Index fell 3.5% (a big move for
the world's reserve currency) leading to atypical summer interest in gold.
As
the dollar held most of its losses until the end of August that year, so did
gold keep most of its gains. It finished the summer of 2005 4.0% above where
it had started, its best summer performance of this entire secular bull.
Still, on average gold ended each summer just 0.3% above where it had
started. Such gains over 3 entire months are terrible, gold was essentially
unchanged.
And
though 2008 enjoyed a big anomalous gold spike in July, it was very
short-lived. A month later in August gold had plunged way under its
center-mass downtrend, and it finished that summer a whopping 6.5% below
where it had started. This was its worst summer of this entire bull by far.
As you probably remember, the summer of 2008 saw the bond panic which
snowballed into that autumn's stock panic. As US mortgage giants Fannie Mae
and Freddie Mac teetered near bankruptcy, gold caught a temporary bid.
The
other major downside breakout happened in June 2006, and it too was
short-lived. Earlier that spring, gold had rocketed higher in its biggest upleg of its entire bull to that point. It was
wildly-overbought in May, which soon led to it plunging in a necessary and
healthy correction in June. By mid-June it had fallen 21.9% in less than 5
weeks! Though gold soon climbed back into its center-mass downtrend, it still
finished that summer down 4.0%.
Gold's
summer-doldrums center-mass downtrend has ultimately prevailed throughout all
the years of this gold bull. While anomalous events can drive gold outside it
temporarily, this metal soon gravitates back to its magnetic grind. All that
traders can reasonably expect any summer is more of the same given this
ironclad precedent. At best gold is likely to meander near the flatline during the summer months, but it definitely has
a downside bias with selling pressure much more likely than buying pressure.
While
the fortunes of gold are silver's biggest driver, this wild metal is far more
volatile. So the raw data under silver's even-worse summer doldrums is much
more dispersed. Nevertheless, when this mess of individually-indexed summers
is averaged the result is still a meandering drift lower. Silver can buck
gold's lead from time to time, but eventually it always falls back in line
with the PM sector's leader.
Far-more
speculative and hence more likely to be battered about by the apathetic
summer psychology, silver's summer-doldrums drift is more pronounced than
gold's. At best its average nearly regains its May close, down 0.3%. And at
worst it falls as low as 5.2% below May's close. And silver tends to end the
summer about 3.0% lower than where it started. Summer is the weakest time of
the year by far for silver seasonals.
Silver
has seen more outlying summers than gold, on both the upside and downside.
Most simply mirror and amplify what was going on in gold though. If gold was
oversold after a correction heading into summer and thus likely to rally
above trend, silver naturally followed. If gold was overbought after an upleg heading into summer and thus likely to correct
below trend, silver tagged along. Silver usually follows gold.
Interestingly
as the blue line shows, today silver is off to one of its worst early-summer
starts of this entire bull. This metal has been hyper-volatile after soaring
to absurd heights in a parabolic speculative mania, and then promptly
collapsing in a brutal near-crash
in early May. After any unsustainable parabolic ascent, its aftermath leads
to exceptionally-volatile silver until the extreme oscillations gradually
abate. This volatile-yet-moderating trend will probably persist well into
this summer.
The
range of silver's summer performances in its bull so far has been vast, from
falling 19.7% in 2008 as that bond panic was gradually morphing into the
first stock panic in a century to rallying 10.8% way back in 2004. But
silver's average center-mass downtrend definitely meandered lower. So though
silver is always a crapshoot and a strong summer is
possible, the odds are certainly stacked against it with gold drifting
listlessly sideways.
Not
surprisingly with gold and silver trapped in the PM summer doldrums, the gold
stocks and silver stocks are slaved to their
metals' lethargic drifts. The flagship HUI gold-stock index naturally shares
in the precious-metals malaise, drifting sideways to lower for much of the
summer. If you want to deploy more capital in gold stocks and silver stocks,
early summer is the worst time of the year seasonally
to do it!
While
the HUI witnesses outlying summers too, the center-mass trend of all its
indexed summers is definitely down. And so is their average, for most of
summer anyway. It goes as high as 1.9% over May's close and as low as 5.0%
under it. Unlike gold and silver the HUI finishes summer relatively strong,
up 1.6% on average. But given the huge risks inherent in PM stocks, this is
nothing to write home about.
Interestingly
this average is heavily skewed by a single year, which is why it is important
to consider the underlying individual-summer indexed data and not just the
averages. During the summer of 2003 the HUI soared a breathtaking 36.9%,
manhandling the summer doldrums! That year gold rallied 3.0% while silver
climbed 10.2%. But the PM stocks still broke out big time, as many investors
new to them rushed to join the early contrarians enjoying big gains.
That
incredible summer, mainly August, was an anomaly that hasn't even come close
to being replicated since. With the PM stocks' collective market
capitalization far larger now, and far more mainstream investors including
hedge funds owning PM stocks, it isn't likely we'll see another anomalous
summer surge like 2003's. As long as gold and silver drift sideways in their
summer doldrums, there is almost no chance the PM stocks will command such an
outsized bid.
Provocatively
if that summer of 2003 is excluded from this average, the HUI's summer
performance falls dramatically from up 1.6% on average to down 1.9%.
And if you ignore 2003's outlying indexed line above visually, the HUI's
center-mass downtrend is definitely down just like silver's. So summer really
isn't a high-probability-for-success time to deploy new capital in gold
stocks and silver stocks.
At
least early summer, that is. The red average line above,
whether 2003 is included or not, shows the PM stocks carve a distinct
seasonal low near the end of July. So late July and early August is
the time to start deploying capital in the beaten-down PM stocks. I suspect
this early low occurs because traders are anticipating the big autumn
rallies in gold and silver. These are driven by major gold-investment-demand
spikes out of Asia that really start ramping up in September.
Sentiment
also comes into play near these summer lows. Following the often-exciting
spring action in the precious metals, summer really demoralizes newer traders
who aren't aware of the doldrums. They get more and more discouraged as the
summer wears on and PMs grind lower, defying the bullish fundamentals.
Eventually they capitulate and sell in disgust, driving PM stocks down to
bargain prices.
The
subsequent often-large autumn rallies are the reason the PM summer doldrums
are a blessing, not a curse, for speculators and investors. As these charts
show, on average gold, silver, and the HUI really start powering higher in
September. Soon before that is when you want to have all your capital
allocated to the precious-metals complex fully deployed. The PM summer
doldrums are awesome because they drag the PMs lower right before
their big autumn rallies launch. This grants a wonderful opportunity to
buy low!
So
I actually look forward to the PM summer doldrums each year. As a speculator
and investor, they give me plenty of time to research PM stocks to find the
highest-potential-for-success ones I want to buy and recommend to our
subscribers. And they drag down gold, silver, and especially PM-stock prices
to their best entry levels of the year seasonally. Some time to figure out
what to buy, followed by subsequent relatively-low prices to do that buying,
is really a great boon for traders.
With
the better part of two months left before those late-summer buying ops
arrive, this is the perfect time to do your homework. At Zeal we are
constantly researching commodities stocks in great depth, to find our
fundamental favorites in a variety of PM-stock sub-sectors. Periodically we
publish comprehensive reports
profiling a dozen of these elite companies. Fascinating and full of
expert world-class research, these reports are available on our website for
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today! Enjoy some great summer reading while preparing your personal
PM-stock shopping list for the excellent late-summer buying op.
We
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The
bottom line is the precious-metals summer doldrums have arrived. The
market-wide vacation psychology combined with the lack of any major seasonal
gold-investment-demand spikes leads to drifting PM prices. With the exception
of occasional anomalies, this happens every year like clockwork. PMs' summer
performances have been poor for their entire decade-long secular bull. 2011's
summer isn't likely to buck this trend.
This
is very frustrating for those not expecting it, leading to a sentiment
wasteland in late summer where many traders capitulate in disgust. But this
summer-doldrums washout drives the best seasonal entry points of the year for
gold, silver, and the PM stocks. Soon after, the powerful autumn gold rally
arrives as seasonal investment demand surges in Asia. Buying low late in the
summer doldrums usually leads to big gains in the autumn rally.
Adam Hamilton,
CPA
Zealllc.com
So how can you
profit from this information? We publish an acclaimed monthly
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that details exactly what we are doing in terms of actual stock and options
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Questions for
Adam? I would be more than happy to address them through my
private consulting business. Please visit www.zealllc.com/adam.htm for
more information.
Thoughts,
comments, or flames? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that I
am not able to respond to comments personally. I will read all messages
though and really appreciate your feedback!
Copyright 2000
- 2006 Zeal Research (www.ZealLLC.com)
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