The
gold miners’ stocks have been drifting sideways to lower like usual
in their summer doldrums. They are likely near their major seasonal
lows ahead of a strong autumn rally, a great buying opportunity.
Gold rebounding higher will be the primary driver fueling the
gold-stock advance, dispelling today’s bearish psychology. And
strong Q2 production growth will likely play a sizable role in
restoring favorable sentiment.
Market summers have long been gold’s weakest time of the year
seasonally. Junes and early Julies in particular are simply devoid
of the big recurring demand spikes seen during most of the rest of
the year. With traders vacationing to take advantage of warm
sunshine and kids being out of school, markets take a back seat. So
there’s no outsized gold buying driven by income-cycle or cultural
factors this time of year.
Back
in early June I published my latest research on
gold’s summer
doldrums, which forecast the usual sideways-to-lower
early-summer grind this year. And as goes gold, so go silver and
the stocks of their miners. Gold stocks struggle to make any
significant headway when gold is drifting listlessly, which of
course really taints precious-metals sentiment. These summer
doldrums simply have to be endured.
With
2018’s market summer half over, the gold stocks have tracked their
typical seasonal trading pattern quite well. Both the
benchmark HUI
NYSE Arca Gold BUGS Index and the leading gold-stock ETFs have
largely ground sideways as expected. They are the GDX VanEck
Vectors Gold Miners ETF including larger companies, and the GDXJ
VanEck Vectors Junior Gold Miners ETF which actually holds mid-tier
ones.
While growing in popularity, these dominant gold-stock ETFs are
relatively new. GDX and GDXJ were born in May 2006 and November
2009 respectively. While they closely mirror the HUI’s price
action, they lack the extensive price history necessary to distill
out seasonal trends. So this first chart updated from my
summer-doldrums research uses the HUI to show gold-stock behavior in
modern bull-market years.
Gold
enjoyed a powerful bull market from 2001 to 2012, which catapulted
the HUI an amazing 1664.4% higher over 10.8 years between November
2000 to September 2011! After gold’s own bull-market gain of 638.2%
in roughly that same span, it rolled over into a brutal bear market
from 2013 to 2015. Then gold started marching higher in a new bull
that still persists, so bull-market years resumed from 2016 to 2018.
Gold
stocks’ summer price action in all these modern bull-market years is
rendered in this chart. All the yellow lines represent
individual-year market summers starting with the HUI indexed at 100
as of the last pre-summer closes on Mays’ final trading days. This
indexing normalizes very-different prevailing levels of gold-stock
prices over the years, making them all comparable. A 5% summer
rally shows up as 105 indexed.
All
this normalized summer trading action from 2001 to 2012 and 2016 to
2017 is then averaged together in the red line, revealing gold
stocks’ core underlying summer trend. Finally the current
summer-of-2018 gold-stock price action is superimposed over the top
in blue. The gold miners’ stocks are doing exactly what they
usually do this time of year, drifting sideways to lower. That
shouldn’t have surprised anyone.
The gold stocks
rarely fare very well in Junes and Julies. On average the HUI
rallied 0.8% in Junes in these modern bull-market years, before
retreating 0.2% in Julies. That makes for the summer-doldrums drift
clearly seen here. On average gold stocks slump 2.3% from the ends
of Mays into their big seasonal lows in mid-Junes. This mean
smoothes out a consolidation range mostly running +/-10% from Mays’
final closes.
While this
summer’s gold-stock action has been weaker than the bull-year
average, it still remains well within that trend. In this summer of
2018 the HUI fell 3.1% in June, driven by gold crumbling lower under
extreme selling
pressure from gold-futures speculators. Ultimately gold stocks
mirror and amplify what gold is doing, since its price drives their
profitability. Major gold stocks’ leverage to gold generally
runs 2x to 3x.
This sector’s
likely summer-doldrums nadir came later than usual in late June,
when the HUI had fallen 5.3% month-to-date. But the gold stocks
soon bounced and nearly regained their mean, returning them to flat
summer-to-date earlier this week. So the summer-2018 gold-stock
price action has been perfectly normal so far. This low
consolidation doesn’t need to dishearten students of market history
who saw it coming.
Investors and
speculators alike tend to get down on the gold miners in market
summers, either worrying their stock prices are heading even lower
or ignoring them entirely. That’s a huge mistake, as the gold
stocks’ summer-doldrums lows mark the best seasonal buying
opportunities of the entire year! After the first halves of
market summers pass, gold stocks start powering higher in a series
of major seasonal rallies.
Following those
weak bull-market-year average performances of +0.8% in Junes and
-0.2% in Julies, the HUI has surged 4.2% higher in Augusts on
average! That’s when gold stocks’ major autumn rallies really begin
marching higher, fueled by gold’s own major autumn rallies. This
chart looks at the overall
gold-stock
seasonals in these same modern bull-market years of 2001 to 2012
and 2016 to 2017. This is also indexed.
Each calendar
year’s HUI price action is individually indexed to 100 as of the
final close of the preceding year. Then all years’ indexes are
averaged together to distill out gold stocks’ core bull-market
seasonal tendencies. A 120 level means the HUI has rallied 20%
year-to-date. This sector’s major seasonal lows this time of year
are readily evident, showing the outstanding seasonal buying
opportunities in Junes and Julies.
The gold miners’
stocks tend to slide initially in early Junes, rally out of those
lows, and then slump back near them again in late Julies. As these
seasonal tendencies are mere averages, the exact summer lows are not
precise. They can come anytime between early June and early
August. The weaker gold stocks are earlier in market summers, the
higher their odds of decisively bottoming. That concludes their
weak season.
Following the
summer doldrums, gold stocks tend to enjoy a series of major autumn,
winter, and spring seasonal rallies. In these modern bull-market
years of 2001 to 2012 and 2016 to 2017, the average HUI gain between
late July and late September has run 10.5%. That’s fairly large for
a long-term average even though the autumn rally is the weakest
major seasonal one of the year. Its upside is still well worth
riding.
Last year was a
great example. The gold stocks bottomed in early July 2017 on the
same day as gold, Jobs Friday. From there they started climbing
higher again with gold after speculators’ extreme gold-futures
selling had
exhausted itself. Over the next 2.0 months, the HUI surged
22.7% higher in a nice autumn rally. That doubled gold’s own autumn
rally of 11.2% over that same span making for 2.0x upside leverage.
Both GDX and GDXJ
had similar 2017 autumn rallies, weighing in at +20.2% and +20.4%.
But plenty of the best mid-tier and junior gold miners with superior
fundamentals had gains well exceeding the major gold miners that
dominate the HUI. GDXJ in particular has seen
radical
composition changes in the past year shifting to mid-tier
gold miners, so its coming autumn-rally upside ought to exceed
the HUI’s and GDX’s.
Generally the smaller a gold miner in market-capitalization terms,
and the better its fundamentals from a production-growth,
mining-cost, and profitability standpoint, the more its stock-price
gains outperform the major gold miners controlling the HUI and GDX.
So a carefully-handpicked portfolio of the best mid-tier and smaller
gold miners should enjoy autumn-rally gains much better than the
overall sector average.
Investors and
speculators alike ignore gold stocks during the summer doldrums
until gold itself starts to recover. As its usual autumn
rally starts modestly in Julies before accelerating in Augusts,
gold-mining stocks see growing capital inflows. That shifts
sentiment out of summers’ bearishness and apathy back towards
bullishness. The more gold stocks advance in this virtuous circle,
the more traders pay attention to them.
In terms of news
flow from individual gold miners, traders often prize production
growth most highly of all. The gold miners have little control
over their selling prices, which are dictated by the global gold
markets. Their profit margins are the difference between prevailing
gold prices and mining costs. So higher gold production increases
both cash flows generated from operations and earnings, while
lowering per-ounce costs.
At Zeal we’ve been
taking advantage of these summer doldrums in recent weeks to
aggressively deploy new gold-stock and silver-stock trades as
explained in our newsletters. So I’ve spent lots of time going
through individual miners to try and uncover the ones with superior
fundamentals. That research has left me thinking a lot about how
traders react to production news from individual miners. It’s
quite fascinating.
The new mid-tier
gold miner Pretium Resources has been a great example in the past 9
months or so. It is ramping up its great new Brucejack gold mine in
northwestern British Columbia, which first achieved commercial
production a year ago in early July 2017. Ever since PVG’s stock
price has been a case study in how important production trends are
for investment capital flows. We’ve traded and currently own
this stock.
Bringing a new
gold mine online for the first time is complicated and fluid.
That’s when actual real-world ore grades, mining efficiencies, and
recoveries vary from the myriads of estimates made by geologists and
engineers in the planning and construction phases. So mine managers
have to go with the flow and adjust and optimize processes in
real-time as gold mines ramp up. I’ve seen this many times over
the decades.
But for some
reason many traders don’t understand this, and always assume the
latest production report can be linearly extrapolated into the
future. On October 11th, 2017, Pretium issued a press release right
after its first full quarter of commercial production. It reported
mining 82.2k ounces of gold in Q3’17, way better than traders were
expecting. So they flooded into PVG stock bidding it 25.1% higher
that day alone!
But on January
23rd, 2018, Pretium reported that Q4’17 production came in lighter
at 70.3k ounces. It not only explained why in terms of new-mine
operational challenges it was working to overcome, but it gave
first-half-2018 guidance at a 175k-ounce midpoint. But
excitable traders still freaked out about the declining production
in Brucejack’s second commercial quarter, pummeling PVG stock 26.5%
lower that day!
On April 11th
Pretium reported mining 75.7k ounces of gold in Q1’18, and
reiterated that H1’18 guidance near 175k ounces confirming that
production was forecast to surge in Q2’18. So PVG’s stock
soared 19.3% that day in exuberance. But again traders started to
doubt whether Pretium could really deliver that implied huge
production growth in Q2. So over the next several trading days PVG
dropped 15.8%.
In our July 2018
Zeal Intelligence
monthly newsletter published June 30th, I wrote regarding our open
PVG trade “PVG ought to report excellent Q2 production in early
July. It has given H1’18 guidance at a 175k-ounce midpoint
as this new mine ramps up. Q1 was weaker at 75.7k, implying 100k+
ounces are likely in Q2! That would thrill unaware investors.”
Pretium would’ve warned if that guidance was in jeopardy.
Sure enough just
this Monday July 9th, Pretium reported Q2’18 production large enough
to exceed its H1’18 midpoint. Q2’18 saw a hefty 111.3k ounces of
gold mined as Brucejack finally achieved steady-state production in
its fourth quarter after going commercial. Yet the goofy oblivious
traders still acted surprised, bidding PVG stock 14.6% higher that
day alone! Traders really buy and sell on production news.
Pretium is just
one small example, I could write books on what I’ve seen on this
front over my decades of actively trading gold stocks. But the
really interesting revelation I’ve had recently is Q2 production
reports are what help end the summer doldrums! Gold rebounding
remains the primary driver of the gold stocks’ strong autumn rally,
but I’m starting to think production growth plays a sizable role in
turning sentiment around.
You’d think
production is relatively constant year-round, as gold miners
generally have the same capacity in terms of excavating, hauling,
and processing ore quarter after quarter. But that’s not the case
because ore grades vary significantly to radically within gold
deposits. With overall tonnage throughput fixed, ore grades
translate into lower or higher quarterly production depending on the
gold richness within that ore.
For some reason
mine managers seem to universally choose to run lower-grade ores
in Q1s, resulting in lower production.
These Q1 results
are published between early Aprils and mid-Mays, contributing to the
weakening sentiment leading into the summer doldrums. My best guess
is mine managers want to take production hits early in calendar
years rather than later to help maximize stock-price gains into
year-ends.
That’s when
stock-based compensation like options are decided. So any slower
production necessary from digging through lower-grade ores on the
way to better stuff is best absorbed early in years. Another factor
is likely capital budgets, which are decided late in preceding
years. Mine managers thus often feel flush with capital to invest
in improving operations in early years, and that work sometimes
disrupts mining.
This phenomenon is
backed up by the best hard data in the world on global gold supply,
which the World Gold Council publishes quarterly in its fantastic
Gold Demand Trends reports. These offer the deepest fundamental
view available on what’s going on with gold, and are essential
reading for everyone trading anything precious-metals-related. The
WGC compiles the total global mined supply of gold every quarter.
Over the past 7
years between 2011 to 2017, the quarterly gold-production trends are
quite pronounced. In quarter-on-quarter terms from Q4s to Q1s,
global gold mine production fell sharply every single year in this
span. Those absolute quarterly drops ranged from 6.9% to 11.7%, and
averaged a hefty 9.1%! So when gold miners report their Q1
results late in market springs, sharply-lower quarterly production
is the norm.
Investors and
speculators unaware that this is typical start worrying, sometimes
hammering stocks lower and usually getting more bearish on the gold
miners in general. That feeds into the miserable psychology
defining the summer doldrums. But once mine managers chew through
their lower-grade ores in Q1s, and finish their mining-disrupting
investments, production improves dramatically in both Q2s and
Q3s.
Per that same
comprehensive WGC data, Q2s from 2011 to 2017 saw absolute QoQ
production growth averaging 6.4%. So when Q2 results are
reported between early Julies to mid-Augusts, traders think the gold
miners are growing strongly. That starts turning sentiment around,
restoring some bullishness and beginning to return gold miners to
favor. We’re just entering that perspective-altering Q2 earnings
season now.
Gold production
continues growing into Q3s, which saw even-stronger 6.7% average
absolute growth from Q2s in 2011 to 2017! The Q3 reporting season
runs from early Octobers to mid-Novembers, which gives gold stocks
nice boosts into year-ends. That’s part of their major winter
rallies, which are their strongest seasonal surges of the year.
That leaves gold-stock prices high when year-end bonuses are
calculated.
This same
years-old gold-mining cycle is playing out again this year, which
increases the odds the gold stocks are now bottoming near
summer lows. As more and more of the good gold miners included in
GDX and GDXJ report Q2 results, they will be bid higher as traders
like their quarterly production growth. That also serves to lower
per-ounce costs, spreading the big fixed costs of gold mining across
more ounces.
Lower
all-in sustaining
costs driven by higher production make the gold miners more
profitable, further improving traders’ sentiment. All this means we
are entering the psychological sweet spot for the gold miners over
the next half-year or so. Now is the time to get deployed, to
aggressively buy low before the gold miners stage another major
autumn rally and head much higher. Gold stocks
are dirt-cheap
today!
While investors
and speculators alike can certainly play gold stocks’ coming
powerful uplegs with the major ETFs like GDX and GDXJ, the best
gains by far will be won in individual gold stocks with superior
fundamentals. Their upside will far exceed the ETFs, which are
over-diversified with underperforming stocks. A
carefully-handpicked portfolio of elite gold and silver miners will
generate much-greater wealth creation.
At Zeal we’ve
literally spent tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to
trade and when. As of the end of Q2, this has resulted in 1012
stock trades recommended in real-time to our newsletter subscribers
since 2001. Fighting the crowd to buy low and sell high is very
profitable, as all these trades averaged stellar annualized realized
gains of +19.3%!
The key to this
success is staying informed and being contrarian. That means buying
low before others figure it out, before undervalued gold stocks soar
much higher. An easy way to keep abreast is through our acclaimed
weekly and
monthly
newsletters. They draw on my vast experience, knowledge, wisdom,
and ongoing research to explain what’s going on in the markets, why,
and how to trade them with specific stocks.
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The bottom line is
gold stocks bottom around the middles of market summers. These
major lows offer the best seasonal buying opportunities of the
entire year. Gold stocks start powering higher again in mid-summers
mainly because gold’s own strong autumn rallies start getting
underway. But the psychology surrounding gold stocks also gets a
major boost from their big quarter-on-quarter production surges in
Q2s.
As investors and
speculators see Q2 results arrive between early Julies and
mid-Augusts, they love the sharply-higher QoQ gold mined. That
leaves the gold miners’ fundamentals looking much stronger, also
lowering costs and increasing profitability. Traders who want to
ride these big autumn rallies need to be largely deployed before
most of this parade of good Q2 results arrives. Get buying before
summer lows pass! |