The
gold miners’ stocks have suffered a psychologically-grating year so
far. They’ve remained trapped in their vexing low-consolidation
trading range, disheartening and driving away the great majority of
traders. But that should soon change as this deeply-out-of-favor
sector enters its strong season, which begins with a powerful autumn
rally starting late summers. This year’s has exceptional upside
potential from such a low base.
Seasonality is the
tendency for prices to exhibit recurring patterns at certain times
during the calendar year. While seasonality doesn’t drive price
action, it quantifies annually-repeating behavior driven by
sentiment, technicals, and fundamentals. We humans are creatures of
habit and herd, which naturally colors our trading decisions. The
calendar year’s passage affects the timing and intensity of buying
and selling.
Gold stocks
exhibit strong seasonality because their price action mirrors that
of their dominant primary driver, gold. Gold’s seasonality
generally isn’t driven by supply fluctuations like grown commodities
experience, as its mined supply remains
fairly steady
year-round. Instead gold’s major seasonality is demand-driven,
with global investment demand varying dramatically depending on the
time in the calendar year.
This
gold seasonality
is fueled by well-known income-cycle and cultural drivers of
outsized gold demand from around the world. Starting in late
summers, Asian farmers begin to reap their harvests. As they figure
out how much surplus income was generated from all their hard work
during the growing season, they wisely plow some of their savings
into gold. Asian harvest is followed by India’s famous wedding
season.
Indians believe
getting married during their autumn festivals is auspicious,
increasing the likelihood of long, successful, happy, and even lucky
marriages. And Indian parents outfit their brides with beautiful
and intricate 22-karat gold jewelry, which they buy in vast
quantities. That’s not only for adornment on their wedding days,
but these dowries secure brides’ financial independence within their
husbands’ families.
After that comes
the Western holiday season, where gold-jewelry demand surges for
Christmas gifts for wives, girlfriends, daughters, and mothers.
Following year-end, Western investors figure out how much surplus
income they earned after getting bonuses and paying taxes. Some of
this is invested into gold just like the Asian farmers do. Then big
Chinese New Year gold buying flares up heading into February.
So during its
bull-market years, gold has always tended to enjoy major autumn
rallies driven by these sequential episodes of outsized demand.
Naturally the gold stocks follow gold higher, amplifying its gains
due to their
profits leverage to the gold price. Today gold stocks are once
again right at their most-bullish seasonal juncture, the transition
between the usually-drifting summer doldrums and big autumn rallies.
Since it’s gold’s
own demand-driven seasonality that fuels the gold stocks’
seasonality, that’s logically the best place to start to understand
what’s likely coming. Price action is very different between bull
and bear years, and gold is absolutely in a young bull market.
After being crushed to a 6.1-year secular low in mid-December 2015
on the Fed’s first rate hike
of this cycle,
gold powered 29.9% higher over the next 6.7 months.
Crossing the +20%
threshold in March 2016 confirmed a new bull market was underway.
Gold corrected after that sharp initial upleg, but normal healthy
selling was greatly exacerbated after Trump’s surprise election
win. Investors
fled gold to chase the taxphoria stock-market surge. Gold’s
correction cascaded to monstrous proportions, hitting -17.3% in
mid-December 2016. But that remained shy of a new bear’s -20%.
Gold’s last mighty
bull market ran from April 2001 to August 2011, where it soared
638.2% higher! And while gold consolidated high in 2012, that was
technically a bull year too since gold just slid 18.8% at worst from
its bull-market peak. Gold didn’t enter formal bear-market
territory at -20% until April 2013, thanks to the crazy
stock-market
levitation driven by extreme distortions from the Fed’s QE3 bond
monetizations.
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 2018. Thus these are the years most relevant to
understanding gold’s typical seasonal performance throughout the
calendar year. We’re interested in bull-market seasonality,
because gold remains in its young bull today and bear-market action
is quite dissimilar.
Prevailing gold prices varied radically throughout these modern
bull-market years, running between $257 when gold’s last secular
bull was born to $1894 when it peaked a decade later. All these
years along with gold’s latest bull since 2016 have to first be
rendered in like-percentage terms in order to make them
perfectly comparable. Only then can they be averaged together to
distill out gold’s bull-market seasonality.
That’s accomplished by individually indexing each calendar
year’s gold price action to its final close of the preceding year,
which is recast at 100. Then all gold price action of the following
year is calculated off that common indexed baseline, normalizing all
years regardless of price levels. So gold trading at an indexed
level of 105 simply means it has rallied 5% from the prior year’s
close, while 95 shows it’s down 5%.
This
chart averages the individually-indexed full-year gold performances
in those bull-market years from 2001 to 2012 and 2016 to 2017. 2018
isn’t included yet since it remains a work in progress. This
bull-market-seasonality methodology reveals that late summers
are when gold’s long parade of big seasonal rallies gets underway.
And that starts with the major autumn rally which is born in gold’s
summer doldrums.
During these modern bull-market years, gold has enjoyed a strong and
pronounced seasonal uptrend. From that prior-year-final-close 100
baseline, it has powered 16.0% higher on average by year-ends!
These are major gains by any standard, well worth investing for.
While this chart is rendered in calendar-year terms since these
increments are easiest for us to grasp, gold’s seasonal year
actually starts in the summers.
Remember this whole concept of seasonality relies on blending many
years together, smoothing away outliers to reveal the core
underlying tendencies. Seasonally gold tends to bottom in mid-June,
but then still largely drifts sideways in its
summer doldrums
until early July. This year’s low near $1216 came later in
early August. And it was way worse than usual in price terms, which
is a seriously-bullish harbinger.
On
average gold’s summer-doldrums lows birthing its major autumn
rallies see it still up 6.2% and 7.0% at worst year-to-date in
mid-Junes and early Julies. But in early August 2018, gold slumped
to a deep summer-doldrums low down a whopping 6.6% YTD! With gold
diverging about 13% under its seasonal average this summer, its
autumn rally has far-greater upside potential than usual. Gold
needs to mean revert way higher!
Gold’s autumn rallies generally start grinding higher in Julies,
which have seen modest average gains of 0.7% in these modern
bull-market years per this dataset indexed from prior-year closes.
They accelerate considerably in Augusts, which is when that Asian
harvest buying kicks into full swing. Gold averaged big 2.2% gains
in Augusts, which is its 4th best month seasonally! So
traders need to be long gold by late Julies.
The
upside momentum in gold’s strong autumn rallies only builds from
there. From 2001 to 2012 and 2016 to 2017, Septembers enjoyed hefty
additional average gains of 2.7%! That makes for gold’s 3rd best
month of the year, only behind Januaries’ 3.1% and Novembers’ 2.9%.
Gold’s major autumn rallies generally running from mid-Junes to late
Septembers have enjoyed big 6.6% average gains in these bull
years!
That’s a major upleg run by any standard in just 3.4 months.
Overall US stock-market returns historically have averaged around 8%
annually. So seeing gold surge nearly that much in just over a
quarter the time is really impressive. And these big autumn rallies
are only the first third of gold’s strong season. They are
followed by much-larger winter rallies averaging huge 9.5% gains
between late Octobers to late Februaries!
Then
smaller spring rallies averaging 3.7% gains between mid-Marches to
late Mays close out gold’s strong season before the summer doldrums
return. Together gold’s autumn, winter, and spring rallies carve
its strong seasonal uptrend rendered in this chart. Investors and
speculators alike can certainly ride gold’s strong bull-market
seasonality in physical bullion or the leading GLD SPDR Gold Shares
gold ETF.
But
the gold miners’ stocks well outperform gold’s underlying
seasonal gains, amplifying gold’s trio of big seasonal rallies. The
gold stocks enjoy powerful sentimental and fundamental boosts when
gold rallies consistently. Higher gold prices shock traders out of
their usual apathy for this small contrarian sector, restoring
capital inflows. The resulting gold-stock gains start shifting
sentiment back to bullish, fueling more buying.
That’s totally justified fundamentally, as gold-mining profits
really leverage underlying gold gains. The higher gold prices flow
directly through to bottom lines, as production costs are largely
fixed when mines are being planned. Gold miners’ profits
leverage to gold is very important to understand, illuminating
why gold stocks are the best way to ride gold’s seasonal uptrend.
The latest real-world data drives home this point.
The
leading gold-stock investment vehicle is the GDX VanEck Vectors Gold
Miners ETF. It includes the world’s biggest and best major gold
miners. Every quarter I analyze the latest operational and
financial results from GDX’s elite gold stocks. While this current
Q2’18 earnings season is well underway, it won’t be finished until
mid-August. So the latest full results available are still Q1’18’s,
which proved quite strong.
The
GDX gold miners reported average all-in sustaining costs of
$884 per ounce,
which is what it costs them to produce and replenish each ounce of
gold. AISCs don’t change much regardless of prevailing gold prices,
as mining still requires the same levels of infrastructure,
equipment, and employees quarter after quarter. Between Q2’17 to
Q1’18, the GDX gold miners’ AISCs averaged $867, $868, $858, and
$884.
That
makes for $869 AISCs over the past year. Gold-mining profits are
the difference between prevailing gold prices and AISCs. At gold’s
summer-doldrums low of $1222 this week, the gold miners were still
earning fat $353 per-ounce profits. If gold’s 2018 autumn
rally is merely average at 6.6%, it would climb back over $1302 by
late September. If gold miners’ AISCs stay flat like usual, their
profits would surge to $433.
That
is big 22.7% earnings growth on a mere 6.6% gold rally, making for
3.4x upside leverage! This core fundamental relationship
between gold-mining profits and gold prices is why gold stocks tend
to amplify gold’s gains by 2x to 3x. That leverage grows much
larger after gold stocks are wildly undervalued and deeply out of
favor. In roughly the first half of 2016, GDX soared 151.2% on a
29.9% gold upleg for 5.1x upside!
So
gold stocks’ own strong bull-market seasonality is fully justified
fundamentally. This next chart applies this same seasonal
methodology to the flagship HUI NYSE Arca Gold BUGS Index. We can’t
use GDX for this study since its price history is insufficient, it
was only born in May 2006. But since GDX and the HUI hold most
major gold miners in common, they
closely mirror
each other. Gold stocks see big autumn rallies.
During these same
modern gold-bull-market years of 2001 to 2012 and 2016 to 2017, the
gold stocks as measured by the HUI enjoyed average gains of 10.5%
between late Julies and late Septembers. Augusts and Septembers are
actually gold stocks’ strongest 2-month span of the year, averaging
respective big gains of 4.9% and 3.9%. Investors and speculators
need to be fully deployed before Augusts, just like in gold.
The gold stocks’
10.5% average autumn rally only leverages gold’s 6.6% one by 1.6x,
behind that 2x to 3x expected. But that evens out over the winter
and spring rallies, where the gold stocks rally another 15.5% and
12.8%. That works out to 1.6x and 3.5x upside leverage to gold. In
full-calendar-year terms, the gold stocks’ bull-market seasonal
gains averaging 28.9% amplify gold’s 16.0% by 1.8x. This falls
short of that 2x to 3x.
Unfortunately gold
stocks have underperformed gold for years, because investors have
largely forgotten the latter. That’s dragged down gold stocks’
average upside leverage to gold. Investment gold demand wanes when
stock markets are near record highs fueling extreme euphoria.
Complacent investors forget markets are forever cyclical, feeling no
need to prudently diversify their stock-heavy portfolios with gold.
Gold tends to
rally when stock
markets weaken, making it the ultimate portfolio diversifier.
And in recent years these crazy
bubble-valued
euphoric stock markets have rarely seen much material weakness at
all. That’s left gold way out of favor, making it hard for gold
stocks to catch a significant bid. But they’ve still enjoyed strong
autumn rallies even in such a hostile sentiment environment.
Consider last year’s example.
In 2017’s summer
doldrums, gold and thus the HUI bottomed in early July. Gold’s
autumn rally was born from there as speculators’ collective
gold-futures positions were too bearish, they’d hit selling
exhaustion. So as they covered
extreme short
positions, gold surged 11.2% higher over the next 2.0 months
into early September. The HUI rallied 22.7% higher over that same
span, making for 2.0x gold-stock upside leverage.
This year’s autumn
rally has much-greater potential. Before I get into that, this
final chart slices up gold-stock seasonals into calendar months
instead of years. Each is indexed to 100 at the previous month’s
final close, and then all like calendar months’ indexes are averaged
together across these same modern bull-market years of 2001 to 2012
and 2016 to 2017. Again Augusts and Septembers are the best
2-month span.
While the average
5.4% gains in Februaries and 5.0% gains in Mays beat the 4.9% in
Augusts and the 3.9% in Septembers, they are much more isolated.
Augusts and Septembers are the only back-to-back months where
gold stocks have averaged strong rallies in modern bull-market
years. Late summers offer the best seasonal buying opportunities of
the year to aggressively deploy capital into beaten-down gold
stocks.
And for a
bunch of reasons, 2018’s coming autumn
rally has far greater upside potential than usual. In pure seasonal
terms alone, the gold stocks are way behind where they usually are.
Typically by their final late-July summer-doldrums low, the HUI is
still up 17.3% year-to-date. But this
week when this year’s summer-doldrums low was hit, the HUI
was actually down 14.5% YTD. That’s about
32% lower than normal!
This
exceptionally-weak gold-stock performance this year is explainable
by gold’s own. In early August when
gold slumped to its summer-doldrums lows, it was
again down 6.6% YTD. The HUI was just leveraging that 2.2x
like usual. So when gold inevitably rebounds higher in its autumn
rally, the abnormally-low gold stocks have real potential to see a
huge mean-reversion-rebound rally. Their setup today is
wildly-bullish.
Heading into their
strong season, the gold stocks spent much of this summer mired in
deep bearishness sentimentally, consolidating low technically, and
trading at dirt-cheap prices fundamentally. So everything is
stacked in their favor as gold turns around. And that’s inevitable
after gold got hammered with heavy selling this summer. Both
gold-futures speculators and normal investors sold to
selling-exhaustion extremes.
I’ve discussed all
these bullish factors in depth in recent essays. Traders hate gold
stocks because their prices are so darned low. They’ve been
basing in a low
consolidation since early 2017, trading between $21 support to
$25 resistance in GDX terms. While grueling psychologically, this
has long since shaken out all the weak hands. Only the hardcore
fundamentally-focused contrarian gold-stock investors remain.
At their recent
summer-doldrums lows, the gold stocks were trading at prices first
seen 15.0 years ago way back in August 2003 when gold was just in
the $350s! It is
fundamentally-absurd to see the same gold-stock price levels
today with gold about 3.5x higher and
gold-mining profitability radically greater in both absolute and
percentage terms. These ludicrously-cheap
gold-stock
valuations won’t last forever.
They only exist
because speculators and investors have totally forsaken this
sector. But as gold powers higher in its
coming strong season, they will start returning. Encouraged
by surging gold-mining profits as discussed earlier, their capital
inflows will bid the beaten-down gold miners’ stocks much higher.
Gold itself has an exceptionally-bullish autumn-rally setup given
speculators’ and investors’ excessive summer selling.
The
hyper-leveraged gold-futures speculators who dominate short-term
gold price action sold short at extreme levels in June and
July. That resulted in
record-high
gold-futures shorts that have to be covered by buying
offsetting longs! This same gold-futures short-covering dynamic is
what propelled gold sharply higher in 2017’s autumn rally. Major
gold uplegs are birthed by speculators buying to cover excessive
shorts.
This summer’s
extreme gold-futures shorting spooked investors into dumping in
sympathy. This was really evident in the gold-bullion holdings of
that leading GLD gold ETF, which fell sharply in recent months on
heavy differential GLD-share selling. That
waning gold
investment forced GLD’s holdings down to major bull-market
support levels. So investors too will have to buy back in as gold’s
autumn rally powers higher.
With speculators
and investors both nearing selling exhaustion this summer, gold is
set up to see serious buying as this
year’s strong season gets
underway. The higher gold climbs, the more attention it will get
from the financial media, speculators, and investors. As their
sentiment turns bullish again, capital will flood back into the
beaten-down gold stocks. Their surging profits on higher gold will
justify that fundamentally.
While investors
and speculators alike can certainly play gold stocks’ coming strong
seasonal uplegs with the major ETFs like GDX and GDXJ, the best
gains 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
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The bottom line is
gold-stock seasonals argue this sector is
right on the verge of a major autumn rally. Augusts and
Septembers are the best couple-month span of the year for gold
stocks seasonally in bull-market years. This is driven by a
parallel autumn gold rally fueled by outsized Asian demand coming
back online. Gold stocks naturally amplify gold’s gains since their
profits leverage gold’s price moves.
And gold stocks’
upside potential in this year’s autumn rally is exceptional.
They’ve way underperformed their seasonal averages in 2018, they’re
super-low technically, and they’re trading at truly
fundamentally-absurd prices. This beaten-down sector is overdue for
a massive catch-up rally to mean revert far higher to reflect
prevailing gold prices. It has a good chance of starting to unfold
over this coming strong season. | 
