The
gold miners’ stocks have mostly been consolidating low this year,
exacerbating bearish sentiment. Even with gold grinding higher in a
solid uptrend and nearing a major upside breakout, the gold stocks
just can’t get any love. But that may be about to change, with gold
and its miners’ stocks in the midst of their spring rally. Strong
seasonal tailwinds make May one of the best months of the year in
gold-stock bulls.
Gold-stock
performance is highly seasonal, which certainly sounds odd.
The gold miners produce and sell their metal at relatively-constant
rates year-round, so the temporal journey through calendar months
should be irrelevant. Based on these miners’ revenues, there’s
little reason investors should favor them more at certain times of
the year than others. Yet history proves that’s exactly what
happens in this sector.
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 all year
long. Instead gold’s major seasonality is demand-driven,
with global investment demand varying dramatically depending on the
time within the calendar year.
This
gold-demand
seasonality is well-known and heavily studied. The seasonal
gold year starts in late July as Asian farmers begin reaping their
harvests. They plow some of their surplus income into gold. That’s
followed by the famous Indian wedding season in autumn, with its
heavy gold buying for brides’ dowries. That culture believes
festival-season weddings have greater odds of yielding long,
successful marriages.
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 investment demand balloons after bonuses
and tax calculations as investors figure out how much surplus income
the prior year generated for investment. Then Chinese New Year gold
buying flares up after that heading into February.
These
understandable cultural factors drive surges of outsized gold demand
between summer and late winter. But interestingly there is one more
gold-demand spike in spring. Over the years I’ve seen a variety of
theses explaining this April-and-May seasonal gold rally, but
nothing definitive like for the rest of the year’s gold
seasonality. As silly as it sounds, I suspect spring itself
is the reason for this demand surge.
Sentiment
exceedingly influences investing, which requires optimism for the
future. Investors won’t risk deploying their scarce capital unless
they believe it will grow. And the glorious expanding sunshine and
warming temperatures of spring naturally breed optimism. The
vast majority of the world’s investors are far enough into the
northern hemisphere that spring has a major impact. This
seasonality
extends to stocks too.
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 early March 2016 confirmed a new bull market was
underway. Gold corrected after that sharp initial upleg, but normal
healthy selling was greatly exacerbated following 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. But that was 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 2017. 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.
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 chart
distills out gold’s bull-market seasonal tendencies in like
percentage terms. Quantifying gold’s bull-market seasonal
tendencies requires all relevant years’ price action to be recast to
be perfectly comparable.
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
methodology renders all bull-market-year gold performances in
like percentage terms. That’s critical since gold’s price range
has been so vast, from $257 in April 2001 to $1894 in August 2011.
Finally each calendar year’s
individually-indexed gold prices are averaged together to arrive at
this illuminating gold-bull seasonality. Gold has always tended to
enjoy strong rallies in the spring months of April and May.
During these modern bull-market years from 2001 to 2012 and 2016 to
2017, gold’s spring rally tended to start in mid-March on
average. From that major seasonal low following the winter rally,
gold often starts grinding higher before its gains accelerate
through April and most of May. This spring rally has generally run
its course by late May. Across the 14 bull years in this study,
gold averaged nice spring rallies of 3.7%.
This
spring rally unfolds rapidly, with an average duration of just 2.2
months. That makes it the smallest and shortest of gold’s
three major seasonal rallies, falling way behind the champion 9.5%
winter rally that precedes it and strong 6.6% autumn rally that
follows the
summer doldrums. Nevertheless, it is still well worth trading.
3.7% gains still really make a difference, and naturally about half
of years exceed this average.
This
year gold’s spring-rally bottoming came on March 20th, when gold
closed at $1310 the day before the Fed was universally expected to
hike for the 6th time in this cycle. That was March’s 14th trading
day this year, right in line with gold’s average seasonal low on
March’s 10th trading day. And so far gold has largely followed the
spring-rally seasonal pattern since, gradually grinding higher from
late March to mid-April.
Climbing the typical 3.7% from that spring low into May’s
spring-rally topping would propel gold to $1358. That’s right on
the verge of being a major decisive breakout from the
horizontal $1350 resistance line that gold-futures speculators watch
like hawks. And it isn’t far from new bull-market highs above July
2016’s $1365 bull-to-date peak. As I wrote last week, this spring
rally really ups the odds
gold is nearing a
bull breakout!
And
given its performance in April, gold ought to see a bigger May
rally than usual this year. On average in these 14 modern
bull-market years, gold climbed 1.8% in Aprils then another 1.3%
into its late-May spring-rally toppings. But as of the middle of
this week, gold was actually down 0.1% month-to-date in April.
That’s poor performance by April standards, setting up this May for
a strong mean-reversion rally.
Historically this spring-rally April-May span is often
self-equalizing. If gold materially underperforms or outperforms
its seasonal averages in April, its May performances tend to mean
revert and overshoot in the opposite direction. Back in 2009 for
example, gold fell 3.4% in April but then blasted 10.0% higher in
May! In 2016 gold surged 5.1% in April before dropping 6.1% in
May. Weak Aprils often lead to strong Mays.
If
gold is bid too aggressively in April, the resulting excitement
entices in and exhausts all available near-term buying before the
summer doldrums. That certainly hasn’t happened this year. Gold
rallied into mid-April, but reversed sharply on a strong
short-covering rally in US Dollar Index futures. Thus gold has
largely drifted sideways on balance this month. So the usual spring
buying likely hasn’t even started yet!
That
leaves traders with full capital firepower to flood back in in May,
likely as the sharp USDX rally runs out of steam. The delayed
spring-rally gold buying this year can all be compressed into May,
which really increases the odds of outsized gains. While nothing is
guaranteed in seasonals since they merely use multi-year averages to
reveal trend tendencies, strong Mays are definitely more likely
following weak Aprils.
And as goes gold,
so go gold stocks. Gold stocks also exhibit strong
seasonality, which is of course the direct result of gold’s own
seasonality. Since gold-mining costs are largely fixed when mines
are being planned, fluctuations in gold’s price flow directly into
amplified moves in gold-mining profits. Higher gold prices drive
much-higher earnings for the gold miners, which attract in more
investors to bid up stock prices.
The ironclad
historical relationship between the price of gold,
gold-mining
profitability, and therefore the gold-stock price levels is
exceedingly important to understand. If you need to get up to
speed, I wrote an essay looking at gold-stock price levels
relative to gold
early last month. Fundamentally gold stocks are leveraged plays on
gold. Thus they really outperform in the spring due to
gold’s strong seasonal rally.
This next chart
applies this same bull-market-seasonality methodology used on gold
directly to the gold stocks. It looks at the average annual indexed
performance in the flagship HUI NYSE Arca Gold BUGS Index in these
same bull-market years of 2001 to 2012 and 2016 to 2017. Because of
gold’s dominant influence over gold-mining earnings, gold-stock
seasonality naturally mirrors and amplifies gold’s own
seasonality.
Gold
stocks’ seasonal spring rally is much stronger than gold’s,
buttressing that spring-optimism-drives-stock-buying thesis.
Between mid-March and early June, the gold stocks have averaged
hefty 12.8% rallies in these 14 modern bull-market years. That
makes for exceptional 3.5x upside leverage to gold’s 3.7%
seasonal spring rally! Interestingly this is gold stocks’ best
seasonal leverage to gold’s gains by far.
While the HUI averaged 15.5% surges during gold’s winter rally, that
only made for 1.6x upside leverage to gold’s big 9.5% gain. And the
HUI’s 10.5% average gain during gold’s autumn rally also only
amplified gold’s 6.6% gain by 1.6x. So while the gold-stock spring
rally’s 12.8% average gains rank second out of these three seasonal
rallies, it offers the most bang for the buck in gold-stock upside
compared to gold!
This
year the gold stocks’ spring-rally bottoming happened on March 20th,
the same day as gold’s. The HUI slumped to 169.2 that day. Since
then this leading gold-stock index has recovered 6.9% as of the
middle of this week, trouncing gold’s 1.0% spring-rally gains so
far. A merely-average spring rally would take the HUI to 190.9 by
late May or early June, which is another 5.6% higher from here.
That’s worth riding.
But
if gold’s seasonal spring rally is compressed into May, and strong
buying forces it over $1350 or even better its $1365 bull-to-date
high, the gold miners’ stocks have far more near-term upside
potential. For the most part gold stocks remain deeply out of
favor, forgotten or ignored. But they will explode back on to
speculators’ and investors’ radars if major new gold highs attract
the financial media’s interest and attention.
Again as I discussed last week,
gold’s nearing
bull breakout will work wonders for not only psychology but hard
gold-mining profits. The gold stocks are radically undervalued
today compared to their actual underlying fundamentals. In Q4’17
gold averaged about $1276 per ounce, but the major gold miners of
the leading GDX VanEck Vectors Gold Miners ETF reported average
all-in sustaining costs of
just $858 per
ounce!
So
they were already collectively earning fat operating profits of $418
per ounce. And these are going to soar in Q1’18, because the
average gold price surged 4.1% quarter-on-quarter to $1329. Since
mining costs are largely fixed, all-in sustaining costs will likely
stay flat from Q4. That means major gold miners’ operating profits
are likely to rocket 12.7% QoQ to $471 per ounce! That will
delight contrarian investors.
The
gold miners will be releasing these latest Q1 results between now
and mid-May, right when gold is powering higher in its seasonal
spring rally. So the gold stocks are certainly set up for an
outsized spring rally this year! The potent combination of
absurdly-cheap gold-stock prices, surging earnings forcing their
valuations even lower, and higher gold prices attracting
financial-media attention should really stoke traders’ interest.
This last chart
breaks down gold-stock seasonality into even-more-granular monthly
form. Each calendar month between 2001 to 2012 and 2016 to 2017 is
individually indexed to 100 as of the previous month’s final close,
then all like calendar months’ indexes are averaged together.
Slicing up seasonal tendencies this way shows May has averaged
the second-strongest monthly gold-stock gains in modern
bull-market years.
During these 14 Aprils in modern gold bull-market years, the gold
stocks as measured by the HUI saw average gains of 1.6%. But the
lion’s share of the spring-rally gains came in May, where
average gains more than tripled to 5.0%! For decades if not longer,
May has been one of the best and most-important months to be heavily
long gold miners’ stocks. Only February proved better seasonally at
a +5.4% average.
The
key to gold stocks’ spring rally is to get your capital deployed in
mid-March, when gold stocks swoon to their spring-rally bottoming.
In intra-month terms the initial gains are often fast in late March
as gold stocks rebound out of oversold lows. But then the spring
rally tends to slow down in April, discouraging impatient and
short-sighted traders. The real gains come in May, and next month’s
setup is exceptionally bullish.
Of course the
standard seasonality caveat applies that these are mere
tendencies, not primary drivers of gold or gold stocks.
Seasonal tailwinds can be easily drowned out by bearish sentiment,
technicals, and fundamentals. Seasonality doesn’t always work,
especially when it doesn’t align with the primary drivers of
sentiment, technicals, and fundamentals in that order. Thankfully
that certainly isn’t the case this year.
The
gold miners’ stocks aren’t entering their second-strongest month of
the year overbought after a big rally. Quite the contrary, they
have really underperformed year-to-date on excessive bearishness.
This week the HUI was actually still down 6.0% so far in 2018, far
behind gold’s modest 1.6% gain! Since gold-mining profits amplify
gold price moves, gold-stock prices tend to leverage gold by 2x
to 3x much of the time.
Thus
spring rally aside the HUI should already be up 3.1% to 4.7%
year-to-date, or trading between 198.3 to 201.4 compared to this
week’s anomalously-low 180.8. That’s another 9.6% to 11.3% higher
from here even if gold merely stays near $1325. The gold stocks are
overdue to mean revert higher no matter what gold does!
Gold’s spring rally will simply hasten and enlarge gold stocks’
long-delayed next upleg.
The
farther gold rallies in May in one of its strongest spans of the
year seasonally, the closer it will get to major breakouts and new
highs. The higher gold climbs, the more attention it will get from
the financial media, investors, and speculators. As their sentiment
turns bullish again, capital will flood back into the beaten-down
gold stocks. The gold miners’ coming surging earnings in their Q1
results are icing on the cake.
While investors
and speculators alike can certainly play gold stocks’ coming spring
rally with the major ETFs like GDX, the best gains by far will be
won in individual gold stocks with superior fundamentals. Their
upside will trounce the ETFs’, which are burdened by
over-diversification and underperforming gold stocks. A
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The key to this
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The bottom line is
gold stocks experience a strong spring rally seasonally. This is
driven by gold’s own seasonality, where outsized investment demand
arises at certain times during the calendar year. Gold usually
enjoys a strong spring rally likely driven by the universal optimism
this season brings. And since gold drives gold miners’
profitability, their stock prices naturally follow it higher while
amplifying its gains.
And gold stocks’
already-strong spring rally is likely to prove exceptional this
year. Gold stocks have really lagged gold so far in 2018, despite
fat earnings rapidly growing with higher gold prices. Once gold
nears breakouts, traders are going to remember the gold miners and
be amazed by their dirt-cheap stock prices wildly disconnected from
fundamentals. They will flood back into this small sector
catapulting it higher. | 
