The
gold miners’ stocks have mostly been correcting in recent months,
after blasting higher with gold last summer. While this necessary
and healthy selloff to rebalance sentiment likely isn’t over yet,
this sector is entering its strongest seasonal rally of the year.
That portends big gains in coming months as the next bull-market
uplegs in gold and its miners’ stocks get underway. These seasonal
tailwinds amplify upside.
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
see, as its mined supply remains
relatively steady year-round. Instead gold’s major seasonality
is demand-driven, with global investment demand varying
considerably 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. And the
biggest seasonal surge of all is just getting underway heading into
winter. As the Indian-wedding-season gold-jewelry buying that
normally drives this metal’s
big autumn rally
winds down, the Western holiday season ramps up. The holiday spirit
puts everyone in the mood to spend money.
Men splurge on
vast amounts of gold jewelry for Christmas gifts for their wives,
girlfriends, daughters, and mothers. The holidays are also a major
engagement season, with Christmas Eve and New Year’s Eve being two
of the biggest proposal nights of the year. Between a third to a
half of the entire annual sales of jewelry retailers come in
November and December! And jewelry historically dominates overall
gold demand.
According to the
World Gold Council, from 2015 to 2019 jewelry demand averaged 51% of
gold’s overall global demand! That’s much larger than gold
investment demand’s 29% share. And in this crazy 2020 dominated by
the COVID-19 pandemic, holiday gold-jewelry buying could prove even
bigger than normal. After cratering earlier this year during
governments’ draconian national lockdowns, big catch-up buying
is due.
The WGC publishes
the best-available world gold fundamental data quarterly, and the
latest report as I pen this essay is Q2’20’s. During the first half
of this year, global gold-jewelry demand plummeted an astounding 46%
year-over-year! That was wildly unprecedented, largely driven by
pandemic mitigation measures in the jewelry-demand powerhouses of
China and India. But as lockdowns pass, gold buying is normalizing.
From 2015 to 2019,
fully a third of global jewelry demand came from China. In
Q1’20 which proved the height of that country’s stay-at-home orders
and general COVID-19 fear, jewelry demand collapsed 66% YoY. But in
Q2’20 as the Chinese government lifted restrictions and claimed the
virus was under control, jewelry demand improved considerably
falling 36% YoY. The Chinese are resuming buying as normal life
returns.
But the big
holiday-season gold-jewelry splurge is more of a Western thing.
Because of this pandemic, American gold-jewelry demand could explode
in Q4’20 for a couple reasons. With the great majority of people
spending far less on services including travel due to COVID-19
worries, sales of goods have been soaring. While a lot of
Americans are struggling, plenty aren’t. So analysts expect a big
Christmas season.
And learning to
live with COVID-19 and governments’ heavy-handed responses to it has
made 2020 the most stressful year of our lifetimes. Marriages have
been under serious strain with work and school being shoehorned into
homes and stress-relieving vacations cancelled. So legions of
husbands are likely to buy their frazzled wives impressive gold
jewelry this year. That holiday demand could prove exceptional.
The usual frenzied
Western jewelry buying heading into Christmas shifts to pure
investment demand after year-end. That’s when Western investors
figure out how much surplus income they earned during the prior year
after bonuses and taxes. Some of this is plowed into gold in
January, driving it higher. Finally the big winter gold rally
climaxes in late February on major Chinese New Year gold buying
flaring up in Asia.
So during its
bull-market years, gold has always tended to enjoy major winter
rallies driven by these sequential episodes of outsized demand.
Naturally the gold stocks follow gold higher, amplifying its gains
due to their great profits leverage to the gold price. Today gold
stocks are now once again heading into their strongest seasonal
rally of the year, driven by this annually-recurring robust
winter gold demand.
Since it is gold’s
own demand-driven seasonality that fuels 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 remains in a middle-aged bull market. After falling
to a 6.1-year secular low in mid-December 2015 as the Fed kicked off
its last
rate-hike 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 serious proportions, hitting -17.3% in
mid-December 2016. But that remained shy of a new bear’s -20%.
Gold rebounded
sharply from those severe-correction lows, nearly fully recovering
by early September 2017. But gold failed to break out to new
bull-market highs, then and several times after. That left gold’s
bull increasingly doubted, until June 2019. Then gold surged
to a major
decisive breakout confirming its bull remained alive and well!
Its total gains grew to 96.2% over 4.6
years by early August 2020, still modest.
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 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,
then resumed in 2016 to 2020. 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 latest bull today and
bear-market action is quite dissimilar.
Prevailing gold prices varied radically through these modern bull
years, running between $257 when gold’s last secular bull was born
to early August’s newest record high of $2062. All those long years
with that great range of gold levels 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 2019. 2020
isn’t included yet since it remains a work in progress. This
bull-market-seasonality methodology reveals that gold’s strongest
seasonal rally by far is its winter one which tends to start
in late October. That portends big gains in coming months from
correction-depressed gold stocks.
 
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 15.0% higher on average by
year-ends! These are major gains by any standard, especially
averaged across 16 different years. The majority of these annual
seasonal gains accrue during gold’s big winter rally, which tends to
start in late October.
On
average gold’s
biggest seasonal selloff of the year following its autumn rally
topping tends to bottom on that month’s 16th trading day. That
happened to be October 22nd this year. From there gold surges
9.1% higher on average by late February. That big winter rally
dwarfs the spring and autumn seasonal rallies which have averaged
3.3% and 6.2% gains. This winter-rally span is the best time to be
long gold!
But
seasonality comes with an important caveat, it can’t override gold’s
primary drivers of sentiment, technicals, and fundamentals. They
are the engines moving gold prices, while seasonals act more like
prevailing winds boosting or hindering wherever gold is heading
under its main locomotion. So this year’s strong winter-rally
season could start later than normal after gold’s underway
correction runs its course.
Gold
shot parabolic last summer on extreme differential gold-ETF-share
demand, which
went missing in action after gold peaked losing its
greed-stoking upside momentum. That left this metal
extraordinarily
overbought, necessitating a healthy correction to rebalance away
euphoric sentiment and normalize super-stretched technicals.
Exacerbating gold’s downside risk was a
very-low US
dollar, which needed to bounce.
A
rapidly-strengthening US dollar unleashes major gold-futures selling
by leveraged speculators. The resulting falling gold prices scare
gold-ETF shareholders into dumping their own positions, amplifying
the correction. With gold remaining well above its 200-day moving
average which is major correction support, this process might not be
over yet. So gold’s winter rally could be delayed until this
rebalancing selloff ends.
That
would compress gold’s winter rally into the later months of this
span. On average in these modern gold-bull years of 2001 to 2012
and 2016 to 2019, gold has tended to climb 2.4% in Novembers, 1.1%
in Decembers, 3.1% in Januaries, and 1.7% in Februaries. So even if
these peak seasonal tailwinds are delayed a few weeks until gold’s
correction finishes its important work, there’s still plenty of time
for the winter rally.
Naturally the gold miners’ own seasonality is directly driven by
gold’s. The leading gold-stock benchmark and trading vehicle is the
GDX VanEck Vectors Gold Miners ETF. It tends to amplify material
gold-price moves by 2x to 3x. If gold’s own winter rally
sees a delayed start this year due to that healthy correction, so
will the gold stocks’ winter rally. But they are still likely to
see major gains compacted into a shorter time frame.
This
next chart applies this same modern-gold-bull-year seasonality
methodology to gold stocks. Since GDX was born later in May 2006,
its price history is insufficient for longer-term studies. Thus the
classic HUI gold-stock index is used instead. GDX and the HUI
closely track
each other, they are functionally interchangeable containing
most of the same major gold stocks. Gold gains drive their big
winter rally.
During these same modern gold-bull-market years of 2001 to 2012 and
2016 to 2019, the gold stocks as measured by the HUI enjoyed average
gains of 15.2% between late October to late February. That also
makes the gold stocks’ winter rally their largest seasonal one
of the year, besting both the spring rally’s 11.5% gain and autumn
rally’s 10.4% upside. Winter also sees gold stocks’ strongest
cluster of monthly rallies.
The
monthly performances underlying these calendar-year seasonals are
easier to understand if gold-stock seasonality is instead sliced
into months. This next chart does just that, offering a
more-granular perspective on seasonality. Each calendar month in
these same modern bull-market years is individually indexed to 100
as of the previous month’s final close, then all like-months’
indexes are averaged together.
The
major gold stocks have averaged impressive 3.7%, 3.6%, 3.9%, and
3.8% gains in Novembers, Decembers, Januaries, and Februaries! The
latter couple months climaxing their strong winter rally rank as the
3rd and 4th best months of the year seasonally. So there is no more
important time to be heavily long the gold miners. Even if the gold
correction delays and compresses this winter rally, big gains are
coming.
Gold
stocks will naturally rally with the metal that overwhelmingly
drives their profits when gold’s next bull-market upleg gets
underway. Gold-stock corrections and uplegs mirror and amplify
gold’s own, running parallel to them at an exaggerated scale. So
whenever gold gets sufficiently oversold forcing sentiment to
bearish-enough levels to wrap up this correction, gold stocks will
bottom in sympathy. That’s when to buy big!
But
it’s the gold miners’ wildly-bullish fundamentals that could
supercharge their coming winter rally. The record prevailing gold
prices this year have blasted gold-stock profits stratospheric, with
earnings growth likely to continue soaring. When strong seasonal
tailwinds line up with bullish sentiment, technicals, and
fundamentals, seasonal rallies balloon to outsized proportions.
That makes coming months’ potential huge.
The
gold miners are currently reporting their Q3’20 operational and
financial results, which are due by mid-November. They should
collectively reveal epic profits growth, justifying
far-higher gold-stock prices during gold’s next bull upleg. Right
after every quarterly earnings season, I do a
deep fundamental
dive into how the major gold miners of GDX are faring as a
whole. Their collective Q3 results should prove awesome.
Gold-mining profitability is driven by prevailing gold prices less
all-in sustaining costs for producing that metal. Thanks to gold’s
parabolic upleg peaking in early August, last quarter gold averaged
an all-time-record high $1912. That soared 29.8% YoY from
Q3’19’s levels! Gold-stock prices are highly leveraged to gold
because the miners’ costs are largely fixed. They don’t change much
regardless of prevailing gold prices.
Quarter after quarter individual gold mines generally require the
same levels of infrastructure, equipment, and employees to feed
their fixed-capacity mills with fresh gold-bearing ores. Thus
higher gold prices like Q3’s usually directly translate into
much-higher earnings. Over the past four reported quarters
ending in Q2’20, the GDX major gold miners’ all-in sustaining costs
averaged $933 per ounce. Q3’s will likely be lower.
In
Q2’20 which was the peak quarter for national lockdowns to fight
COVID-19, plenty of gold miners were forced to temporarily suspend
operations. The resulting lower output left fewer ounces to spread
the big fixed costs of gold mining across, catapulting GDX miners’
AISCs to $984. But with gold mines reopening in late Q2 and early
Q3, and miners rushing to make up for lost ounces, Q3 should see
lower unit costs.
But
even if the past year’s $933 average holds, gold-mining earnings are
soaring. Last quarter’s lofty $1912 average gold prices less
conservative $933 AISCs imply the major gold miners earned a
colossal $979 per ounce wresting their product from the bowels of
the earth. That would make for stupendous stock-market-leading
66% year-over-year profits growth from Q3’19! And this isn’t
some one-off anomaly.
During the last four reported quarters ending in Q2’20, the major
gold miners of GDX saw their collective earnings soar 54%, 56%, 56%,
and 66% YoY! That’s the big fundamental reason gold-stock prices
have rocketed in 2019 and 2020. And with gold’s own bull market
likely to keep marching higher on balance for years to come for all
kinds of reasons, higher gold prices will continue to fuel outsized
gold-miner profits growth.
So
there’s a good chance gold stocks’ coming winter rally will be
amplified as speculators and investors increasingly discover and
marvel at the epic earnings numbers this sector is putting up.
Seeing seasonal tailwinds aligning with sentiment, technicals, and
fundamentals undergirds the strongest seasonal rallies. So once
gold’s necessary correction runs its course, the gold-stock outlook
remains incredibly bullish.
Gold-miner
valuations remain really low relative to gold, so this sector
has lots of lost ground to regain in coming years. And some of that
is likely over the next four months which are gold stocks’
seasonally-strongest span of the year. So once gold’s own
indicators flash green lights implying its correction is over,
traders should aggressively add fundamentally-superior gold miners
to ride this sector’s big winter rally.
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Corrections are the time to do your gold-stock homework, preparing
to redeploy as they pass.
The bottom line is
gold stocks are just entering their seasonally-strongest period of
the year. Their big winter rally is fueled by gold’s own, which is
driven first by outsized demand from holiday jewelry buying and
later new-year investment buying. So both the metal and its miners’
stocks have strong tendencies to rally between late October to late
February in bull-market years. It’s the best calendar span to own
gold stocks!
This year’s
dawning winter rally has great upside
potential after the gold and gold-stock corrections run their
courses. The gold miners’ fundamentals remain powerfully
bullish, with earnings soaring on higher prevailing gold prices.
The resulting low gold-stock valuations should attract lots of new
investors to this contrarian sector as Q3’s spectacular results
capture their attention. Seasonal tailwinds will amplify that
upside. | 
