by Adam Hamilton of Zeal LLC
The gold miners’ stocks were whacked hard earlier this summer on a Fed-rate-hikes scare. That serious anomaly really damaged sentiment, spawning exceptionally-weak seasonal performance in this contrarian sector. But the bruised gold stocks and the metal they mine have trudged through, making it back to the start of their traditional strong season. That begins with robust autumn rallies that usually start marching now.
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. 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.
So during its bull-market years, gold has usually 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 back at their most-bullish seasonal juncture, the transition between the typically-drifting summer doldrums and big autumn rallies.
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 it 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 2021. 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 August 2020’s latest record high of $2,062. All those long years with that vast 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 is down 5%.
This chart averages the individually-indexed full-year gold performances in those bull-market years from 2001 to 2012 and 2016 to 2020. 2021 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 really gets underway. That starts with the major autumn rally which is born in gold’s summer doldrums.
2020 proved an amazing year for gold, with this leading alternative investment blasting 25.1% higher! At gold’s August-2020 all-time-record peak before the subsequent healthy correction, this metal had soared a huge 35.9% year-to-date. And from March 2020’s stock-panic-driven low to that last upleg topping, gold clocked in with a giant 40.0% gain in just 4.6 months! Any way you slice it, gold enjoyed a phenomenal year.
Such outsized performance really skews the indexed seasonal average, even though 2020 was the 17th year added to this modern-gold-bull span. So I included a new data series in these charts, the light-blue lines showing pre-2020 seasonality before last year entered the mix. Gold’s huge gains during that crazy pandemic year really shifted its seasonal average considerably higher, which certainly doesn’t happen often.
Overall across these last 17 gold-bull calendar years, gold averaged major 15.6% gains. With this kind of growth rate compounded, it takes less than five years for gold prices to double. That has held true during gold’s current bull too, as gold powered from $1,051 in December 2015 to $2,062 in August 2020. That’s up 1.96x in 4.6 years! Gold’s strong seasonals are the impetus behind gold stocks’ powerful seasonal rallies.
Gold’s autumn rally technically starts with its summer-doldrums bottoming in mid-June. But summers for gold have often been sideways-grindy affairs. 2019 and 2020 both proved exceptions, seeing strong gold surges on momentum-fueled investment demand. This current summer 2021 had plenty of potential to see that summer strength flare again, but an absurd Fed-rate-hike scare in mid-June initially scuttled that.
The Fed’s Federal Open Market Committee met for another monetary-policy meeting then, and changed nothing. The FOMC kept its hyper-easy zero-interest-rate policy and $120b of monthly quantitative-easing money printing in place indefinitely. There were no hints at all of rate hikes or tapering QE bond buying. But top Fed officials’ individual projections of future rates came in slightly more hawkish than expected.
Just a third of those guys thought the Fed might need two quarter-point rate hikes way out into year-end 2023. Not only is that an eternity away in the markets, the Fed chair himself warned to take that so-called dot plot “with a big grain of salt.” Even though it has proven notoriously inaccurate at forecasting future federal-funds-rate levels, prospects for distant-future rate hikes scared speculators into dumping gold futures.
That hammered gold 5.2% lower in just three trading days after that nothingburger FOMC decision! Gold soon bounced and recovered into mid-July, but remained well below pre-hawkish-dots-scare levels. So though this year’s gold autumn rally got off to a slow start, it actually has bigger upside potential launching off such anomalous lows. Gold’s tendency to mean revert higher after sharp selloffs should fuel bigger gains.
During these modern gold-bull years, gold’s autumn rally averaged strong 6.4% gains between mid-June to late September. But those certainly weren’t linear over that span, tending to cluster around August. In June, July, and August proper, gold’s average gains from 2001 to 2012 and 2016 to 2020 weighed in at +0.5%, +1.1%, and +2.1%. Gold’s autumn rally tends to accelerate as summers mature, especially in August.
That’s certainly good news this year after gold’s Fed-gold-futures purge in mid-June. Late summers are when massive Indian seasonal gold demand starts mounting, from both post-harvest and pre-wedding buying. And that could be considerably bigger than usual in this imminent August 2021. Not only are gold prices relatively-low which attracts shrewd price-conscious Indians, but there is catch-up buying to do.
Indian gold dealers reported demand all but vanished in May, due to soaring COVID-19 cases then and new lockdowns in response. Indians even ignored a big mid-month Hindu festival that usually drives outsized gold demand. So Indian gold experts expect to see large catch-up buying unfold during gold’s autumn rally. Indian gold-jewelry demand is the second-largest in the world after China, utterly massive.
That alone should push gold prices higher between now and that late-September autumn-rally peak. As gold continues recovering and mean reverting higher, that will attract capital inflows from the two groups of American traders who dominate gold’s short-term fortunes. They are the gold-futures speculators who drove gold’s hawkish-Fed-dots plummeting, and gold investors who have largely been ignoring gold ever since.
The specs puked out the equivalent of an enormous 89.7 metric tons of gold in the week of that FOMC decision, and another 22.6t the following week! That left their total longs and shorts running 0% and 79% up into their past-year trading ranges. The most-bullish-possible near-term setup for gold is 0% longs and 100% shorts, indicating selling exhaustion. These guys have room for massive buying to normalize their positions.
At that point specs needed to buy the gold-futures equivalent of 404.0t of gold to push their bets back to levels where major gold selloffs grow increasingly likely! For comparison, gold’s young upleg interrupted by those hawkish Fed dots powered 13.5% higher between early March to early June on just 125.3t of spec gold-futures buying. As of the latest weekly positioning report, they still have room to buy another 300.0t!
Gold getting pounded on that leveraged gold-futures selling really impaired psychology, shifting investors’ gold outlook more to the bearish side. The best high-resolution daily proxy for gold investment demand is the combined physical-gold-bullion holdings of the dominant American GLD SPDR Gold Shares and IAU iShares Gold Trust gold ETFs. They were largely flat in June straddling the FOMC, edging up 0.4% or 6.8t.
But investors started worrying more in early July, after gold didn’t quickly and fully bounce back from that anomalous rate-hike-fear plunge. So by the middle of this week, GLD+IAU holdings have slumped 1.4% or 21.4t summer-to-date. Investors love chasing momentum, so they need sustained meaningful gold advances to entice them back in. The normal Indian autumn demand along with catch-up buying ought to help.
Gold powered dramatically higher in the last couple summers bucking the doldrums because investment demand was so strong. Across June, July, and August 2019, GLD+IAU holdings soared 17.4% or 178.7t! And during the summer of 2020, these leading and dominant gold ETFs enjoyed another mighty holdings build of 192.0t or 12.3%! Big investment buying needs to return to fuel an outsized autumn rally this year.
And it really ought to given the soaring price inflation increasingly ravaging the US economy. Gold is the ultimate inflation hedge, as its mined supply only grows on the order of 1% annually. So as central banks print money, relatively much more has to chase relatively much less gold bidding up its price. The Fed is inflating like there is no tomorrow, unleashing the epic deluge of new money rapidly forcing prices much higher.
Since that March 2020 stock panic, the Fed has ballooned its balance sheet by a radically-unprecedented 91.1% or $3,929b! That’s no typo, this profligate FOMC has recklessly chosen to nearly double the US dollar supply in just 16.3 months. As more investors start to understand this and its dire implications, they’ll really want to up their still-super-low gold portfolio allocations. That could start accelerating in August.
So despite this year’s autumn rally kicking off with gold’s anomalous low on that distant-future-rate-hikes scare, big upside potential remains. A merely-average 6.4% autumn rally would mean revert this metal back up near $1,874. But stronger Indian gold demand, speculators normalizing lopsided gold-futures bets, and investors increasingly returning as inflation worsens could easily fuel a much-larger autumn rally.
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 large gold stocks. Gold’s gains fuel their own autumn rally.
The major gold stocks have averaged a nice 11.2% autumn rally in 2001 to 2012 and 2016 to 2020. The timing of that naturally closely parallels gold, launching in mid-June before running into late September. Gold stocks’ autumn rally ends the summer-doldrums drift and kicks off this sector’s strong season, which runs all the way to the following June. This contrarian sector’s overall seasonal uptrend is incredibly strong.
On average across these 17 gold-bull-market years, gold stocks have powered 27.2% higher! That is an extraordinary gain through such a long secular span. While gold stocks aren’t very popular outside of the usual contrarian circles, they certainly should be. With average annual gains at that scale, speculators and investors can double their capital in major gold stocks in less than 3 years! That’s hard to beat anywhere.
Yet out of gold stocks’ three major seasonal rallies that mirror gold’s, the autumn one is the most anemic. It is the smallest on average with those 11.2% HUI gains, compared to 13.8% in the subsequent winter rally and 13.2% in the later spring rally. Those run parallel to gold’s +6.4%, +8.9%, and +3.8% in its own autumn, winter, and spring rallies. Thus gold stocks’ autumn-rally upside leverage to gold has only run about 1.8x.
That lags GDX’s normal gold outperformance of 2x to 3x, but is still better than the winter rally’s worse upside leverage near 1.6x. Gold stocks amplify gold’s gains best in their spring rally, which clocks in way up at 3.5x! But their autumn rally is still well worth trading even with relatively-poor upside leverage to gold on average. That is skewed low by weak autumn-rally years where gold and gold stocks fall sharply.
But in strong autumn-rally years where elevated gold investment demand pushes the yellow metal higher, gold stocks really amplify its gains. Summer 2019 was a great case in point. Between late May to early September that year, roughly the autumn-rally span, GDX soared 51.6% on a 21.4% gold run! That made for much-better 2.4x upside leverage. When gold rallies strongly during summer, gold stocks still really outperform.
So if gold investment demand strengthens as it ought to this August and September, the gold stocks should see much-bigger autumn-rally gains than usual. August has proven gold stocks’ second-best month of the year seasonally, enjoying excellent average 4.1% gains! September is no slouch either averaging +2.0%. These months combined are one of major gold stocks’ strongest two-month seasonal spans.
That is more apparent in this final chart that slices gold-stock seasonals into calendar months. Each is indexed to 100 at the previous month’s final close, then all like months’ indexes are averaged together. These same modern-gold-bull years of 2001 to 2012 and 2016 to 2020 are included. The next couple months are usually an important time to be fully deployed in gold stocks in order to ride their autumn rally.
Gold-stock seasonals are certainly very favorable in these next couple months. Late summers heading into August before gold’s and gold stocks’ autumn rallies usually accelerate offer an excellent seasonal buying opportunity. While not quite as good as the earlier summer-doldrums lows, late summers are just before gold stocks transition into their seasonally-strong autumns, winters, and springs. Those enjoy major gains.
That being said, seasonality reveals mere tendencies. The primary drivers of gold and its miners’ stocks are sentiment, technicals, and fundamentals. Seasonality reflects how these average out across calendar years over long spans, but they can easily override seasonals in any given year. But this year’s autumn-rally setup still looks really bullish, partially because of that Fed-gold-futures purge and mean reversion higher.
On average at their autumn-rally topping in late September, the major gold stocks of both the HUI and GDX have powered up 27.2% year-to-date in these modern-gold-bull years! But thanks to mid-June’s hawkish-Fed-dots scare, as of this week GDX is still down 5.1% YTD. That is largely the result of that post-FOMC plunge, as in mid-May GDX was tracking up 10.2% this year compared to a +12.0% seasonal average.
To mean revert back up to those average 27% YTD gains by the end of today’s autumn rally, GDX would have to soar to $45.82. That’s another 34% higher than this week’s levels, big potential upside well worth trading. With the major gold stocks’ typical 2x-to-3x leverage to gold, it would only need to power 11% to 17% higher to fuel a full gold-stock seasonal mean reversion. These relatively-modest gains are totally doable.
In gold-stock terms, that would extend GDX’s total upleg since its last correction bottomed in early March to 48.3%. The first four uplegs of this gold-stock bull averaged massive gains of 99.2% over 7.6 months each! So seeing this battered sector mean revert back up to seasonal norms in the next couple months of this autumn-rally span isn’t a stretch. All it would take is gold normalizing after that Fed-rate-hike-scare purge.
And this leading alternative investment’s bullish backdrop certainly favors that. Late-summer Indian gold demand is likely to be bigger than usual on catch-up buying. Speculators’ gold-futures positioning is still very bullish for gold after their violent selling purge on that Fed-rate-hike scare. And investors haven’t fled gold on that anomalous weakness, so they’ll likely chase coming upside momentum amplifying gold’s gains.
While we took our lumps on gold-stock stoppings on that post-FOMC gold-futures puking, we redeployed in fundamentally-superior mid-tier and junior gold miners to keep our newsletter trading books full. With gold stocks battered down to really-oversold levels relative to GDX’s 200-day moving average and really-undervalued levels compared to gold, their upside potential in the rest of this autumn rally looks amazing.
At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can. We overcome popular greed and fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental, and fundamental research. That has already led to realized gains in this current young upleg as high as +51.5% on our recent newsletter stock trades!
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The bottom line is gold and gold stocks are entering their strong season, starting with their autumn rally mostly in August and September. That is normally fueled by Asian seasonal gold demand ramping back up. But this year’s setup is much more bullish than usual. Gold-futures speculators need to do big buying to normalize their positioning after their violent exodus in the wake of mid-June’s distant-future-rate-hikes scare.
And while that anomalous event left gold investment demand anemic this summer, it will likely ramp up fast as gold mean reverts higher. Investors love chasing gains to ride momentum, which amplifies gold’s upside. Gold portfolio allocations should soar too on the raging inflation unleashed by the Fed nearly doubling the money supply since March 2020’s stock panic. This is a great setup for a big gold-stock autumn rally.
Adam Hamilton, CPA
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