by Adam Hamilton of Zeal LLC
The gold miners’ stocks are recovering after a rough summer, where they were sucked into heavy gold-futures selling on Fed-tightening fears. That scuttled their normal autumn rally, leaving this sector way behind year-to-date. But now gold stocks’ strongest seasonal rally is getting underway, the winter one. That should provide a nice tailwind accelerating this sector’s upward momentum as it mean reverts higher.
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 2016 to 2020 jewelry demand averaged 47.5% of overall world gold demand! That is much larger than the 34.2% commanded by investment demand. And 2020’s pandemic craziness really distorted these five-year averages. Last year jewelry and investment swapped places at 37.5% and 47.5% of the global total! In the five years before that, they averaged 51.3% and 29.2%.
Despite big Western holiday buying, China and India still lead the global jewelry market. Together they averaged 4/7ths of the world total over the last five years. And with pandemic lockdowns largely passed, jewelry demand this year has soared. The WGC’s data current to Q2’21 reveals H1’21 jewelry demand rocketed up 56.6% year-over-year! And jewelry’s proportion of total gold demand blasted from 27.3% to 47.7%!
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 powerful 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 is 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 previous 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 110 simply means it has rallied 10% 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 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 selloff-depressed gold stocks.
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% upleg in just 4.6 months! That was mostly fueled by investors flocking back to gold.
Such huge outperformance 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 massive gains during that crazy pandemic year really shifted its seasonal average considerably higher, which 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 driving ones unfold in spring, heading into autumn, and during winters. Interestingly they’ve grown progressively stronger in that calendar order. Gold’s spring, autumn, and winter seasonal rallies during these modern bull-market years averaged 3.8%, 6.4%, and 8.9% gains respectively. So gold’s winter rally running from late October to late February has long proven the main event of outsized seasonal strength.
An 8.9% winter-rally gold surge is a big move. Normally gold’s winter-rally bottoming paving the way for this big seasonal surge comes around late October. But this year’s seasonals are all out of whack due to the slow-motion taper tantrum of extreme gold-futures selling in anticipation of the Fed’s coming QE tapering. That thwarted gold’s normal autumn rally, and forced its seasonal low to spawn early in late September.
An average 8.9% winter rally from there would carry gold back up to $1,879. But odds certainly favor a much-larger winter rally than average this year. That taper-tantrum gold-futures puking battered this asset so low that it was down 9.1% year-to-date in late September. On average in its past 17 bull-year winter-rally bottomings, gold was up 11.1% YTD! Had that pattern held, gold’s trough would’ve been near $2,108.
So merely to mean revert back in line with normal seasonals, gold would have to soar during the next four months. Seasonality alone couldn’t drive that, as it just quantifies tendencies. But gold should follow the Fed’s exploding money supply much higher. This profligate central bank’s printing presses continue to spin full-speed, after catapulting its balance sheet an insane 106.0% or $4,406b higher in just 19.8 months!
The Fed more than doubling the monetary base since the March 2020 pandemic-lockdown stock panic is fueling the serious inflation ravaging this nation. That leaves vastly more dollars to chase and bid up relatively-far-less gold. Its aboveground supply only grows about 1% annually through mining. Gold investment demand will soar as investors increasingly suffer and worry about this mounting rampant inflation.
So much-higher gold prices are likely, with winter-rally seasonals adding a nice tailwind. On average in November, December, January, and February, gold rallied 1.9%, 1.5%, 3.2%, and 1.6% from 2001 to 2012 and 2016 to 2020. No other four-month span comes anywhere close to this sustained strength, and January is gold’s seasonally-strongest month with that mighty 3.2% gain. Gold needs to mean revert way higher.
The yellow metal was enjoying a strong upleg earlier this year before that anomalous gold-futures selling short-circuited it. Between the correction bottoming in early March to early June, gold powered 13.5% higher. But the several subsequent episodes of extreme gold-futures selling on Fed-tightening fears then forced gold 9.6% lower by late September. Very bullishly, gold investors mostly held strong during that span.
Changes in the combined physical-gold-bullion holdings of the world-dominant American GLD SPDR Gold Shares and IAU iShares Gold Trust gold ETFs are the best high-resolution proxy for overall global gold investment demand. During recent months’ 9.6% gold swoon, GLD+IAU holdings only slumped 3.5%. Gold investors are strong hands, and capital will flood back into gold as its upside momentum grows.
Naturally the gold miners’ own seasonality is directly driven by gold’s. The GDX VanEck Gold Miners ETF remains the leading gold-stock benchmark and trading vehicle. It tends to amplify material gold-price moves by 2x to 3x. That means an outsized gold winter rally should translate into far-larger gold-stock gains. Gold stocks bouncing hard out of their late-September taper-tantrum low proves traders will rush back in.
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 still 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 miners. Their winter rally is fueled by gold’s.
Gold stocks’ own winter rally is also their seasonally-strongest of the year, but by a much-smaller margin. In these same modern-gold-bull years of 2001 to 2012 and 2016 to 2020, the gold stocks averaged gains of 13.2%, 11.2%, and 13.8% in their spring, autumn, and winter rallies. But those averages distill out and mask this high-flying sector’s big inherent volatility. Gold stocks’ winter rallies grow way bigger when gold surges.
2018 is a great example. Similar to this year, gold’s winter-rally-bottoming seasonal low came early in late September. That year gold’s autumn rally was also slaughtered by anomalous extreme gold-futures selling. But that paved the way for an outsized winter-rally rebound, as gold powered 13.3% higher by mid-February 2019. The major gold stocks of GDX leveraged that for a strong parallel 27.4% winter rally!
This year’s has the potential to grow much larger given the super-depressed gold-stock prices leading into it. After getting dragged to an early seasonal low with gold in late September, GDX blasted sharply higher rallying 15.7% at best by late October! Overall in this coming winter-rally span, GDX and the HUI should continue to amplify gold’s gains by their usual 2x to 3x. That could make for a one heck of a run.
The Fed more than doubling the US money supply in about a year-and-a-half is radically-unprecedented, nothing remotely close has ever happened before! And recent months’ extreme gold-futures selling on Fed-tightening fears left the yellow metal anomalously-low. So a 20% winter gold rally carrying gold back up near $2,070 seems reasonable. Such gains would probably catapult GDX 40% to 60% higher in this span!
As usual gold stocks’ fortunes in coming months depend on how gold fares. The bigger gold’s mean reversion higher restoring its Fed-tightening-fears-interrupted upleg, the farther the gold stocks will surge. And their upside leverage to the metal that overwhelmingly drives their profits should shake out on the higher side. The next four winter-rally months have proven this sector’s strongest cluster of seasonal gains.
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. No other four-month span comes close to this winter-rally one in terms of average gold-stock strength, a heck of a seasonal tailwind!
In these winter-rally months of November, December, January, and February during gold’s modern-bull-market years, the gold stocks have averaged excellent gains of 2.9%, 3.7%, 3.5%, and 3.1%. While several other months average bigger seasonal rallies, no other span offers such a big consistent cluster of strong up months. So gold stocks respond very favorably to higher gold prices during their winter rally.
Like gold, its miners’ stocks certainly have a lot of seasonal ground to make up. On average at their winter-rally-bottoming seasonal low in late October, this sector is up 19.0% YTD. But that extreme gold-futures selling this summer pummeled GDX down 19.7% YTD at its early seasonal low in late September! Those were deeply-oversold levels driven by fearful sentiment, as gold stocks were super-cheap fundamentally.
Gold-stock prices hadn’t been as low relative to gold since emerging from March 2020’s brutal pandemic-lockdown stock panic. The mean reversion higher and overshoot out of those extreme anomalous lows was enormous, as GDX skyrocketed 134.1% higher in just 4.8 months! Gold-stock upside is massive after capitulation selling on excessive herd fear crushes them to unsustainably-low levels, like in late September.
Their bludgeoned stock prices helped drive incredibly-low valuations, with many gold stocks trading at dirt-cheap trailing-twelve-month price-to-earnings ratios in the teens and even single digits! Strong profits growth likely continued in the currently-underway Q3’21 earnings season. I’ll analyze the results from the top 25 GDX and GDXJ gold miners as always once those quarterly results are fully-reported by mid-November.
In Q2’21, the GDX major gold miners were producing gold at average all-in-sustaining costs of $1,037. That was $778 below the $1,814 average gold price, fat earnings making for the third-most-profitable quarter on record for this sector! These high prevailing gold levels persisted into Q3, which saw average gold prices merely slump 1.4% to $1,789. The damage from recent months’ gold-futures dumping was limited.
The gold miners’ AISCs are likely to retreat too, as many had forecast higher production in Q3 on better ore grades. That means more ounces to spread the big fixed costs of mining across. So Q3 profitability will probably be better than even Q2’s lofty levels! And amazingly-bullish fundamentals certainly support a much-bigger-than-normal gold-stock winter rally in coming months. That is likely given this year’s great setup.
Leading into this seasonally-strongest span of the year is a great time to get deployed in fundamentally-superior mid-tier and junior gold miners. With lower market capitalizations and better output growth, their stock-price gains as gold powers higher well outperform the GDX majors. Our newsletter trading books are full of these high-potential gold stocks. The earlier traders get deployed, the more upside they can ride.
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The bottom line is gold stocks are just entering their seasonally-strongest time 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 exceptional upside potential after extreme gold-futures selling hammered gold and gold stocks to deeply-oversold levels recently. Gold’s upleg should power higher on the serious inflation unleashed by the Fed’s epic money printing, driving soaring earnings among gold miners. These powerfully-bullish fundamentals should propel gold stocks much higher, aided by seasonal tailwinds.
Adam Hamilton, CPA