The
gold miners’ stocks have resumed grinding higher on balance, mean
reverting out of their summer-doldrums selloff. Their usual
seasonal autumn rally driven by gold’s own looks to be gathering
steam. Outsized Asian gold demand typically fuels solid-to-good
precious-metals gains this time of year. And the coming months have
much-better upside potential than normal with the Fed’s extreme
rate-hike cycle ending.
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 behaviors 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
display strong seasonality because their price action amplifies 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 tended to enjoy sizable-to-strong 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. This old research thread focuses on modern bull-market
seasonality, as bull and bear price action is quite different. Gold
enjoyed a mighty 638.2% bull run from April 2001 to August 2011,
fueling gold stocks skyrocketing 1,664.4% per their leading
index then!
Following that
secular juggernaut, gold consolidated high then started correcting
into 2012. But the yellow metal didn’t enter formal bear territory
down 20%+ until April 2013. That beast mauled gold on and off over
several years, so 2013 to 2015 are excluded from these seasonal
averages. Gold finally regained bull status powering 20%+ higher in
March 2016, then its modest gains grew to 96.2% by August 2020.
Another high
consolidation emerged after that, where gold avoided relapsing into
a new bear despite a serious correction. Later the yellow metal
started powering higher again, coming within 0.5% of a new nominal
record in early March 2022 after Russia invaded Ukraine. So 2016 to
2021 definitely proved bull years too, with 2022 really looking like
one early on. Then Fed officials panicked, unleashing market
chaos.
Inflation was
raging out of control thanks to their extreme money printing. In
just 25.5 months following the March 2020 pandemic-lockdown stock
panic, the Fed ballooned its balance sheet an absurd 115.6%! That
effectively more than doubled the US monetary base in just a
couple years, injecting $4,807b of new dollars to start chasing
and bidding up the prices on goods and services. That fueled an
inflation
super-spike.
With big inflation
running rampant, Fed officials frantically executed the
most-extreme
tightening cycle in this central bank’s history. They hiked
their federal-funds rate an astounding 450 basis points in just
10.6 months, while also selling monetized bonds through
quantitative tightening! That ignited a huge parabolic spike in the
US dollar, unleashing
massive
gold-futures selling slamming gold 20.9% lower into early
September.
That was
technically a new bear market, albeit barely and driven by an
extraordinary anomaly that was unsustainable. Indeed
gold soon
rebounded sharply, exiting 2022 with a trivial 0.3% full-year
loss. Gold kept on powering higher, reentering bull territory up
20.2% in early February 2023! So I’m also classifying 2022 as a
bull year for seasonality research. Gold’s modern bull years
include 2001 to 2012 and 2016 to 2022.
Prevailing gold prices varied radically across these secular spans,
running just $257 when gold’s mighty 2000s bull was born to August
2020’s latest record high of $2,062. That vast range of gold levels
spread over all those long years has to first be rendered in
like-percentage terms in order to make them perfectly comparable
with each other. Then they can 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. So gold trading at 110 simply means it has rallied 10% off
the prior year’s close. Gold’s previous seasonality before 2022 was
added is shown in light blue.
If
investors understood gold’s phenomenal performance in recent
decades, it would be far more popular with allocations included in
every portfolio. Through 19 of the last 22 years, gold has enjoyed
fantastic average calendar-year gains of 13.8%! And the great
majority of that was before the Fed recklessly more than doubled the
US money supply. With inflation raging since, everyone
should have 5% to 10% in gold.
Seasonally gold enjoys three distinct rallies occurring in autumn,
winter, and spring. Their average gains from 2001 to 2012 and 2016
to 2022 clocked in at 5.1%, 8.6%, and 3.6%. Gold’s autumn rallies
tended to start in mid-June at its seasonal uptrend’s lower
support. Then they typically powered higher on balance until
hitting upper resistance in late September. This year’s price
action is nicely tracking that seasonal pattern.
Gold’s latest strong upleg achieved its high-water mark in early
May, powering up an impressive 26.3% since late September’s deep
secular low on the Fed’s extreme rate hikes. But challenging
all-time-record nominal highs, gold was seriously overbought. The
yellow metal had stretched 13.2% above its 200-day moving average.
That hadn’t hit the upleg-slaying danger zone over 16%, but a
pullback was still in order.
Those healthy mid-upleg selloffs exist to rebalance sentiment, to
bleed off excessive greed before it metastasizes into lethal
euphoria. So over the next eight weeks or so into late June, gold
indeed pulled back 6.9%. Though that was well shy of 10%+
correction territory and gold bounced well above both its 200dma and
uptrend support, that normal pullback really accomplished its
mission of slaughtering bullish sentiment.
The
summer doldrums certainly contributed, gold’s weakest time of the
year seasonally centered in June. Traders check out mentally
during peak vacation season, getting distracted from following
markets in general. That leaves gold drifting in something of a
sentiment wasteland, a contrarian investment that is largely
forgotten. But the yellow metal rebounded strongly in July,
starting its usual nice autumn rally.
Between late June to mid-July, gold surged 3.6% primarily on three
weaker-than-expected US economic-data prints. Those started with a
miss in monthly jobs, then continued first on cooler CPI inflation
and later slower retail sales. All these were Fed-dovish, slashing
odds for more rate hikes after this week’s baked-in 11th one of this
cycle. Gold weathered that nicely, although it got hit Thursday on
better GDP data.
Overall gold’s early autumn-rally technicals this year have proven
very bullish. In merely eight trading days into mid-July, gold
recovered nearly half of its entire pullback losses! That
rebound rally included a decisive 50dma upside breakout, confirming
a short-term reversal. That key technical line has largely held as
support since, even despite that Fed-hawkish GDP upside surprise.
Gold is looking really good.
Typically in late July, gold has averaged 6.8% year-to-date gains in
these modern bull-market years. So far in 2023, the yellow metal
has bested that up 8.2% mid-week. On average gold edged a trivial
0.0% lower in June in the worst of the summer doldrums. Then it
rebounded 1.0% in July accelerating to 1.7% in August as its autumn
rally gathered steam. That continued into late September’s peak
with another 1.8% surge.
Gold’s improving autumn-rally performance as summers progress is
readily evident in this seasonal chart. After drifting lower to
sideways in June, gold perks up in July before its ascent slope
really steepens in August and most of September. That outsized
Indian gold demand this time of year has long fueled nice autumn
rallies. There’s no reason that seasonality shouldn’t happen again
in 2023, driving gold well higher.
Gold’s late-summer setup this year is actually much better than most
years’. After an economy-crushing 525bp of rate hikes in just 16.3
months, this Fed-rate-hike cycle is effectively over. Back in
mid-June, top Fed officials predicted one more 25bp hike beyond this
week’s later this year. But even if that comes to pass, this
US-dollar-goosing gold-slamming extreme rate-hike cycle is already
more than 19/20ths finished.
With
the Fed running out of room to keep hiking without bankrupting the
heavily-indebted US government, hawkish jawboning is losing its
efficacy. Traders are increasingly interpreting Fedspeak as
dovish. This week’s FOMC statement didn’t hint at more hikes,
and the Fed chair said “Looking ahead, we will continue to take a
data-dependent approach in determining the extent of additional
policy firming that may be appropriate.”
Since the Fed’s initial hike of this cycle in March 2022, gold price
action has been dominated by currency traders filtering everything
through a Fed-hawkish-or-dovish lens. When Fedspeak or major
economic data looks to support more rate hikes, the US dollar
rallies so gold-futures speculators sell. When the opposite
happens, the dollar falls so they buy. That constant dollar-bullish
threat of more hikes is disappearing.
That
portends the benchmark US Dollar Index continuing to roll over
and weaken on balance, which isn’t a new trend. The USDX peaked at
an extreme 20.4-year secular high in late September as gold carved
its own stock-panic-grade 2.5-year low! Since then the primary
reason gold has blasted 26.3% higher at best is the USDX has
collapsed 12.6% at worst. This dollar bear growing will fuel big
gold-futures buying.
And
speculators’ current positioning implies they have lots of room to
keep adding longs which drives gold higher. As of the latest weekly
Commitments of Traders report before this essay was published, total
spec longs were only 3/8ths up into their probable gold-upleg
trading range. That means these super-leveraged traders dominating
short-term gold price action still have the majority of their
likely buying left to do!
As
traders increasingly realize this monster Fed-rate-hike cycle is
effectively over, the dollar will continue to weaken. The resulting
big gold-futures buying will drive gold higher, soon becoming
self-feeding. The more specs buy, the faster and higher gold
rallies, the more other specs will follow them in to chase those
gains. This dynamic should start attracting back missing-in-action
investors too, supercharging gold’s upside.
So
odds favor this year’s autumn rally growing outsized relative
to multi-decade gold-bull-year seasonal precedent. That certainly
bodes well for gold stocks in the next couple months. Their leading
GDX VanEck Gold Miners ETF tends to amplify material gold moves by
2x to 3x. But only birthed in May 2006, GDX is too young for this
long-term seasonal analysis. For that we need the classic HUI
gold-stock index.
It
is functionally interchangeable with GDX, containing the same
major gold miners. To test this, I remade this seasonal research
thread’s underlying spreadsheet by plugging in GDX instead of the
HUI starting in 2007. The resulting charts proved all but
identical, so for consistency’s sake I’m continuing to advance these
studies with the HUI. The gold stocks are already thriving in July,
leveraging gold’s upside like usual.
Major gold stocks have averaged outstanding 23.1% gains
during 19 of the last 22 years! With an epic track record like
that, it blows my mind that this high-potential contrarian sector
isn’t more widely followed by traders. Everyone who likes
multiplying their wealth should keep an eye on gold stocks and
maintain some reasonable portfolio allocation like 10% to 15%. Gold
stocks are ultimately leveraged plays on gold.
So
they have long enjoyed a seasonal autumn rally just like the metal
they mine. But with their autumn, winter, and spring rallies
averaging 8.1%, 13.3%, and 12.1% gains, this late-summer surge has
usually been the weakest. Festering bearish sentiment lingering
from gold stocks’ summer-doldrums grind lower is a factor. Even
contrarian traders tend to remain skeptical on this sector until
gold starts looking bullish again.
Last
year’s extreme anomaly also really dragged down the autumn-rally
average. Gold stocks plunged with gold late last summer as the
US dollar
skyrocketed parabolic on those extreme Fed rate hikes. The
light-blue line in this chart again shows what gold-stock seasonals
looked like before 2022 was added in. Excluding that outlier, the
gold stocks’ autumn rally has generally been considerably stronger
averaging +9.5%.
And
gold-stock fortunes are already looking way better this summer. GDX
blasted up 63.9% between late September to mid-April as gold’s
underlying upleg powered higher. The gold stocks nearly carved a
new upleg high with their metal in early May, but narrowly missed.
Then they naturally got sucked into gold’s pullback, with GDX
falling 18.9% by early July. That was perfectly normal, amplifying
gold’s downside by 2.7x.
The
major gold stocks rebounded dramatically with gold this month on
that Fed-dovish economic data. GDX shot up 12.3% in just eight
trading days on that, leveraging gold’s rebound by a big 3.4x! And
this leading gold-stock benchmark also achieved its own decisive
50dma upside breakout, confirming this reversal is the real
deal! Mid-week GDX was still 8.9% above its recent low, better than
average autumn rallies.
If
gold continues powering higher on balance as it ought to during this
autumn-rally span running into late September, the gold stocks will
amplify its gains like usual. For a variety of reasons
analyzed in
recent essays, today’s gold upleg ought to challenge 40% before
giving up its ghost. That implies $2,275 gold at some point,
another 15% higher than mid-week levels. That would drive
additional 30% to 45% GDX gains.
This
probably won’t all be achieved in just the next couple months’
autumn-rally timeframe. But both the metal and its miners’ stocks
have lots of upside potential from here. This favorable seasonal
tailwind will accelerate any further upleg gains primarily driven by
technicals, sentiment, and fundamentals. And the lion’s share of
gold stocks’ autumn rallies happen in August and most of September,
certainly a bullish omen.
This
last chart slices gold-stock seasonals into calendar months, using a
similar methodology. 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 2022
are included. Between now and late September is an important
time to be fully-deployed in gold stocks to ride their usual
autumn rally!
Gold
stocks’ entire seasonal autumn rally runs from mid-June to late
September, mirroring gold’s. That peak-summer-doldrums month of
June tends to be weak for the gold miners, averaging just 0.6% gains
in HUI and GDX terms. Interestingly July is even worse, with the
major gold stocks merely eking out 0.4% rallies on average from 2001
to 2012 and 2016 to 2022. Again bearish sector sentiment lingers
for some time.
This
July the major gold stocks are already faring wildly better than
seasonal norms, with GDX still up a big 5.1% month-to-date as
of mid-week! That’s a great foundation to undergird a coming
much-bigger-than-normal autumn rally. The vast majority of gold
stocks’ autumn-rally gains come in August and most of September,
where they surged an average of 2.8% then another 3.3%! GDX should
outperform this year.
That
coming big gold-futures buying on the looming end of this
Fed-rate-hike cycle is the primary reason, as gold stocks will
follow gold. But the miners’ strong fundamentals should help
entice traders back. The gold stocks are just starting their Q2’23
earnings season, which should prove impressive. Many miners have
forecast growing
gold production as 2023 marches on, helping to drive down their
unit mining costs.
As I
analyzed in last week’s essay on
GDX’s decisive
50dma breakout, that is combining with the highest
quarterly-average gold prices ever to make for big earnings. Last
quarter gold averaged a record $1,978 on close, surging a
strong 5.6% year-over-year! Traders’ motivation to chase this
sector should mount as they see plenty of miners report surging
profits and operating cash flows on higher gold and lower costs.
With
gold stocks’ autumn-rally setup this year quite bullish, it’s time
to get redeployed in gold stocks. We have long specialized in
fundamentally-superior
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and junior miners, which outperform the majors when gold
advances. We added fully 20 new gold-stock trades in our
newsletters over several weeks into early July as this sector
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The
bottom line is gold and its miners’ stocks are reentering their
strong season. That starts with nice autumn rallies mostly in
August and September, normally fueled by seasonal Asian gold
demand. This year has much-better upside potential than usual
though with the Fed’s monster rate-hike cycle finally nearing its
end. As traders stop expecting more rate hikes, the US dollar will
weaken driving gold-futures buying.
Speculators still have room to do the majority of their likely
long-contract buying in this gold upleg. As that pushes gold
higher, its upside momentum will feed on itself attracting in more
buying including investors. The gold stocks will leverage gold’s
coming gains like usual, probably fueling an outsized autumn rally
this year. Their imminent Q2 results are likely to show strong
fundamentals too, increasing their allure. |