The
gold stocks enjoyed a strong surge early this year, fully reversing
their sharp post-election losses. While they spent much of February
consolidating before sliding, this
sector’s seasonals will soon turn very favorable again in
mid-March. The gold miners have long enjoyed strong spring rallies
in bull-market years. Early March’s seasonal lull is a great
opportunity to deploy aggressively ahead of this big spring buying.
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 exhibits high
seasonality, which seems counterintuitive. Unlike grown commodities
like crops, the mined supply of gold is constant year-round. But
supply is only half of the fundamental supply-demand equation that
drives pricing. Gold’s investment demand happens to be
highly seasonal, and that’s what sets gold prices at the margin.
Investors favor gold buying far more during some parts of the year
than others.
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 early spring. 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 increased daylight 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.
Whatever the
reason, gold definitely exhibits strong bullish spring seasonality
as this chart reveals. As prices behave very differently in bull
and bear markets, seasonality differs between them. Gold was in a
mighty bull market between April 2001 and August 2011, powering 638%
higher. 2012 saw a normal bull-market correction following an
incredible upleg, seeing gold down 18.8% at worst from its 2011
peak.
But everything
changed in 2013 as the Fed’s wildly-unprecedented open-ended
QE3 campaign ramped to full speed. That
radically
distorted the markets,
levitating stocks
which crushed demand for alternative investments led by gold. So
gold plunged into an artificial bear that year. In Q2’13 alone, it
plummeted by 22.8% which was its worst calendar quarter in an
astounding 93 years! Gold’s bear continued until late 2015.
Remember the
formal threshold for declaring bull and bear markets is a 20%+
counter move from the preceding extreme on a closing basis. After
slumping to a 6.1-year secular low in mid-December 2015, gold
reentered formal bull-market territory with a 20%+ gain by
early last March. Gold’s young new bull grew to 29.9% by early
July, confirming its status. Despite gold’s
sharp
post-election plunge, 2016 was a bull year.
This metal still
rallied 8.5% last year, better than the bull years of 2012 and 2008
which saw 7.0% and 5.7% gains. 2016 proved gold is officially back
in a bull market after those dark Fed-induced bear-market years
between 2013 to 2015. Price behavior is naturally very different in
bulls and bears, which drives differing bull and bear seasonality.
With gold back in a bull, it’s important to understand its
bull-market seasonality.
So this first
chart distills down gold’s seasonality in the bull-market years from
2001 to 2012, and 2016. The methodology is simple. Gold is
individually indexed within each calendar year, with its
close on the final day of the preceding year recast at a level of
100. Then all gold’s closes that year are indexed off that
prior-year-close baseline. So an indexed level of 110 means gold
was up 10% year-to-date at that point.
This indexing is
necessary to keep gold price moves comparable in percentage terms
across years with differing prevailing gold prices. Gold averaged
$604 in 2006 and $1250 in 2016, but a 10% move is the same in either
year. Each calendar year’s individually-indexed gold prices are
then averaged together to arrive at this gold-bull seasonality. It
reveals gold’s tendency to enjoy a major rally in the spring
months.
![](http://www.24hgold.com/24hpmdata/articles/img/Adam Hamilton-Gold Stocks Spring Rally 2-2017-03-03-001.gif)
Between 2001 to
2012 and 2016, gold averaged a strong 3.8% gain between mid-March
and late May. In precise terms it bottomed seasonally on the 15th
trading day of March, then peaked seasonally on the 17th trading day
of May. So gold’s spring seasonal rally clocks in at 2.1 months.
Annualize those gains, and gold is rising at a 22% pace.
That’s excellent despite gold’s spring rally being its weakest
seasonal one.
The Asian-harvest
and Indian-wedding-season autumn rally from mid-June to
mid-September averages a 6.9% gain in modern bull-market years.
That’s dwarfed by the Western-Christmas and Chinese-New-Year winter
rally from late October to late February that enjoys the largest
average gain of 9.5%. But gold’s spring rally is still very solid
and profitable to trade, primarily because gold stocks really
leverage gold’s gains.
And this year’s
spring gold rally has much-greater potential than average.
Following their mass exodus from gold in Q4’16 on that crazy
Trumphoria stock-market surge, investors are
radically
underinvested in gold today. As these lofty, euphoric,
wildly-overvalued stock markets inevitably roll over into their
long-overdue next
bear, investors will have to do
massive gold
buying to prudently diversify their stock-heavy portfolios.
Gold tends to move
counter to stock markets, making it the ultimate portfolio
diversifier. So investment demand for this anti-stock trade
surges when stock markets weaken. Futures speculators also have far
too little gold exposure after
fleeing in Q4.
So they will also soon need to do
big gold-futures
buying to normalize their positions. That will be
further catalyzed by the super-overcrowded
long-US-dollar
trade reversing.
Given these
extreme market conditions in stocks and the dollar, investors and
speculators alike are way too bearish on gold and thus way
underdeployed. So this year’s spring gold rally has a high chance
of exceeding its seasonal averages to the upside. Nothing
begets buying like buying, since it drives prices higher and entices
in more capital. Gold is beautifully set up for a powerful virtuous
circle of buying this spring.
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
a couple months ago. 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. Because of gold’s
dominant influence over gold-mining earnings, gold-stock seasonality
naturally mirrors and amplifies gold’s own seasonality.
![](http://www.24hgold.com/24hpmdata/articles/img/Adam Hamilton-Gold Stocks Spring Rally 2-2017-03-03-002.gif)
Gold stocks enjoy
strong seasonal rallies corresponding with gold’s own. Yet unlike
gold’s which vary considerably, gold stocks’ seasonal rallies have
been much more consistent on average during these bull-market
years. Starting in spring, they ran 14.0%, 11.2%, and 15.4%
compared to gold’s 3.8%, 6.9%, and 9.5%. The seasonal gains in gold
stocks are more-evenly distributed over the calendar year than
gold’s.
While 13
bull-market years are indexed and averaged in this chart, last
year’s outsized gold-stock action still really influenced these
seasonals. As measured by the benchmark HUI, gold stocks blasted
182.2% higher in just 6.5 months between mid-January and early
August! Later the post-election gold exodus on stock-market
Trumphoria helped drive a massive 42.5% HUI drop by the recent
mid-December bottom.
So this entire
gold-stock-bull seasonal chart shifted higher by about 5
indexed points compared
to last year’s
version before 2016! Nevertheless, the magnitude of the spring
gold-stock rally didn’t change much. It now runs 14.0% on average
from the 11th trading day of March to the second trading day of
June, a 2.6-month span. That is only up slightly from 13.7%
pre-2016, and annualizes to hefty 65% gains.
That’s not out of
line at all for this super-volatile sector that has long richly
rewarded smart contrarians. In all of last year, the HUI still
rocketed 64.0% higher trouncing every other sector despite all that
brutal fourth-quarter selling. In gold stocks’ last secular bull
between November 2000 and September 2011, the HUI skyrocketed 1664%
higher over 10.8 years. That works out to huge 30%+ compound annual
gains!
Thus a 14% spring
gold-stock rally is unexceptional, merely average in bull-market
years. Maybe gold stocks will drift lower like usual into
mid-March, blessing investors and speculators with more time to
amass positions before the coming surge. But maybe gold stocks’
recent February consolidation then slide pulled forward that
seasonal selling, paving the way for the spring rally to start
earlier than usual this year.
From the HUI’s
recent late-February low, a garden-variety average 14.0% spring
rally would catapult this benchmark index
near 223 by early June. That’s nothing to sneeze at, as it
would take gold stocks’ new upleg since mid-December
to 37% gains. There’s no other sector in all the stock
markets that can rival that kind of performance. But like gold,
gold stocks’ spring rally this year has great potential to prove
outsized.
While gold stocks
have enjoyed a
strong new upleg this year, there hasn’t been much enthusiasm as
evident in waning volume. The leading gold-stock trading vehicle
that closely
mirrors the HUI, the GDX VanEck Vectors Gold Miners ETF, has
seen capital volume fall on balance this year despite the
higher gold-stock prices! This surprising
volume divergence
reflects much residual bearishness still plaguing gold stocks.
After suffering an
extraordinary three mass stoppings in Q4, investors and
speculators remain very wary of this sector. By the third mass
stopping in mid-December following a more-hawkish-than-expected Fed,
gold-stock selling exhaustion was hit. While gold stocks have seen
some contrarian buying since then, this year’s new upleg has been
driven more by a lack of selling than major new buying from traders.
With
gold stocks still mired in universal bearishness, elite traders
including hedge funds have very little exposure to this
high-potential sector. So once gold starts powering higher on the
lofty stock markets and US dollar rolling over, gold-stock demand is
going to just explode. Given the precariousness of this Trumphoria
stock-market rally built on nothing but hope, it should
falter by gold’s spring-rally timeframe.
Don’t
underestimate the gold-stock upside that can be driven by herd
psychology shifting from bearish to bullish! During this same
spring-rally period last year from mid-March to early June, gold
stocks as measured by the HUI soared 34% higher. They greatly
outperformed over that spring-rally span even though gold really
underperformed with an anemic sub-1% rally! It’s not just gold, but
gold expectations.
With low
enthusiasm for and participation in gold stocks’ new upleg so far,
they are perfectly set up for a major influx of rally-fueling
capital as perceptions shift. Higher spring-rally gold prices would
certainly motivate investors and speculators to redeploy into gold
stocks. But so could higher gold-stock prices alone, just like we
saw a year ago. Buying begets buying, helping to put this sector
back on traders’ radars.
An increase in
general gold bullishness could do it too, even before gold starts
powering higher again in a serious way. Nervousness is rightfully
growing over the extreme risks inherent in this enormous
long-in-the-tooth stock-market bull trading at bubble valuations.
The more expectations mount for the long-overdue major stock selloff
to ignite, the more attractive gold becomes. That will really alter
gold-stock sentiment.
So it wouldn’t
surprise me one bit to see gold stocks’ spring rally this year
really outperform its seasonal averages again. Instead of a 14%
gain, gold stocks could easily enjoy spring-rally gains double or
triple that given this superbly-bullish setup. Now is the time
to get your capital deployed in elite gold stocks and silver stocks
with superior fundamentals, before the coming spring rally drives
them much higher.
Interestingly gold
stocks’ bull-market-year spring-rally gains are fairly lumpy within
that span. This final chart breaks down gold-stock-bull seasonality
as exhibited by the HUI into calendar months. Each is indexed to
100 as of the previous month’s final close, and then individual
calendar months’ indexes are averaged across gold-stock-bull
calendar years. These monthly seasonals flesh out the spring
rally’s internals.
![](http://www.24hgold.com/24hpmdata/articles/img/Adam Hamilton-Gold Stocks Spring Rally 2-2017-03-03-003.gif)
After gold stocks’
mid-March seasonal lull, they tend to enjoy an initial strong surge
into the end of this month. That averaged out to a 3.2% gain in
these bull market years of 2001 to 2012 and 2016. But the rapid
gains soon moderate seasonally in April, which has seen smaller
average gains of just 1.9%. Then the gold-stock buying roars back
again in May, which has enjoyed monster 5.3% average gains
seasonally.
So the key is to
get all your gold-stock capital deployed by mid-March, and
not get discouraged in April when the fast early gains peter out.
The climax of the spring rally comes in May when most of its gains
are won. May is actually the second-strongest month seasonally in
modern gold-stock bull years, only exceeded by February’s 6.2%
rally. But don’t make the mistake of assuming seasonal timing is
precise.
I’ve studied and
written about gold and gold-stock seasonality for many years now.
And without a doubt the most-important thing to realize is seasonals
are mere tendencies. While these averages over years are
driven by underlying sentiment, technicals, and fundamentals, the
seasonals can easily be overpowered in any year by these same
driving forces. Seasonals are like tailwinds or headwinds, not
primary engines.
While an outsized
spring gold-stock rally is highly likely this year, it could very
well play out differently than the seasonal averages. Remember last
year saw gold stocks soar about 34% in this spring-rally span. But
it sure didn’t go according to script. The HUI skyrocketed 31.0%
last April, defying its usual modest rally! That extreme April
buying pulled forward May’s, thus the HUI mean reverted to fall
13.8% that month.
Spring’s strong
seasonal tailwinds for gold stocks can be overwhelmed by
sentiment and technicals, which can amplify them, cancel them out,
or buck them entirely. While 2017’s spring-rally setup for both
gold and gold stocks is exceptionally bullish, don’t get wrapped up
in the apparent precision that these bull-market averages imply.
Without that long-term smoothing effect, seasonals unfold more
sloppily in real-time.
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
carefully-handpicked portfolio of elite gold and silver miners will
generate much-greater wealth creation.
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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 experiences
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. With gold and gold stocks heavily sold after the election,
traders remain greatly underdeployed. As this crazy Trumphoria
stock-market rally inevitably fails, demand for gold and gold stocks
will flare intensely again. This sector’s usual early-March
seasonal lull is a great time to deploy aggressively ahead of that
strong spring rally. |