Gold
stocks have mostly ground lower to sideways since spring, leaving
this contrarian sector really out of favor again. Yet both the
metal and its miners’ stocks are early on in their strongest
seasonal rallies of the year. From late October to late February,
gold tends to enjoy excellent gains which the gold stocks leverage.
Given 2023’s great winter-rally setup, gold’s bullish seasonals
should prove potent tailwinds ahead.
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. 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, and daughters. 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. Something like a third
to half of the entire annual sales of many jewelry retailers
come in November and December! And jewelry historically dominates
overall gold demand.
The
World Gold Council closely tracks global gold supply and demand,
publishing the latest data each quarter. During the last five
calendar years, jewelry demand averaged 42.7% of overall total world
gold demand. That is much larger than investment demand, which
averaged 26.6% during that same 2018-to-2022 span. Year-to-date in
2023 at the end of Q3, jewelry demand is tracking at a similar 42.9%
of the total.
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 gold’s big winter rally
climaxes in late February on major Chinese New Year gold buying
flaring up in Asia.
So during its
bull-market years, gold has usually 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 excellent profits leverage to the gold price. Today
gold stocks are now once again early on in gold’s 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. This old research thread focuses on modern bull-market
seasonality, as bull and bear price action are 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 gains grew to a modest 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 2023.
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.
During fully 19 of the last 22 years, gold has averaged excellent
13.8% annual gains! This great recent-decade track record
should leave gold widely respected as an essential portfolio
diversifier. All investors should deploy some small fraction of
their financial assets into gold, like the traditional 5% to 10%
which was considered prudent for centuries. Gold allocations
stabilize returns, while protecting against market shocks.
Gold’s hefty modern-bull-year seasonal gains mostly accrued in three
distinct rallies, autumn, winter, and spring ones. They
respectively averaged 5.1%, 8.6%, and 3.6% gains during this secular
span. While all are worth riding, gold’s winter rally is easily the
seasonal champion sporting the biggest upside. Surging 8.6% higher
in just 4.1 months annualizes near a fast 25% rallying pace!
Gold’s winter rally is quite powerful.
Again it is usually born around late October, where gold has already
averaged 9.1% year-to-date gains. This year’s winter-rally
bottoming proved different, pulled earlier and lower by a
monster bear
rally in the US Dollar Index on expectations for more Fed rate
hikes. While gold’s pre-winter-rally seasonal low averages
October’s 16th trading day, this year it arrived on the 4th. Gold
was also more battered than usual.
Thanks to more
heavy gold-futures selling in reaction to that soaring US
dollar, the yellow metal actually drooped to a slight 0.2% YTD
loss! But more-oversold lower lows herald bigger
mean-reversion-rebound rallies, and this underway winter one is no
exception. Igniting from geopolitical fears then largely fueled by
slipping Fed rate expectations, gold blasted up 10.2% in just
a few weeks! This winter rally is already big.
That
sharp symmetrical V-bounce left gold up a
more-normal-for-this-time-of-year 9.9% YTD. While such gains
already exceeded the winter-rally average, that doesn’t mean this
year’s seasonal run prematurely exhausted itself. Gold suffered an
unusual breakdown leading into early October, plunging 5.8% over
just 12 trading days after hawkish FOMC officials
upped their
year-end-2024 forecast for the federal-funds rate.
Interestingly fully 6/10ths of gold’s strong winter rally
since was just regaining that lost technical ground! Had those
aggressive FOMC dots not blindsided gold, its winter-rally bottoming
in 2023 would have likely proven considerably higher. Maybe closer
to $1,900 than that distorted $1,820 nadir. With the majority of
this winter rally’s surge being a mean-reversion bounce out of an
anomalous breakdown, it doesn’t look mature.
These winter-rally averages yield gold upside targets. An 8.6%
average gain from early October’s deep low would merely leave gold
near $1,976, under current levels. That would be disappointing,
implying gold would just grind sideways on balance into late
February. But if that early-October selloff anomaly that quickly
reversed is ignored, from a more-normal $1,900 bottoming an 8.6%
seasonal surge yields $2,063.
That
sure makes for a powerful level psychologically. Gold’s nominal
all-time-record closing high was again $2,062 in early August 2020.
This newest winter rally could easily push gold to the verge of
forging into record territory. Gold nearing, challenging, and
achieving new records will win widespread financial-media
coverage stoking soaring popular bullishness and greed!
Investors will flock back to chase those gains.
These guys generally ignore gold until it surges long enough and
high enough to recapture their attention. Then they rush to buy to
ride that upside momentum, amplifying gold’s gains with their
massive capital inflows. So if this young winter rally boosts gold
near record territory, it will almost certainly mushroom outsized
before giving up its ghost. There’s another average-winter-rally
target even more bullish for gold.
These seasonal winter rallies run from late in years to early in
subsequent ones. Across all these modern gold-bull years, on
average winter rallies peaked 18.5% above gold’s final closes
entering the first years. Think of this as a year-to-date measure
extended into the second years when winter rallies crest. Gold
climbing 18.5% above its year-end-2022 levels yields an
average-winter-rally target way up at $2,161!
These absolute levels aren’t the point here, they can never be
precisely predicted. But it’s important to realize this young 2023
seasonal winter rally lifting gold to new nominal records in
coming months isn’t a stretch at all. And that will change
everything psychologically for gold, quickly shifting herd sentiment
back to very-bullish. Gold will be impossible to ignore as new
records generate excited financial-media hype.
Major price trends are driven by sentiment, technicals, and
fundamentals, not seasonals. But when the former three prime movers
are pushing gold higher, strong seasonals act like nice tailwinds
ballooning those gains. The dominant bullish case for gold today is
speculators’ bearish positioning in gold futures, which will
require massive buying to normalize. My recent essay on
gold’s new major
upleg analyzed that in depth.
Bullish seasonals are simply the icing on the cake, not necessary
but nice to have to enhance in-progress uplegs. And if gold hitting
new record closes soon gets speculators and investors excited,
demand for unloved gold stocks will skyrocket. They will follow
their metal higher like usual, really amplifying its gains. Gold
stocks also tend to see solid winter rallies thanks to gold’s, their
strongest seasonal time of the year.
Gold
miners’ stocks will be the biggest beneficiaries of a
record-supercharged gold winter 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. Closely tracking each other, GDX
and the HUI are functionally interchangeable.
The
major gold stocks enjoy parallel seasonal autumn, winter, and spring
rallies mirroring and leveraging gold’s. Those averaged solid 8.1%,
13.3%, and 12.1% gains during these same 19 modern gold-bull years.
That made for respective upside leverage to gold of 1.6x, 1.5x, and
3.4x. It also helped the HUI achieve big average annual gains of
23.1% over this long secular span! Gold stocks have proven
major winners.
Like
gold, the gold stocks’ winter rallies begin in late October then run
into late February. This gold-stock surge starts a few trading days
after gold’s, but ends at the same time. This year’s
pre-winter-rally low came a few weeks earlier than usual, forced by
gold’s anomalous post-FOMC plunge. Slammed to its own very-oversold
unsustainable low, GDX’s initial mean-reversion rebound was
symmetrically sharp and violent.
In
the first couple weeks after that gold-futures-selling-driven
winter-rally bottoming, GDX blasted up 14.0% amplifying
gold’s own 5.6% V-bounce by 2.5x. That was right in the middle of
major gold stocks’ normal leverage range to material gold moves of
2x to 3x. But over the next couple weeks or so as gold continued
surging, GDX fell way behind. By the time gold had recovered 10.2%,
GDX had merely rallied 12.7%.
That’s really poor, gold stocks have to leverage their metal to
compensate traders for the major additional risks they bear. I
analyzed why gold
stocks were lagging in another essay a few weeks ago. The
general stock markets falling sharply in that span contributed,
universally tainting sentiment. Bearishness surged on that, leaving
traders less willing to add any stock trades. But gold-stock
performance is also just lumpy.
Gold
stocks tend to surge then drift, advance sharply then retreat some
to consolidate those gains. This is even evident in the
winter-rally seasonals in this chart. Gold stocks’ outperformance
to gold also tends to grow as gold uplegs mature. Early on
traders are skeptical about their staying power, so they remain
reluctant to add gold stocks. But the longer and higher gold runs,
the more attractive gold stocks become.
So
disproportional gold-stock buying tends to occur later in major gold
uplegs as popular greed flares. That often leads leverage to gold
to improve considerably as gold uplegs age. GDX could easily end up
amplifying gold’s mounting winter rally closer to 3x in the coming
months. Gold’s new record highs will help drive that, greatly
increasing sector interest and bullishness. Great gold-stock
fundamentals will help.
Last
week I analyzed the GDX-top-25 gold miners’
latest Q3’23
results. The were fantastic, making for one of the best
quarters gold stocks ever reported. Lower mining costs combined
with higher gold prices led sector unit earnings to nearly
double! Revenues, profits, and operating cash flows were
strong, and this trend is likely to continue. Better earnings drive
down valuations and attract back institutional investors.
To
hit that $2,161 winter-rally target in late February, gold’s new
upleg would only have to grow to 18.8% gains. That’s fairly modest,
as its last upleg cresting in early May soared 26.3%. If gold
rallied around 19%, the GDX gold stocks ought to double to triple
that at 38% to 57% winter-rally gains! Right in the middle
at 2.5x leverage would leave GDX near $38.25 in a few months, which
would be well worth riding.
Traders tend to warm to gold stocks in coming winter months, as this
final chart slicing gold-stock seasonals into calendar months shows.
Each is indexed to 100 at the previous month’s final close, then
all like months’ indexes are averaged together across these same
modern-gold-bull years. Together November, December, January, and
February have long proven this sector’s strongest cluster of big
seasonal gains.
During these four winter-rally months, the HUI has averaged
strong 3.6%, 3.4%, 2.6% and 2.9% gains in these modern-gold-bull
years. November, December, and February rank as the 2nd, 3rd, and
4th best calendar months for gold-stock seasonal gains! While May
is stronger up 4.1% on average, no other seasonal span rivals the
winter rally’s grouping of big up months. Outsized rallies are
likely this time of year.
The
closer gold advances to new record territory, the more popular
bullishness will mount. As sentiment improves, interest in the
battered gold stocks should soar. While the larger majors of GDX
should amplify gold’s upside by 2x to 3x,
smaller mid-tiers
and juniors ought to really outperform. Our newsletter trading
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The
bottom line is gold and thus gold stocks are early on in their
strongest seasonal rallies of the year. Gold’s big winter rally is
fueled by outsized demand first from holiday jewelry buying, then
later new-year investment buying. That has long helped drive the
metal and its miners’ stocks considerably higher from late October
to late February. And 2023’s young winter rally has great potential
to grow much bigger than usual.
Gold
is forging towards nominal all-time-record territory again for the
first time in several years. As gold nears, challenges, and
achieves new records, bullish financial-media coverage will soar
helping to entice back legions of investors. The longer and higher
gold runs, the more they’ll rush to chase its gains amplifying
them. Meanwhile gold miners’ earnings are soaring, leaving their
stocks even more undervalued. |