Gold, silver, and their miners’ stocks suffer their weakest
seasonals of the year in early summers. With traders’ attention
normally diverted to vacations and summer fun, interest in and
demand for precious metals usually wane. Without outsized
investment demand, gold tends to drift sideways to lower dragging
silver and miners’ stocks with it. Long feared as the summer
doldrums, they can offer good buying opportunities.
This
doldrums term is very apt for gold’s traditional summer
predicament. It describes a zone surrounding the equator in the
world’s oceans. There hot air is constantly rising, spawning
long-lived low-pressure areas. They are often calm, with little
prevailing winds. History is full of accounts of sailing ships
getting trapped in this zone for days or weeks, unable to make
headway. The doldrums were murder on ships’ morale.
Crews had no idea when the winds would pick up again, while they
continued burning through their limited stores of food and drink.
Without moving air, the stifling heat and humidity were suffocating
on those ships long before air conditioning. Misery and boredom
grew extreme, leading to fights breaking out and occasional
mutinies. Being trapped in the doldrums was viewed with dread, it
was a very trying experience.
Gold
investors can somewhat relate. Like clockwork trudging through
early summers, gold starts drifting listlessly sideways. It
often can’t make significant headway no matter what trends looked
like heading into June, July, and August. As the days and weeks
grind on, sentiment deteriorates markedly. Patience is gradually
exhausted, supplanted with deep frustration. So plenty of traders
abandon ship, capitulating.
June
and early July in particular have often proven desolate sentiment
wastelands for precious metals, devoid of recurring seasonal demand
surges. Unlike most of the rest of the year, the summer months
simply lack any major income-cycle or cultural drivers of outsized
gold investment demand. Yet several recent summers have proven big
exceptions to these decades-old seasonals, and 2023’s could still be
another.
While gold has suffered a sizable pullback over this past month
ramping bearish psychology, it is still having a good year. As of
mid-week near selloff lows, the yellow metal was still up a solid
6.5% year-to-date. In early May, gold’s latest powerful upleg
extended to big 26.3% gains over 7.2 months. The pullback
since was largely fueled by massive gold-futures selling as
hawkish Fedspeak
goosed the US dollar.
Rather than getting discouraged, traders should embrace gold’s
summer doldrums. Healthy pullbacks are essential for maximizing
uplegs’ longevity and ultimate gains, rebalancing sentiment before
greed grows excessive enough to prematurely slay uplegs. These
selloffs also offer the best mid-upleg buying opportunities.
Instead of checking out in early summers, traders should be
researching great stocks to add.
Quantifying gold’s summer seasonal tendencies during bull markets
requires all relevant years’ price action to be recast in
perfectly-comparable percentage terms. That is accomplished by
individually indexing each summer’s gold prices to their last
closes before, which are May’s final trading days. They are set to
100, then all summer gold-price action is recalculated off those
common indexed baselines.
So
gold trading at an indexed level of 110 simply means it has rallied
10% from May’s final close, while 95 shows it is down 5%. This
methodology renders all bull-market-year gold summers in like
terms. That’s necessary since gold’s price range has been so
vast, from $257 in April 2001 to $2,062 in August 2020. That span
encompassed two secular gold bulls, the first soaring 638.2% over
10.4 years into August 2011!
Following that
mighty 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.
When
all gold’s summer price action from these modern gold-bull years is
individually indexed and thrown into a single chart, this
spilled-spaghetti mess is the result. 2001 to 2012 and 2016 to 2021
are rendered in yellow. Last summer’s action is shown in light-blue
for easier comparison with this summer. Seeing all this
perfectly-comparable indexed summer price action at once reveals
gold’s center-mass-drift tendency.
These summer seasonals are further refined by averaging together all
19 of these gold-bull years into the red line. Finally gold’s
summer-to-date action this year is superimposed over everything else
in dark-blue, showing how gold is performing compared to its
seasonal mean. Just entering the summer doldrums, the yellow metal
has meandered a little below trend as of mid-week. That’s
perfectly-normal doldrums behavior.
Gold’s latest mid-upleg pullback is readily apparent here, dragging
it a sharper 5.4% lower in several weeks into late May. Then gold
challenged those pullback lows again this week. As of Thursday when
I penned this essay, that looked like a successful technical retest
and double-bottom. That morning some weak US economic data
in surging weekly jobless claims slammed Fed-rate-hike odds, really
boosting gold.
Across those two decades of modern gold-bull years, the yellow
metal’s summer-doldrums seasonal low actually arrived quite early.
On average in 2001 to 2012 and 2016 to 2022, gold bottomed on
June’s 10th trading day just under 99.3 indexed. That was
merely down 0.7% or so, highlighting the mostly-sideways-drifting
nature of this seasonally-weak span. This year that seasonal low
coincides with Wednesday June 14th.
That
happens to be a major news day for gold, which could drive big
trading. The Fed’s Federal Open Market Committee is releasing its
latest monetary-policy decision. After a blistering 500bp of hiking
off zero in just 13.6 months, rate futures are largely pricing in
a pause next week. But that FOMC meeting is one of the
every-other ones accompanied by top Fed officials’ latest
federal-funds-rate forecasts in the dot plot.
If
those dots come in significantly more hawkish or dovish than
expected, that could really move both the US dollar and gold. The
former would increase the odds gold bottoms on its seasonal schedule
in mid-June, but a surprise is unlikely. The FOMC’s FFR-target
midrange is now at 5.13%, exactly where Fed officials had forecast
it at year-end 2023 in their last dot plot in late March. They may
add another hike or two.
But
traders expect that, as federal-funds futures are now pricing in
only about a 30% chance of a rate hike next week but nearly 90% for
another 25bp one at the FOMC’s subsequent meeting in late July! So
the new dots showing one or two more hikes shouldn’t shock traders.
But even if gold carves a pullback low around there, that doesn’t
mean the summer doldrums are over. They actually tend to grind on
into early July.
After hitting that 99.3 indexed in mid-June, gold slumps back near
99.5 in both late June and early July. Then once again after the
big US Independence Day holiday, gold retreats one more time to
99.6. So gold’s summer doldrums really stretch from roughly late
May to early July. Traders shouldn’t expect too much upside
from gold in this seasonally-weakest span, it is simply something
that needs to be stoically endured.
But
rather encouragingly, gold’s summer doldrums are mostly an
early-summer phenomenon. In both July and August the yellow metal
increasingly picks up steam heading into its usual strong autumn
rally. On average during these modern bull-market years, gold
slumped 0.2% in June which isn’t much. And then in July and August,
it averaged excellent 1.1% and 1.8% gains! So gold’s June
doldrums is more correct.
From
a trading-strategy perspective, gold-stock trades are often stopped
out or sold in May after their powerful
seasonal spring
rallies peak. If gold and gold stocks didn’t soar to
extremely-overbought levels in May, any remaining trades can be held
through June’s mostly-sideways drift. Then new trades can be added
in late June and early July to fill up and top off trading
books. At Zeal we’re preparing for that now.
Our
weekly and monthly newsletter trading books are still about 2/3rds
full, because gold’s pullback last month ignited well before
the metal or its miners’ stocks surged to upleg-slaying levels of
overboughtness. Many of our trades still have great unrealized
gains despite gold’s pullback, running as high as +117% mid-week!
I’m doing gold-stock research now to rebuild the last third of our
trading books in coming weeks.
Gold’s summer doldrums aren’t a threat, but a good mid-upleg
buying opportunity to enter gold stocks at relatively-low
prices. While gold’s recent pullback again grew to 5.4% at worst in
late May, that fueled a sizable parallel gold-stock selloff of 15.2%
in that span per the leading GDX gold-stock ETF! That made for
normal 2.8x downside leverage in GDX’s usual 2x-to-3x range, leaving
nice gold-stock bargains in its wake.
Gold’s price action overwhelmingly drives sentiment for the entire
precious-metals realm, so both gold stocks and silver are slaved to
gold’s fortunes. They also tend to amplify the yellow metal’s price
trends, so they suffer worse summer doldrums than gold.
Starting with silver and then moving on to gold stocks, we’ll use
this same summer-seasonal-indexing methodology. The white metal’s
volatility well exceeds the yellow’s.
Silver’s summer-doldrums center-mass drift has a much-wider range,
from 90 to 110 indexed compared to 95 to 105 for gold.
Interestingly silver’s seasonal low comes a couple weeks later than
gold’s near the end of June, specifically its 20th trading
day. That averaged 96.5 during these same modern gold-bull years,
for a 3.5% loss. That makes for much-worse Junes for silver, which
average bigger 2.8% losses.
Yet
as gold’s autumn rally starts powering higher in July, silver
bounces back strong enjoying hefty average 4.9% gains! All
that surging apparently pulls forward some late-summer buying, so
August slumps back to small 0.5% average rallies. Still silver’s
overall summer trends mirror and amplify gold’s, starting with
seasonal selloffs in June which reverse sharply into rallying on
balance in July and August.
But
through these entire 3-month market summers, silver’s average
seasonal performance has proven disappointing. Gold averaged
rather-impressive 2.7% full-summer gains in these modern bull
years, but silver failed to leverage that only seeing lagging 2.5%
gains! Silver acts like a gold sentiment gauge, and herd psychology
usually festers on the bearish side throughout most of market
summers even as gold climbs.
Still when gold is enjoying outsized summer gains like several years
ago, the resulting bullish sentiment catapults silver sharply
higher. While gold blasted up 13.7% through June, July, and August
2020, silver skyrocketed up 58.1% in that summer-doldrums
span! Once gold really gets moving generating real herd greed,
silver explodes higher. This young summer of 2023 has better odds
of seeing outsized gold gains again.
Major gold uplegs are fueled by
three stages of
buying, speculators’ gold-futures short covering, then their
gold-futures long buying, and finally far-larger investment buying.
While the stage-one short covering is exhausted, specs still have
somewhere between half to four-fifths of their larger
stage-two long buying left to do based on their current
positioning! In our newsletters I extensively analyze all the
weekly data on that.
And
investors have barely started their all-important
stage-three
buying in this gold upleg. The best high-resolution proxy for
global gold investment demand hasn’t moved much yet. The combined
holdings of the dominant American GLD and IAU gold ETFs are only
up 4.3% at best within gold’s current upleg. They soared 30% to
35% higher during recent major gold uplegs! So gold still has huge
potential buying ahead.
The
catalyst to reignite specs’ stalled gold-futures long buying will
likely be the Fed. Whether the FOMC hikes another time or two or
not, this epic Fed-rate-hike cycle is effectively over. Soon
top Fed officials who’ve been talking hawkish will have to admit
that and shift more dovish. That should reignite US-dollar selling,
driving gold higher. And speculators and investors alike love
chasing upside momentum in gold.
The
gold miners’ stocks remain the biggest beneficiaries of gold
strength, which their earnings and stock prices amplify to big
gains. For gold-stock summer seasonals, I’m using the older HUI
gold-stock index which closely mirrors the
GDX VanEck Gold
Miners ETF more popular today. Unfortunately GDX’s price
history is insufficient to span these modern gold-bull years, as
this leading sector ETF wasn’t born until May 2006.
The
major gold stocks’ summer seasonals are more gold-like than
silver-like, with their seasonal low also averaging June’s 10th
trading day. On average in 2001 to 2012 and 2016 to 2022, the HUI
bottomed at 98.2 indexed. That makes for modest 1.8%
summer-doldrums losses. The gold stocks start recovering from that
right away, rallying on balance for the rests of market summers with
most of their gains later on.
In
June, July, and August, the major gold stocks averaged 0.6%, 0.7%,
and nice 2.7% gains during these modern gold-bull years. Gold-stock
traders’ sentiment is heavily dependent on how gold is faring, and
often lags gold’s a bit. So most of gold stocks’ summer gains
are concentrated in Augusts, after gold’s young autumn-rally
uptrends become clearer. This sector’s summer performances vary
radically with gold.
During that summer of 2020 when gold surged 13.7%, GDX powered 23.2%
higher for outsized gains. The summer before that in 2019, gold
blasted up 16.7% on very-strong investment demand. That
helped catapult GDX 38.2% higher in that June, July, and August
stretch! When gold is thriving even during the summer doldrums, the
gold stocks amplify its gains. But their leverage to gold is a
double-edged sword.
When
gold is weak during market summers, gold stocks get crushed. That
last happened a year ago in the summer of 2022, as the Fed’s extreme
monster rate hikes
launched the US
dollar parabolic. That unleashed heavy gold-futures selling
slamming the yellow metal 6.8% lower during those three months. GDX
cratered a brutal 25.0% on that, making for one miserable summer!
Gold stocks totally depend on gold.
So
if gold rallies later this summer as it ought to given today’s
bullish setup, the major gold stocks of the HUI and GDX should
amplify its gains by 2x to 3x like usual. Smaller
fundamentally-superior
mid-tier and
junior gold miners should fare even better. We’ve specialized
in that high-potential realm at Zeal for almost a quarter century,
and are looking forward to topping off our newsletter trading books
in coming weeks.
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The
bottom line is traders shouldn’t fear gold’s summer doldrums. The
yellow metal’s average seasonal slump in modern bull-market years is
mild, and mostly compressed into June. After tending to bottom in
mid-June, gold generally recovers in July and August as its strong
seasonal autumn rally gathers steam. Gold stocks largely mirror and
amplify gold’s performances, enjoying big summer gains when gold
rallies nicely.
This
summer’s gold setup is more bullish than most, with the Fed nearing
the end of this violent rate-hike cycle. Top Fed officials will
have to start dialing back their hawkish rhetoric, fueling
gold-futures buying. That will drive gold higher as speculators and
investors alike chase its upside momentum. All that really ought to
lead to a stronger summer for gold, silver, and their miners’ stocks
with excellent upside potential. |