After an incredibly
volatile week for the precious metals, PM-stock traders are very
worried. Despite Bernanke’s Fed forcing real interest rates even more massively negative, gold plunged. The PM-stock traders, never paragons of
courage anyway, panicked. The HUI
gold-stock index plummeted with gold.
We were stopped out of a
lot of trades in the carnage, but the great thing about stop losses is they automatically get your capital out early in a sharp plunge. So we are now blessed with lots of dry
powder to scoop up irrationally beaten-down bargains. Great opportunities have bloomed! I will discuss our trading strategy in
depth, including specific new trades, early next week in Zeal Speculator.
But today my mission is to
explore gold and HUI seasonals. This week’s sharp selloff that rained terror on the PM realm like
hailstones of fire makes seasonals more relevant
than ever. A seasonal perspective
really helps put the recent extreme volatility and heavy selling pressure in
gold and the HUI in context. Contrary
to the legions of Chicken Littles frantically
squawking today, perhaps the sky is not
falling.
Seasonality, of course, is
the tendency for a price to behave in a particular way at a particular time
during the calendar year. The key
word here is tendency, as seasonals are seldom the primary driver of prices. They are more like prevailing winds
influencing prices peripherally.
An aviation analogy nicely illustrates this concept.
If you are flying
somewhere, you’ll reach your destination regardless of the prevailing
winds at altitude. But it is
certainly nice to have a tailwind, as it will shorten your flight time. The engines on the airplane are the
primary driver of its velocity, but prevailing winds can really affect the
time (and fuel) it takes to reach your destination. In the financial markets seasonals are like these prevailing winds, an important
secondary influence.
Interestingly both gold and
the HUI have exhibited strong seasonal tendencies over their powerful
bulls. Both tend to be strong at
certain times of the calendar year and weak at other times. While it is easy to understand why a
grown commodity like wheat has seasonal tendencies, I find many traders are
surprised to learn that seasonality even
exists in gold and PM stocks.
Orbital mechanics don’t affect mining, after all.
If you’d like more
background on some of the cultural drivers of gold seasonality, check out my initial essay in this
series. It also explains the
methodology used to construct these updated seasonal charts below, so I
won’t rehash that discussion here.
Instead let’s dive right in to gain some important seasonal
perspective on gold and the HUI today.
Any discussion on HUI seasonals has to start with gold itself, as this metal is
the primary driver of gold stocks’ fortunes. Over the long term, higher gold prices
mean higher profits for the companies mining this metal. And in the stock markets, higher
profits ultimately translate into higher stock prices. So as always, we have to look to gold
first to understand the gold stocks’ volatile gyrations.
This chart looks at an
annual composite of the gold price’s calendar tendencies since
2000. Daily gold price data for
each year is indexed starting at 100 and then all the resulting annual
indexes are averaged. Thousands
of formulas and one complex spreadsheet later, the final results are rendered
above. Since 2000, gold has
exhibited a very clear and strong seasonal uptrend reflecting this
metal’s secular bull.
If you apply standard
technical analysis to this uptrend, gold seasonality has definite support and
resistance lines shown above. Generally gold doesn’t retreat much below
its seasonal support. Thus when
it hits seasonal support, it is usually an excellent time to add long
positions. Note that one of only
three support approaches during the year happens in mid-March! Gold tends to be weak right now.
Now lest you suspect the
sharp selloff just witnessed this week has unduly
influenced the charts in this essay, I cut off this data as of February 29th,
2008. So all these charts reflect
average Marches from 2000
to 2007, but not 2008. You hardcore skeptics
can prove this to yourself by carefully comparing March in these charts with
March in my last seasonal charts from September
2007. March seasonality is
identical!
So even before this week,
seasonal weakness in gold in mid-March was a well-established tendency. In fact, gold generally started
selling off in late February before finally bouncing at seasonal support in
mid-March. While not as apparent
above, in earlier seasonal charts not including
February 2008 this selloff was two-phased. It started modestly in late February,
then gold consolidated sideways for a couple weeks, and then it fell more
sharply into mid-March.
But this year, of course,
gold bucked its usual seasonal tendency.
It surged into late February when it usually tends to start
correcting. Then it consolidated
near its highs, in the $970s, for the first couple weeks of March. And then it started surging again,
contrary to seasonal tendencies, to close over $1000 for a couple days. So perhaps this week’s sharp
plunge was simply seasonality catching up with gold in a very
temporally-accelerated way. Three
weeks’ worth of seasonal selling was done in three days!
At least it’s
certainly a provocative thought to ponder. Gold traders are worried that the
Fed’s negative real-rate policies are now somehow mysteriously helping the US dollar. They are worried that hedge funds
unwinding leveraged commodities positions must think this commodities bull is
over. But wouldn’t it be
ironic if gold was simply overbought, needed to retreat a bit, so seasonals finally caught
up with it quickly?
Understanding context is
critical to psychologically weathering sharp adverse moves. Gold hit $925 for the first time in history on January 28th,
$950 on February 27th, $975 on March 3rd, and $1000 on March 14th. So just
two months ago, the levels gold plunged to this week would have been
considered fantastically high! This
metal has certainly earned a breather, and seasonally a pullback was probable
anyway.
And if you can stay coldly
rational in the midst of a howling sentiment storm, the mid-March seasonal
support approach is very bullish.
Starting about now, gold tends to rally strongly into late May. On average from 2000 to 2007, this
rally carried the gold price 5% higher.
The next two months are usually one of gold’s biggest seasonal
rallies of the year. And
today’s seasonal support approach is where it launches.
I suspect gold will have
little problem embarking on its usual March-to-May seasonal rally this
year. Many bullish forces are
stacking up behind it, building upside pressure. The key one is inflation. So far, higher commodities prices
largely have not been passed on from producers to consumers. But they soon will be. As general prices rise, interest in
gold among mainstream investors will grow dramatically.
On top of this, the Federal
Reserve has ramped the US MZM money supply by a
jaw-dropping 16.0% over the past year!
Relatively more money chasing relatively fewer goods, services, and gold means higher prices. And Ben Bernanke’s
disastrous negative real-rate policy, right out of the inflationary 1970s
playbook, is extremely bullish for gold and bearish for the US dollar. Gold will thrive.
And as goes gold, so go the
gold stocks. While sentiment
amongst PM-stock traders was decimated this week, they will be back when gold
resumes rallying. I’ve been
actively trading PM stocks since this HUI bull began in late 2000 and
I’ve never seen a more manic-depressive lot. In the HUI’s
1331% bull to date, sharp selloffs to shake out the
weak hands have been par for the course.
Once they’ve exited, rallying resumes.
So with gold likely near
the launching point for one of its
three biggest seasonal rallies of the year, how do the HUI seasonals line up?
Pretty darned well! If you
quickly scroll between the gold chart above and this HUI chart, you’ll
see that HUI seasonals generally mirror and amplify the underlying gold seasonals rather nicely. The HUI too also hits seasonal support
in mid-March and then rallies seasonally into late May.
Once again, this data is
current as of the end of February.
So the indexed and averaged March shown here has no data from March
2008. And what do we see? HUI weakness in late February
accelerating into a mid-March low right along seasonal support. The HUI has already had a strong
tendency for years to grind lower into the middle of this month, and this
week’s plunge played into it.
This year, the HUI rallied
into late February as its seasonals suggest. But instead of starting to pull back
then, it consolidated sideways for a week and then started retreating
modestly. But gold drives the
gold stocks, so the HUI caught the
gold fever and surged to a new all-time high of 515 on March 14th. But this rallying, fun though it was,
was contrary to the HUI’s usual seasonal
tendency to retreat into mid-March.
So perhaps like gold, the HUI’s seasonals finally caught up with it this week. Instead of having three weeks to pull
back seasonally and bleed off greed, the HUI had three days. And of course the sharper a move, the
more fear is generated which tends to exacerbate that move. While this week’s selloff was irrationally fearful and extreme, it did occur near a seasonally weak time
of the year. It had a tailwind.
Now please realize I am not
emphatically saying that an accelerated seasonal catch-up is what hammered
gold and the HUI. Seasonals are merely secondary
drivers. But if the primary
driver was a short-term overbought gold price that needed to retreat, and the
Fed scared leveraged speculators into unwinding gold longs, then the weak seasonals added a tailwind. Seasonals could help explain this plunge’s
severity, and maybe some of its timing, even though they weren’t its
prime mover.
I know from past consulting
experience that some PM-stock traders won’t survive a week like
this. The leveraged ones using
debt to bet with other people’s money can be totally wiped out by sharp
selloffs like we saw this week or last August. The traders without emotional control
can be so psychologically scarred that they never want to see another PM
stock as long as they live. Both
camps sent me e-mails this week.
But if you prevailed and
your rationality and sanity is intact, this mid-March seasonal support
approach in the HUI offers great opportunities. Just like gold, one of the HUI’s three biggest seasonal rallies of the year
tends to erupt out of these mid-March seasonal lows. It tends to run into late May and is
really quite powerful with a 16.3% average indexed gain.
A 16% run in about 10 weeks
may not sound like much by PM-stock standards, but realize two key
things. First, this is an indexed
average from 2000 to 2007
encompassing 8 years. As the
widening yellow standard-deviation bands above reveal, the spread on
individual March-to-May seasonal rallies is quite broad. Second, seasonals
are merely a tailwind, not a primary driver. We must look to the primary driver for
clues on the size of this rally.
As I wrote in February on HUI upleg
structure, it looks like the HUI is currently in one of its
periodic massive uplegs of this bull
market. While awesome in
hindsight, these massive uplegs are very
challenging psychologically in real time. Sharp selloffs
within the uplegs aren’t uncommon, as PM
stocks do everything in their power to shake out bulls too soon before their
greed-driven highly-profitable climaxes.
If today’s upleg continues to unfold like a massive upleg, it should see half its gains in its final two months. At past massive uplegs’
average duration, today’s upleg’s final
two months run into mid-May. May
is also the highest-probability topping time seasonally, by far, for all of
the HUI uplegs of this bull. Thus if this upleg
continues higher after this week’s panic, it will have a strong
seasonal tailwind leading into May.
The biggest gains of this
entire HUI bull have been witnessed during the final two months of massive uplegs. And
to have seasonal tailwinds concurrent with these probable final two months of
our current upleg is all the better. So despite this week, probabilities
still appear to favor a big HUI rally heading into
May. Gold stocks are really
compelling to buy even at $800 gold, let alone today’s awesome prices.
So with a primary driver,
continuing high gold prices, and a secondary influence, bullish seasonals, lining up, this week’s sharp HUI selloff seems totally irrational. While emotions can spark fast
anomalous moves, emotional extremes never persist. When the dust settles and rationality
returns, PM stocks should prove irresistible. This final chart looks at the HUI bull
seasonals indexed monthly instead of annually.
Monthly indexing then
averaging reveals the same seasonal tendencies discussed above from a
different perspective. The HUI
tends to be weak seasonally heading into mid-March. It pulls back rather sharply but then
recovers late in the month. And
then April tends to be flat as sanity slowly returns to the easily-excitable
PM-stock-trader herd. But then
this sector tends to soar in May in one of its biggest monthly rallies of the
year.
Between 2000 and 2007, the HUI’s seasonal selloff in
mid-March provided one of the four best opportunities to go long gold stocks
of the entire year. Odds are 2008
won’t break this tendency.
Out of extreme fear comes great opportunity,
and this year’s outsized selloff drove far
more fear than is normal seasonally.
It is never easy buying during widespread fear, but that is how
contrarians earn big profits.
I really wish I could tell
you that I expected such a sharp HUI selloff in
mid-March, but I didn’t. I
was well aware of this seasonal tendency to retreat, but I suspected it would
be just a lazy consolidation and pullback this year like usual. Its raw magnitude caught me by surprise too. But such is speculation. The volatility and surprises are what
make this game so exciting. The
markets never cease to astonish!
The upside of big selloffs is they create excellent buying
opportunities. Short-term fear
temporarily overwhelms long-term fundamentals so prices are briefly driven
down to totally irrational lows. Astute
and fearless traders can swoop in and buy on the cheap. And the prudent PM-stock traders
running stop losses just recovered much capital from stopped trades, most at gains, that is now ready to be redeployed.
Not only should we be
regaining the seasonal tailwinds now, but gold stocks have yet to fully
reflect gold’s stellar run since August. Regardless if gold stabilizes at $900,
$850, or $800, mining gold is going to be a
lot more profitable going forward than it has been in the past. In calendar 2007, the gold price
averaged $697. So far this
quarter, the average has soared to $926!
Sooner or later gold stocks will
be bid up to reflect this. Even after a big pullback, the days of
sub-$700 gold are probably history.
The timing of this
fear-driven panic selling is really fortuitous in one way. Back in November, my business partner
Scott Wright and I started wading through the morass of junior gold
stocks. We started with 285,
gradually researching them all and whittling the field down to our 12 favorites. Just this week Scott finished his
brand new Zeal Report fundamentally describing each of our favorite junior golds in depth.
Juniors are small and
very-high-potential stocks, so they are even more slave to sentiment than
larger gold miners. They tend to
thrive the most late in massive uplegs
when widespread greed returns, like in spring 2006. If we are indeed in another massive upleg due to peak in May 2008, they should soar again
soon.
The panic selling this week
helped drive our favorite gold juniors
even lower, offering stellar buying opportunities. If this HUI upleg
remains on track, today is a rare junior-gold fire sale right before greed is likely to return with a vengeance once
traders realize gold isn’t going to zero. Buy our awesome new report today to get the fundamental lowdown on our favorite
high-potential junior golds!
Also, as always,
we’ll continue to explain our actual commodities-stock trades as we launch them in our acclaimed monthly Zeal Intelligence
newsletter. If you are tired of
being tossed to and fro by your own capricious emotions or those of the
marketplace, you’ll love our analyses. After actively trading this gold-stock
bull since its birth, we offer a strong, steady, logical, and unemotional
anchor of cutting-edge research and real-world trading knowledge. Subscribe today!
The bottom line is gold and
HUI seasonals have long exhibited a tendency to
retreat in mid-March. While this
week’s selloff was far sharper and more
extreme than seasonally expected, the metal and stocks had been bucking seasonal trends in the weeks prior to this. So perhaps a secondary driver of the
severity of these selloffs was simply overstretched
seasonals springing back, doing a few weeks’
worth of work in a few days.
While such an extreme selloff stung, good traders never lick their wounds. They look forward. Heading into May, seasonal tailwinds
are due to resume. Over the past
8 years, they have driven one of the three biggest annual seasonal rallies in
both gold and PM stocks. They
ought to again, with PM stocks not yet reflecting new high prevailing metals
prices even after the metals selling.
So unless you think gold is going to zero, carpe diem!
Adam
Hamilton, CPA
Zealllc.com
March
21, 2008
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