Precious-metals
stocks really haven’t had a great summer by any means. After
rallying initially in June, they started relentlessly drifting lower in
July. The net result of this lackluster summer trading is a lethargic
drift sideways. Naturally this listlessness has weighed on sentiment
among this sector’s traders.
At the end of May
just before the dawn of the financial-market summer, the flagship HUI gold-stock
index closed at 454. Since then, it has generally been flat averaging
just 458 on close. At best so far this summer, the HUI was up 8.8% in
mid-June. At worst, it was down 4.7% in late July. For a sector
accustomed to wild volatility and exciting action, 10 weeks of drifting can
feel very discouraging.
But it
shouldn’t be. Gold stocks almost always tend to drift sideways to
lower in the PM summer doldrums. Such uninspiring behavior is par for
the course this time of year. I wrote an essay explaining the research
behind the PM summer doldrums that
was published the very day the HUI peaked this summer (June 18th). At
that time when traders were pretty excited about PM stocks’ prospects I
concluded…
“The bottom
line is summer isn’t a great time for precious metals. Led by
gold, the entire PM complex tends to drift sideways to lower in the summer
doldrums in June, July, and August. This listless price action is
driven by the combination of no seasonal gold-demand surges and the general
lack of investor interest that plagues all markets in the summer
months. Sun, sand, and surf simply provide too much competition for
traders’ attention this time of year.”
But today a couple
months later, the financial-market summer is starting to wane.
We’re on the verge of emerging out of the wilderness that was the
summer of 2010. After forming a relentless headwind retarding gold
stocks’ progress this summer, the major seasonal influences affecting
this sector are shifting back towards a favorable tailwind. The HUI
bull seasonals are looking up, a very bullish omen.
Yes, believe it
or not seasonals do affect gold-stock price levels! This
probably sounds counterintuitive initially. Investors and speculators
can buy and sell gold stocks anytime regardless of the passing of the
calendar year, so why does the time of year matter? The answer is quite
logical. It matters because calendar seasons greatly affect gold
investment demand, and the gold price is the primary driver of gold
stocks’ ultimate profits. When it rallies, they rally. And
when it falls, they follow.
Gold seasonals
are extremely important for all PM-stock traders to understand. Read my latest essay
discussing them in depth if you are not up to speed. In a nutshell,
deeply-ingrained income-cycle and cultural incentives drive big gold demand
spikes in the autumn, winter, and spring. But in the summer, there is
nothing to drive above-average capital inflows into gold. Thus it tends
to grind sideways to lower, and the gold stocks trail in sympathy.
These gold-driven
seasonal trends are readily apparent in the HUI. Since markets behave
quite differently in secular bulls and bears, I like to start my seasonal
analysis when today’s secular gold-stock bull was born in
2000. To distill out the HUI bull seasonals, I individually index
each calendar year’s HUI action from the first day of that year.
This ensures percentage changes within each year are perfectly comparable across
years despite the HUI trading at progressively higher levels as its bull
marches on.
Finally I average
together all these individual-year HUI indexes and chart the results. This
process reveals the HUI bull seasonals rendered below, which are very
valuable for traders to understand. Regardless of everything else going
on in the markets, gold stocks tend to be consistently strong and weak at
certain times of the calendar year. These tendencies can be used to
help investors and speculators execute superior trades.
It’s been
two-and-a-half years since I last updated this thread of research, with
an epic discontinuity defining the period since. During that crazy
once-in-a-century stock panic we weathered in late 2008, gold stocks were
ripped to shreds in the belly of the beast. Between July and October
2008, the HUI plummeted a jaw-dropping 67.7%! And around half these
losses accrued in this span’s final month alone! It was not a fun
time to own PM stocks.
Then between its
brutal October 2008 lows and the end of that year, the HUI rebounded 99.5%
higher. This index has never witnessed anything remotely like that
panic span, so I was really curious about how such wild swings would alter
the HUI’s seasonals. Surprisingly though, the blue HUI seasonal
line in this chart didn’t change too much at all. This shows the
value in averaging over a decade’s worth of years. No one year,
even one as crazy as 2008, wields an outsized influence.
On average since
2000, the HUI has rallied around 27.6% per year (from an indexed level
of 100.0 to 127.6). These are stupendous gains over an ugly decade
where the general stock markets have languished in a secular bear.
As a matter of fact, on the day the HUI bottomed in November 2000 the
flagship S&P 500 stock index closed at 1383. Today a decade later
it is 21% lower while the HUI is 1151% higher! Gold stocks have
been a spectacularly-lucrative investment since 2000!
In this secular
bull the HUI has tended to trade in the well-defined seasonal uptrend channel
shown in this chart. It hits its seasonal support four times a year, in
mid-January, mid-March, late July, and late October. These are the best
times of the year seasonally to add new gold-stock and silver-stock positions
for investors and speculators alike. Your odds of “buying
low” around these support approaches are far better than they are the
rest of the year.
Out of these
major seasonal lows, the HUI’s largest seasonal rallies of the year emerge.
The first runs from mid-March to early June and has averaged 14.5% over the
course of this gold-stock bull. As long as gold stocks aren’t
radically overbought in March, we diligently play this strong spring
gold-stock rally every year. Our subscribers have made lots of money
over the years buying PM stocks with us around mid-March and then selling
them in late May or early June.
After this first
big seasonal rally, the PM stocks enter the dreaded summer doldrums.
They tend to drift sideways to lower for much of the summer. The
summers are, without any doubt, the weakest time of the year for the gold
stocks seasonally. Every year in May I warn our subscribers about these
dangerous PM summer doldrums. They not only result in real trading
losses and even bigger opportunity costs, they can really devastate
traders’ psychology and confidence.
The second big
seasonal rally of the year erupts out of exceptionally-oversold HUI lows in
late July. It tends to run 15.1% higher on average between late July
and late September. Of course right now, in mid-August, we are early on
in this HUI seasonal rally. This is very encouraging and ought to
excite PM-stock traders bummed out from weathering the summer doldrums.
PM stocks almost always rally big heading into autumn, and statistically this
seasonal rally is probably already underway.
If you follow our
research work at Zeal, you are probably scratching your head at this
point. I imagine you thinking, “But Adam, you often write about a
mid-August seasonal low. Doesn’t this late-July HUI
seasonals data contradict this?” Yes, it certainly does.
But this apparent contradiction highlights the supreme importance of broad
and well-rounded research. Indicators must be considered in concert,
not isolation, to optimize trade timing.
Remember that
gold stocks (and silver as well) are ultimately driven by the fortunes of the
gold price. If gold is weak, the entire gold complex has a tough time
rallying. And gold seasonals
bottom in mid-August. Of course silver seasonals
dutifully follow gold, bottoming between mid-August and mid-September.
And just last week, my business partner Scott Wright published some landmark
research on junior seasonals.
Junior gold stocks are hyper-sensitive to gold sentiment. And when do
they bottom? You guessed it, mid-August!
So if you want to
buy PM stocks in late July due to these HUI bull seasonals, your odds for
success are high. And indeed this year, the HUI’s 432 low on July
27th may indeed prove to be summer 2010’s closing low. But
I’ve seen plenty of really ugly HUI selloffs into mid-August,
like 2007’s sharp 13.6% loss over 6 trading days ending August
16th. So personally, I feel more comfortable waiting for the probable
mid-August gold lows before adding new long positions. Gold is gold
stocks’ primary driver.
The HUI tends to
see another seasonal pullback in October. Provocatively, the
wicked-sharp plunge in October 2008’s stock panic stretched this
seasonal tendency considerably. Prior to that anomaly, the HUI tended
to bounce in the middle of its seasonal uptrend in mid-October, not
near support as this latest seasonal chart shows. Since that panic was
such an exceedingly-rare event, I certainly wouldn’t hold out for a
seasonal support approach in Octobers in general. But an early-October
pullback is still highly probable.
The third big
seasonal rally launching out of October’s low actually lasts until late
February of the following year. All together it accounts for a 17.6%
average HUI rally over this past decade, which makes it the
seasonally-strongest time of the year for gold stocks. So as long as gold’s
fundamentals remain bullish, and neither gold nor the
gold stocks have just rapidly spiked to very-overbought levels, it is prudent
to be heavily long gold stocks in the winter. Throw in autumn and
spring as well, for the other two big seasonal rallies.
So boiled down,
these HUI seasonals are really pretty simple. Expect weakness in summer
since there is nothing then to drive gold investment-demand spikes. If
you are an investor, just gird yourself psychologically for this weakness and
don’t get caught up in it or worry about it. If you are a
speculator, you can sell long positions between late May and early June and
then redeploy between late July and mid-August. And then stay long and
deployed for the rest of the other three seasons.
This simple truth
is so powerful and really highlights the value of expert market research for
all traders. Every year without fail, I receive tons of e-mails from
discouraged PM-stock investors and speculators in this late-summer
timeframe. They are frustrated, discouraged, and have either given up
on PM stocks or are considering capitulation. Yet if you study the
markets, or spend a little time and money learning from those who do, there
is nothing to fear in the summer. Don’t expect too much, and you
won’t be let down.
This next chart
takes an alternative view of HUI seasonals, this time dissected monthly.
Every calendar month of this gold-stock bull is individually indexed, and
then each month is averaged with the same months across all other calendar
years. In addition, as in the first chart above, standard deviations
are rendered in yellow. The smaller inset charts show the full range of
these standard deviations.
Standard
deviations, of course, are measures of dispersion. When you are running
averages for market-analysis work, the tighter the underlying data the higher
the probability your average is meaningful. The narrower the yellow
bands (closer to the core blue average), the less dispersed the underlying
data is. The sequences 4, 5, 6 and 0, 2, 13 both average 5, but
obviously the tighter first one is more likely meaningful.
In calendar-month
terms, November, May, and September are the best months for the HUI on
average. We are talking gains of 9.2%, 7.7%, and 4.6%
respectively. The worst months of the year for gold stocks on average
are October and July. This is skewed by the panic October and November
of 2008, however. While these two months were still weak and strong
pre-panic, they weren’t as extreme as they look above.
The 2008 panic
and its 2009 aftermath had a much more-pronounced impact on the smaller
monthly seasonal datasets than it did on the annual ones. It flattened
January, March, and August while extending October and November. If you
want to see the panic changes with your own eyes, compare this chart to the last one I
built before the panic with data current to February 2008.
These monthly
seasonal tendencies reinforce the annual analysis. Summers, especially
June and July, tend to be weak during the PM summer doldrums. August
looks strong above in monthly terms, but realize most of these gains merely
offset July’s big losses. The result is the flat late summer seen
above on the annual chart. But once summer passes, gold stocks tend to
rally on balance in most months except October. While they can drift
lower other times, these non-summer pullbacks tend to be trivial.
So once again the
core thesis of the HUI bull seasonals emerges. Write off summer, but
make sure you are deployed in high-potential gold and silver stocks for the
autumn, winter, and spring gold rallies. Thanks to summer’s
dampening effect on sentiment among naive PM-stock traders, this time of year
almost always sees nice bargains in PM stocks. August is the perfect
time to stock up and prepare for the highly-probable large autumn gold rally.
Gold tends to
rally sharply in autumn because of big Asian buying. After harvest,
farmers can invest in gold once they know how big their profits are.
And gold demand in India in particular, the world’s largest consumer,
rockets higher during autumn’s festival season. If you have any
Indian friends, ask them about Indian wedding season. It is fascinating
and often drives big gold rallies which PM stocks leverage.
Which stocks to
buy? We can help you with that. At Zeal we deeply research entire
PM-stock sub-sectors (gold producers, silver stocks, advanced-stage junior
golds, early-stage junior golds) to uncover what we believe are the best
stocks fundamentally. We publish comprehensive profiles of our dozen
favorite stocks (out of initial universes often in the hundreds) in our
popular Zeal Reports.
You can enjoy the benefits of hundreds of hours of our expert research for a
mere pittance. Buy a PM-stock
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bargains!
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The bottom line
is precious-metals stocks have exhibited very definite seasonal tendencies
over the course of their secular bull. This is largely the result of
gold demand spikes driven by income-cycle and cultural factors that are tied
to the calendar year. While PM-stock seasonals are often secondary
drivers that can be temporarily overridden by short-term technical and
sentimental extremes, prudent traders still pay close attention to these
headwinds and tailwinds.
HUI bull
seasonals show investors and speculators when they have the best odds of
buying low and selling high. They reveal that summer tends to be a poor
time of the year for PM stocks, but the rallies in autumn, winter, and spring
far more than make up for these summer doldrums. They also show that
our current mid-August timeframe is one of the best times of the year to add
new long positions.
Adam Hamilton,
CPA
Zealllc.com
So how can you
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Questions for
Adam? I would be more than happy to address them through my
private consulting business. Please visit www.zealllc.com/adam.htm for
more information.
Thoughts,
comments, or flames? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that I
am not able to respond to comments personally. I will read all messages
though and really appreciate your feedback!
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2006 Zeal Research (www.ZealLLC.com)
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