Over the past
month or so, precious-metals stocks’ performance has been
frustrating. Even though gold looks great, lazily meandering over $1200
without a care in the world, the PM stocks have drifted sideways to
lower. Unfortunately such behavior is typical in the dreaded PM summer
doldrums.
These doldrums
exist because strong seasonal forces affect gold demand. While gold’s
newly-mined supply flows to the markets at an essentially constant rate
throughout the year, this metal experiences wild fluctuations in demand.
And unfortunately none of the usual demand spurts coincide with summer.
Asian gold buying
ramps up in autumn as cashflows from the recent harvests peak. Farmers
invest once they know how big their profits are. Indian demand, the
world’s largest gold consumer, surges during its autumn festival
season. Most Indian weddings happen then, with big gold buying
for brides’ dowries, as Indians believe getting married around these
festivals brings good luck and happiness to marriages.
Around Christmas
and the end-of-year bonus season, Western gold buying peaks. Christmas
is naturally the biggest time of the year for the gold-jewelry
business. And similar to Asian farmers buying gold after their
harvests, we Westerners have the best idea of how much surplus income
we’ve earned that year near year-end. This leads to Western
gold-investment buying. And then in January and February, Chinese New
Year gold buying flares up in China.
My latest essay on gold seasonals
delves into these gold demand spikes in more depth.
Note that none
of these seasonal surges in gold demand around the world happen in the
summer. This time of year is devoid of income-cycle and cultural
incentives to drive above-average capital flows into gold. On top of
this, investment in general really tends to slow down in summer as people
concentrate on vacations and enjoying the sun instead of the financial
markets. The result is the summer doldrums.
Gold tends to
drift listlessly sideways during these summer months, like a great tall ship
trapped in the oceans’ doldrums. There generally isn’t much
selling pressure, but there isn’t much marginal buying interest
either. And as goes gold, so go silver and the precious-metals
stocks. These are derivative plays on gold, so when gold isn’t
doing anything exciting they tend to drift lower as traders get frustrated
and walk away.
In the financial
markets, summer effectively runs from Memorial Day to Labor Day. Thus
calendar June, July, and August are the summer months for trading
purposes. While PM-stock speculators and investors are never happy to
hear about the summer doldrums this time of year, the technical histories of
today’s PM bull markets are crystal clear on the reality of the
doldrums’ dampening impact.
The charts in
this essay illuminate these doldrums in gold, silver, and the flagship HUI
gold-stock index across their respective secular bulls. In order to
make each year perfectly comparable with all others despite wildly-different
price levels, I indexed every summer individually. The final trading
day in May each year is set at 100, and then all other prices are figured
relative to this common base. If gold goes from 100 to 105 for example,
that means it rallied 5% whether it started at $400 or $1000.
All past
years’ individual summer indexes are rendered in yellow. While
your eye can’t follow each year individually, taken together they
define a typical center-mass trend. The summers’ indexes from
2000 to 2009 are then averaged together in the red line, illustrating the
core directional tendencies. And finally this year’s indexed data
is rendered in blue. Every PM-stock trader needs to understand these
doldrums.
Over this secular
gold bull’s past decade, this metal has never had an exciting
summer performance. Not once! The center-mass trend of all its
summer trading action over this long span is clearly down. While there
are some outlying years like 2008 and 2005 to the upside, these anomalous
rallies quickly rolled over and failed. On average between 2000 and
2009, gold drifted sideways in a flat-to-lower fashion.
And despite
today’s excellent gold prices, in indexed terms this metal has
essentially spent the initial weeks of summer drifting sideways just as expected.
Gold closed near $1215 on the last trading day of May 2010. Since then
it has lazily meandered between $1206 on the low side and $1242 on the high
side. Even at its peak gold was only up 2.3% since the end of May,
which remains near the center of its typical summer-doldrums trading range.
Now this
precedent doesn’t mean gold can’t rally sharply in the summer,
far from it. Anything is possible in the financial
markets. With the right incentive (read “crisis”), gold
investment demand could soar even in the lazy summer months. But
speculating and investing are ultimately probabilities games. Traders
only want to add trades when their odds for success are high. And for
an entire decade, the odds haven’t favored gold rallying in
June, July, and August. This doesn’t bode well for summer 2010.
Each time
I’ve written about this phenomenon in the past, I get deluged with
hostile feedback. Highlighting a period of poor seasonal performance
doesn’t exactly win fans among PM-stock traders. The most common
argument I hear is “What about X event? If X happens, gold will
soar.” And usually I agree, if X comes to pass then gold
investment demand would indeed probably surge.
But the problem
is wild exogenous events seldom become reality. While the threat of Xs
always exists, the reality is they almost never hit as feared. Last
summer for example, fears of a California bankruptcy and double-dip recession
dragging the stock markets back down to panic lows were
ubiquitous. Potential Xs were everywhere, yet gold did nothing.
In the summer of 2008, the bond markets were seizing up as Fannie and Freddie
stocks were plummeting. Gold had every reason to soar as Xs loomed
everywhere. Yet the best it could muster was a short-lived rally in
July that soon collapsed.
The cold hard
truth is nasty potential Xs existed in every summer from 2000 to 2009
without fail. Yet gold still steadfastly refused to surge higher every
summer. Worst-case scenarios always exist and are always feared by
excitable PM-stock traders. Any potential wild exogenous events today
like a Europe implosion are
both highly unlikely to come to pass and equally unlikely to drive a huge summer
gold spike.
You don’t
have to like this, I certainly don’t either. Our goal in
speculating and investing is to buy low and sell high, not irrationally
expect any asset to rally 12 months a year every year from now until the end
of time. The charts don’t lie. Any intellectually-honest
PM-stock trader who takes the time to study summer trading action over this
entire bull will have to admit it isn’t very impressive. This
lethargic flat-to-lower gold price action in June, July, and August drives
the PM summer doldrums.
Silver is a
leveraged derivative play on gold. When gold is strong long enough to
generate excitement, traders rush into silver and drive big gains that
amplify gold’s own. But when gold is weak or even drifting
sideways, excitement for PMs fades rapidly. Traders sell silver in the
absence of a gold-strength catalyst to drive further buying, and it falls
faster than gold. So with gold tending to drift sideways during the
summer, silver faces a stiff sentiment headwind that it can seldom overcome.
Silver’s
summer action isn’t as tight as gold’s over the past
decade. The yellow lines showing individual indexed years have much
broader deviations, reflecting silver’s well-deserved reputation for
wild volatility. Yet on balance, silver’s summer tendency is
still clearly weak. Its center-mass trend encompassing the most yellow
indexed lines is down. Even more telling, its red index average drifts
down about 5% by the end of summer. If silver follows precedent this
year, odds favor it trading in the mid-$17s by late August.
Unlike gold,
silver did have several years with upside outlying rallies during the
summer. The most recent was 2008, when silver followed gold’s
spike higher in early July. But soon after that in August that year,
that anomalous strength quickly collapsed into anomalous weakness. 2008
ended up being silver’s weakest summer of its entire secular bull as
the bond-panic-driven US dollar
spike hammered gold.
The other silver
upside outliers were 2003 and 2004. In 2003 the general stock markets,
which have a huge influence on silver traders’ psychology, were advancing out of their
recent bear-market lows much like we saw in the summer of 2009. As a
highly-speculative metal, traders are much more likely to buy silver when the
stock markets are strong and risk trades are in vogue. And in 2004,
silver had just weathered what was essentially a crash in
April and was simply mean-reverting higher in a recovery.
Silver was only
strong in 3 summers out of 10, and one time (2008) it collapsed right after
and another (2004) it was recovering from a brutal 33% plunge in April.
So that leaves just a single summer out of 10 (2003) when silver rallied a
bit and held on in relatively normal conditions. If you want a
high-probability-for-success silver trade, bull-to-date odds running 10% or
so for a significant summer rally certainly isn’t it. As long as
gold drifts listlessly, it is really hard for silver to catch a bid.
Most importantly
of all, and the reason I wrote this essay, is the precious-metals
stocks. The HUI gold-stock index hit 492 in mid-May but has generally
been drifting sideways to lower ever since despite the persistent strong gold
prices. Over the 5 weeks since that interim high, the HUI has merely
averaged 457 on close despite gold averaging $1217. Gold stocks remain radically undervalued
relative to gold, yet they haven’t been rallying.
This lack of
PM-stock performance is causing tremendous frustration amongst PM-stock
traders. I’ve been warning our subscribers about the PM summer
doldrums for months, trying to prepare them psychologically for this listless
PM-stock season. They are ready. But to those traders out there
not enjoying the fruits of our research, all I can do is shrug and say
“hey, it’s summer man”. You just can’t expect
too much from PM stocks while gold drifts in the doldrums.
Just like its
primary driver gold, the center-mass trend of every HUI summer of its entire
secular bull is definitely down. On top of this, much like silver the
average of these 10 indexed years also tends to drift lower in the summer
months. This lack of summer performance is pretty amazing when you
consider that the HUI has skyrocketed 1331% higher at best in this bull since
late 2000. Obviously from this chart, almost none of these epic
PM-stock gains accrued over the lethargic summer months.
Like silver, the
HUI did witness a couple upside outliers. It started rallying sharply
in July 2003 and didn’t look back. That was the kind of summer
every PM-stock trader fervently hopes for, but alas it was an anomaly that
hasn’t even come close to being repeated ever since. 2005 saw a
bump in August, but that soon collapsed back into the center-mass downtrend
before summer ended a few weeks later.
The odds just
don’t favor PM stocks doing anything too exciting during the summer
months. Sure, 2010 could be different and see a rip-roaring gold-stock
rally. But I sure wouldn’t bet on it. Between 2000 and
2009, the HUI generally drifted lower between 5% to 10% above its May close
to 10% to 15% below it. Translated into this year’s HUI levels,
this is a high-probability potential summer range between 385 to 500 or
so. And unfortunately the probabilities greatly favor the lower
end of this range.
If you are a
fellow PM-stock enthusiast like me, the dreary prospect of the PM summer
doldrums as we enter summer 2010 feels like a big wet blanket. I feel
your pain, I’m not thrilled with these weak PM summer tendencies
either. But a decade’s worth of summer data from today’s
secular bull forms a powerful precedent. It isn’t wise to
ignore it. We may buck the trend and see a nice PM-stock rally before
the end of August this year, but the probabilities are wildly against it.
This isn’t
all bad though, there is a fantastic silver lining to this summer-doldrums
cloud. As speculators and investors, our goal is to buy low and
sell high. And thanks to these gold doldrums, late summer is the best
time of the year to buy low in PM stocks. Traders who don’t
understand these doldrums get more and more discouraged as summer grinds
on. As many give up and sell by August, PM stocks typically fall to
their lowest
relative levels of any given year.
So at Zeal rather
than worrying about PM stocks’ usual summer grind, we carefully build
our shopping list for the best buying opportunity of the year in late
summer. We figure out which specific gold stocks and silver stocks
we’d like to own through endless fundamental research. And then
we prepare to buy them when PM-stock sentiment waxes the most bearish and
discouraged at its usual late-summer ebb.
Just this week,
we finished a deep 3-month project fundamentally researching early-stage
junior gold stocks. We started with a universe of over 400
publicly-traded junior gold stocks listing in the US and Canada. We
then looked into every one and gradually whittled this huge list down to our
dozen favorites. We profiled each of these high-potential junior golds
in a comprehensive new 25-page report just published.
Interestingly,
high-potential juniors can often buck the weak summer trend for a couple key
reasons. First, as relatively-unknown juniors with fantastic projects
become more widely known, new investors buy regardless of what gold and the
HUI are doing. Second, summer is the drilling season in the northern
hemisphere when new gold discoveries are made. Juniors spinning drills
that happen to report great gold intercepts often catch a bid even if the
broader PM-stock sector is flagging.
So whether you
are prudently building your high-priority buy list for the late-summer sector
lows, or eager to learn about incredible juniors that aren’t widely
followed yet, now is a great time to digest our new junior-golds report.
At just $95 ($75 for Zeal subscribers) for the fruits of hundreds of hours
of our elite world-class research into junior golds, it is a crazy
bargain. Buy your copy
today and learn about these amazing juniors before
everyone else does!
We also publish
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Intelligence, that analyzes the markets in depth with
the explicit goal of uncovering high-probability-for-success trading
opportunities in commodities stocks. We’ve been actively trading
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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.
While frustrating
for traders not psychologically prepared for these PM summer doldrums, they
create great opportunities for those who are. As summer wears on and PM
stocks grind lower, frustration mounts and discouraged traders dump PM
stocks. This leads to the best seasonal buying opportunity of the year
in late summer, right before the huge autumn gold-buying season begins.
So relax, enjoy this summer, and start building your PM-stock buy list.
Adam Hamilton,
CPA
Zealllc.com
So how can you
profit from this information? We publish an acclaimed monthly
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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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