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After updating my gold-seasonality research last
week, I heard from traders wondering how it affects gold stocks. Since the price of gold is their primary
driver, gold seasonality naturally has a major impact on gold-stock price
levels. This is readily apparent
in the seasonality of the HUI, the flagship gold-stock index. As you’d expect, this sector
mirrors and amplifies the seasonal swings in the metal it mines.
Gold’s seasonality is demand-driven.
Throughout much of the calendar year, various income-cycle and
cultural factors around the world drive outsized spikes in gold demand. After discussing these in depth in
last week’s essay on gold bull seasonals, there’s
no need to rehash them here. But
while gold’s demand varies radically over a calendar year, its mined
supply is almost perfectly inelastic.
Gold’s newly-mined supply flows into the
markets at an essentially-constant rate.
It generally takes over a decade
between finding a new deposit to building an operating mine. Plenty of time-consuming steps slow
this process, from drilling to define the ore body to securing permitting to
arranging financing to ordering long-lead-time equipment to scheduling
construction. This process simply
can’t be rushed.
And once a gold mine is operational, its ore can
only be extracted and processed at a certain rate pre-defined in the
pre-construction engineering process.
It doesn’t matter if the gold price rockets an order of
magnitude higher tomorrow. There
is generally no way to increase gold production at operating mines that
doesn’t necessitate huge capital investments and new construction over
a multi-year time span.
Since global gold supply simply can’t be
ramped up to meet seasonal demand spikes, the only possible economic outcome
is for the gold price to be bid higher.
An essentially-fixed supply is temporarily overwhelmed by surging demand,
forcing the capital flowing into gold to compete for this scarce
resource. This dynamic drives
gold seasonals, which are then mirrored and
amplified by the gold stocks.
The best way to understand gold-stock seasonality is
through the lens of this sector’s primary index, now known as the NYSE Arca Gold BUGS Index. A clever play on the
somewhat-disparaging gold-bug label, BUGS stands for Basket of Unhedged Gold Stocks. The 16 major gold miners now included
in this index are collectively responsible for the majority of global gold
mining today. It is better known
by its symbol, HUI. And born in
1996, it has been around for today’s entire secular gold bull.
Naturally for this HUI-seasonality research, I use
the same methodology from my gold-seasonality work. It deviates from conventional seasonal
analysis, which often considers 30-year blocks of time. The problem with such long spans is
they encompass secular bulls and bears alike. Yet prices behave very differently in
bulls and bears, as all speculators and investors know. So if seasonality is to be used as a
gold-stock-bull trading tool, it is logical to limit the data fed into it to gold-stock-bull years.
And of course as any bull market marches higher, its
prevailing price levels gradually rise.
So far this year, the HUI has averaged 553. This is 9x
higher than its 2001 average of 60!
A 5-point move back then was gargantuan, but the same today is
trivial. So in order to make
every year comparable, we have to individually
index each year’s HUI action.
This makes all years perfectly comparable in percentage terms.
My indexing methodology is simple. The first trading day of each calendar
year (or month for the second chart) is recast at 100. Then the rest of that year’s
daily HUI action in percentage terms is rendered off that common base. If the HUI climbs 10% in any year, no
matter what its absolute level, this index rises to 110. If it falls 10%, its index goes to
90. Averaging all these
individual annual indexes together yields this fascinating chart of HUI bull seasonals.
In order to sync this chart up with last
week’s gold version, I made one major change. 2000 was rolled off. Gold’s secular bull started in
April 2001, but the HUI actually bottomed in mid-November 2000 which heralded
the birth of its own secular bull.
But despite that early start, 2000 definitely wasn’t a
gold-stock-bull year. It was 46
weeks of a maturing gold-stock secular bear, with only 6 short weeks of a
young bull.
Between 2001 and 2011, the HUI gold-stock index
enjoyed utterly-amazing average returns.
By the end of each calendar year, on average the HUI had soared 35%
higher! This is phenomenal during
a secular stock bear
where the general stock markets were dead flat at best over this past decade. The HUI carved a strong seasonal
uptrend over this span, with definite support and resistance lines you can
see above.
Not surprisingly since the price of gold ultimately
drives gold-miner profits and hence their stock prices, these HUI seasonals closely
mirror gold’s. Just
like gold, the strongest time of the year for gold stocks is between autumn
and spring. And just like gold,
this sector’s weakest time of the year is the dreaded summer doldrums. Gold stocks also surge in major
seasonal rallies that coincide with gold’s own.
The first one launches from seasonal lows in
mid-March, the same time gold’s own initial seasonal rally starts
marching higher. You may want to
open a second browser window with last week’s gold-bull-seasonals charts to better
understand and internalize this relationship. While gold tends to climb 5.1% higher
on average by mid-May, the HUI’s first big seasonal rally powers 15.4% higher by late May. This is really impressive 3-to-1
leverage to the price of gold, which is the reason why traders like gold
stocks.
The HUI peaking a couple weeks later than gold in
May is probably due to psychological momentum. After a strong gold-stock rally,
speculators and investors are getting greedy and overly-optimistic about gold
stocks. So even after gold
initially weakens, they tend to suspect it is merely a minor pullback and
continue to buy aggressively. But
then when the summer doldrums really hit in early June and the gold selling accelerates,
the gold stocks are finally dumped aggressively.
Thanks to 2011’s wildly-anomalous summer gold rally,
gold’s own seasonal low in the summer was pulled back considerably from
late July to early June. But the
HUI’s summer seasonal low remains right where it was in the last iteration of
this research, in late July. This
will likely continue to be a better time to deploy capital in gold stocks
going forward, as this sector really tends to weaken during mid-summer. So despite gold’s new earlier
seasonal low, I am still going to favor late July for gold-stock deployments.
After that summer-doldrums washout, the HUI’s
second big seasonal rally starts marching higher. This catapults the flagship gold-stock
index 14.5% higher on average by mid-September. These are impressive gains considering
gold’s own parallel seasonal rally, which now starts over a month
earlier, only sees 7.4% gains on average. The HUI’s
late-summer-early-autumn seasonality exhibits healthy 2-to-1 leverage to the
gold price.
Interestingly gold’s seasonal peak is a few
weeks later than the HUI’s, in early October compared to
mid-September. The likely
explanation is after the gold stocks have surged so far so fast in just a
couple months, speculators are anxious to realize profits. They can sell high on a short-term
basis before buying back in lower at the HUI’s next major seasonal low,
which soon mirrors gold’s in the latter half of October.
The HUI again slumps to its seasonal support then,
although it doesn’t knife below it like in late July. This late-October timeframe is one of
the best times of the year seasonally to buy gold stocks, as they are on the
verge of a massive seasonal
rally. It powers a staggering
19.9% higher on average between late October and late February! Just like for gold, this is the
HUI’s strongest seasonal rally of the year. Once again the HUI’s average
19.9% gain over this span nearly doubles gold’s 10.4%.
After that there is a minor pullback back down to
seasonal support in early March, and then this whole cycle begins anew. Understanding the gold stocks’
seasonality offers some great trading cues to speculators and investors
alike. If you want to increase
your odds of buying new gold-stock positions at relatively-low prices,
consider deploying in mid-March, late July, or late October. These are the crucial times when the
HUI seasonals retreat back to, or even fall under,
their uptrend’s support line.
And if you want to improve your chances of selling
existing gold-stock positions at relatively-high prices, the best times to do
it are as these major seasonal rallies are maturing. We are talking late February, late
May, and mid-September. While the
HUI certainly doesn’t always follow its well-established seasonal
pattern precisely, a decade’s worth of secular-bull price action is
pretty compelling to consider before trading. It helps traders better understand the
most-likely times to buy low and sell high within any year.
This second chart digs a little deeper into HUI bull
seasonality by ratcheting up the resolution to monthly. Each
calendar month is individually indexed and then averaged over the gold
stocks’ 2001-to-2011 secular-bull span. This alternative view highlights some
intra-month insights not readily apparent in the full-year seasonality above. It also reveals what the best months
of the year to own gold stocks are.
They happen to be November, May, August, and
December. On average since 2001,
the HUI has surged 8.6%, 7.9%, 5.9%, and 5.0% higher in these particular
months. The only surprise is
August, which wasn’t as strong in past iterations of this
research. One key factor
contributed to this. The August
2000 now rolled off the average had a modest 2.2% gain in the HUI, while the
latest August 2011 now included saw a massive 10.1% HUI surge driven by a
major gold rally.
This cements the importance going forward of looking
to late July as a major buying opportunity in gold stocks, so traders
don’t miss out on the strong August seasonality. And the other two major seasonal
buying ops are as readily apparent in these monthly seasonals
as they were in the annual seasonals above,
mid-March and late October. These
are the best times of the year seasonally
to add new positions in gold stocks, when the odds for an imminent major
rally are the most stacked in your favor.
While HUI bull seasonality is certainly an
interesting thread of research, the usual big seasonality caveat still
applies. No matter what price you
are studying, seasonality is always a secondary
driver. The primary driver of all
short-term price action is sentiment,
the collective greed and fear of traders actively participating in that
particular market. When either of
these perpetually-warring emotions hits an unsustainable extreme, it easily
overrides seasonality for a spell until that excess is rebalanced away.
And we just witnessed a perfect example. Despite the HUI being in the midst of
a major seasonal rally in mid-August 2011, gold was getting really overbought at that point. I wrote a hardcore contrarian essay on
this right when gold was topping,
warning that the excessive greed and euphoria plaguing it would lead to an
imminent major correction. Even
gold itself was in the midst of a major seasonal
rally at that point.
And indeed gold’s extreme overboughtness
couldn’t be sustained, it corrected rather sharply in the following
weeks in spite of strong seasonals. And of course as the gold
stocks’ primary driver, it easily dragged down the HUI with it. The key lesson here is not to trade on
seasonals independent
of considering technicals and sentiment. An overbought price is still likely to
correct no matter how strong its seasonals happen
to be, while an oversold one is still likely to rally even if its seasonals are weak then.
Think of seasonals like
prevailing winds. As all pilots
know, a tailwind is far preferable to a headwind. Even though an airplane’s
engines are its primary driver, bucking a headwind leads to a slower trip
that consumes considerably more fuel.
But a tailwind makes the same journey faster and more economical. Favorable seasonals
are like a tailwind, providing an additional bullish boost to prices as long
as they aren’t overbought and sentiment isn’t too greedy yet.
And in the case of gold stocks today, both
conditions are true. Trading down
near its 200-day moving average, the HUI is nowhere close to being
overbought. And far from being
greedy, traders are actually pretty apathetic towards gold stocks today. And this is certainly understandable
since the HUI has merely been grinding sideways on balance for an entire year now. It hasn’t advanced much at all
in 2011.
Nevertheless, as I wrote in late October right at
the best seasonal buying opportunity of the year, gold stocks remain very cheap relative to gold. Fundamentally if anything they are
very oversold, languishing at prices that reflect gold prices far lower than
today’s prevailing ones. So
the seasonal tailwinds we now enjoy entering this strongest time of the year
for gold stocks are very bullish given this sector’s technical, sentimental,
and fundamental backdrop.
At Zeal we’ve been trading this secular
gold-stock bull since its humble beginning, when gold was considered a dead
relic and languished under $300.
Over the past decade we zealously studied gold, as well as other
commodities and the stock markets, with the explicit goal of using our
hard-won knowledge to make superior trades. And we’ve been blessed with much
success. Since 2001, all 591 stock trades
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The bottom line is the strong demand-driven gold
seasonality naturally drives parallel seasonality in the gold stocks. They mirror and amplify the seasonal
rallies and slumps in the metal that ultimately drives their profits and
hence stock prices. Gold-stock
traders can use this sector’s seasonality to increase their odds of
buying relatively low and selling relatively high within a calendar
year. It’s a valuable
trading tool.
But as always seasonality is merely a secondary
driver, subordinate to sentiment and technicals. Strong seasonality won’t propel
already-overbought prices higher, nor will weak seasonality retard oversold
ones from rallying. Thankfully
this year as we enter gold stocks’ strongest seasonal rally, they are
far from overbought and few traders are excited about their potential. So today’s seasonal tailwinds
are very bullish for the coming months.
Adam Hamilton,
CPA
Zealllc.com
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Adam? I would be more than happy to address them through my
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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
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though and really appreciate your feedback!
Copyright 2000
- 2006 Zeal Research (www.ZealLLC.com)
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