Adam Hamilton: Gold Summer Doldrums Part Deux

Early summer is the weakest time of the year seasonally for gold, silver, and their miners' stocks. With traders' attention diverted to vacations and summer fun, their precious-metals interest and investment demand wane considerably. Thus this entire sector, and often the markets in general, suffer a seasonal lull this time of year. But these summer doldrums offer the best seasonal buying opportunities of the year.

This doldrums term is very apt for gold's summer predicament. It describes a zone in the world's oceans surrounding the equator. There hot air is constantly rising, creating long-lived low-pressure areas. They are often calm, with little or no prevailing winds. History is full of accounts of sailing ships getting trapped in this zone for days or even weeks, unable to make any 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 precious stores of food and drink. Without moving air, the stifling heat and humidity were suffocating on these ships long before air conditioning. Misery and boredom were 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 nearly every summer, gold starts drifting listlessly sideways. It often can't make significant progress no matter what the trends looked like heading into June, July, and August. As the days and weeks slowly pass, sentiment deteriorates markedly. Patience is gradually exhausted, supplanted with deep frustration. Plenty of traders capitulate, abandoning ship.

Thus after decades of trading gold, silver, and their miners' stocks, I've come to call this time of year the summer doldrums. Junes and Julies in particular are usually desolate sentiment wastelands for precious metals, totally devoid of recurring seasonal demand surges. Unlike the rest of the year, these summer months simply lack any major income-cycle or cultural drivers of outsized gold investment demand.

The vast majority of the world's investors and speculators live in the northern hemisphere, so markets take a back seat to the great joys of summer. Traders take advantage of the long sunny days and kids being out of school to go on extended vacations, hang out with friends, and enjoy life. And when they aren't paying much attention to the markets, naturally they aren't allocating much new capital to gold.

Given gold's dull summer action historically, it's never wise to expect too much from it this time of year. Summer rallies can happen, but they aren't common. So expectations need to be tempered, especially in June and July. That early-1990s Gin Blossoms song "Hey Jealousy" comes to mind, declaring "If you don't expect too much from me, you might not be let down." The markets are ultimately an expectations game.

Quantifying gold's summer seasonal tendencies during bull markets requires all relevant years' price action to be recast in perfectly-comparable percentage terms. That's accomplished by individually indexing each calendar year's gold price to its last close before market summers, which is May's final trading day. That's set at 100 and then all gold-price action that summer is calculated off that common indexed baseline.

So gold trading at an indexed level of 105 simply means it has rallied 5% from May's final close, while 95 shows it's down 5%. This methodology renders all bull-market-year gold summers in like terms. That's critical since gold's price range has been so vast, from $257 in April 2001 to $1894 in August 2011. That span encompassed gold's last secular bull, which enjoyed a colossal 638.2% gain over those 10.4 years!

So 2001 to 2011 were certainly bull years. 2012 was technically one too, despite gold suffering a major correction following that powerful bull run. At worst that year, gold fell 18.8% from its 2011 peak. That was not quite enough to enter formal bear territory at a 20% drop. But 2013 to 2015 were definitely brutal bear years, which need to be excluded since gold behaves very differently in bull and bear markets.

In early 2013 the Fed's wildly-unprecedented open-ended QE3 campaign ramped to full speed, radically distorting the markets. Stock markets levitated on the Fed's implied backstopping, slaughtering demand for alternative investments led by gold. In Q2'13 alone, gold plummeted by 22.8% which proved its worst quarter in an astounding 93 years! Gold's bear continued until the Fed's initial rate hike of this cycle in 2015.

The day after that first rate hike in 9.5 years in mid-December 2015, gold plunged to a major 6.1-year secular low. Then it surged out of that irrational rate-hike scare, formally crossing the +20% new-bull threshold in early March 2016. Ever since, gold has remained in this young bull. At worst in December 2016 after gold was crushed on the post-election Trumphoria stock-market surge, it had only corrected 17.3%.

So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2018. Thus these are the years most relevant to understanding gold's typical summer-doldrums performance, which is necessary for managing your own expectations this time of year. This spilled-spaghetti mess of a chart is actually simple and easy to understand.

The yellow lines show gold's individual-year summer price action indexed from each May's final close for all years from 2001 to 2012 and 2016 to 2017. Together they establish gold's summer trading range. All those bull-market years' individual indexes are then averaged together in the red line, revealing gold's central summer tendency. Finally the indexed current-year gold action for 2018 is superimposed in blue.t

While there are outlier years, gold generally drifts listlessly in the summer doldrums much like a sailing ship trapped near the equator. The center-mass drift trend is crystal-clear in this chart. The vast majority of the time in June, July, and August, gold simply meanders between +/-5% from May's final close. This year that equates to a probable summer range between $1233 and $1363. Gold tends to stay well within trend.

Understanding gold's typical behavior this time of year is very important for traders. Sentiment isn't only determined by outcome, but by the interplay between outcome and expectations. If gold rallies 5% but you expected 10% gains, you will be disappointed and grow discouraged and bearish. But if gold rallies that same 5% and you expected no gains, you'll be excited and get optimistic and bullish. Expectations are key.

History has proven it's wise not to expect too much from gold in these lazy market summers, particularly June and July. Occasionally gold still manages to stage a big summer rally, which is a bonus. But most of the time gold doesn't veer materially from its usual summer-drift trading range, where it's often adrift like a classic tall ship. With range breakouts either way rare, there's usually little to get excited about.

In this chart I labeled some of the outlying years where gold burst out of its usual summer-drift trend, both to the upside and downside. But these exciting summers are unusual, and can't be expected very often. Most of the time gold grinds sideways on balance not far from its May close. Traders not armed with this critical knowledge often wax bearish during gold's summer doldrums and exit in frustration, a grave mistake.

Gold's summer-doldrums lull marks the best time of the year seasonally to deploy capital, to buy low at a time when few others are willing. Gold enjoys powerful seasonal rallies that start in Augusts and run until the following Mays! These are fueled by outsized investment demand driven by a series of major income-cycle and cultural factors from around the world. Summer is when investors should be bullish, not bearish.

The red average indexed line above encompassing 2001 to 2012 and 2016 to 2017 reveals gold's true underlying summer trend in bull-market years. Technically gold's major seasonal low arrives relatively early in summers, mid-June. On average through all these modern bull-market years, gold slumped 1.0% between May's close and that summer nadir. But that's probably still too early to deploy capital.

Check out the yellow indexed lines in this chart. They tend to cluster closer to flat-lined in mid-June than through all of July. The only reason gold's seasonal low appears in mid-June mathematically is a single extreme-outlier year, 2006. Gold's spring seasonal rally was epic that year, gold rocketed 33.4% higher to a dazzling new bull high of $720 in just 2.0 months between mid-March and mid-May! That was incredible.

Extreme euphoria had catapulted gold an astounding 38.9% above its 200-day moving average, radically overbought by any standard. That was way too far too fast to be sustainable, so after that gold had to pay the piper in a sharp mean-reversion overshoot. So over the next month or so into mid-June, gold's overheated price plummeted 21.9%! That crazy outlier is the only reason gold's major summer low isn't in July.

There were 14 bull-market years from 2001 to 2012 and 2016 to 2017. That's a big-enough sample to smooth out the trend, but not large enough to prevent extreme deviations from skewing it a bit. Gold's true major summer seasonal low is really closer to early-to-mid July. After that month's opening holiday week in the States to celebrate Independence Day, investment capital inflows usually start ramping back up.

On average in these modern bull-market years, gold slipped 0.2% in Junes before rallying 0.9% in Julies. After that first lazy summer week in July, gold tends to gradually start clawing its way higher again. But this is so subtle that Julies often still feel summer-doldrumsy. By the final trading day in Julies, gold is still only 0.7% higher than its May close kicking off summers. That's too small to restore damaged sentiment.

Since gold exited May 2018 at $1298, an average 0.7% rally by July's end would put it at $1307. That's hardly enough to generate excitement after two psychologically-grating months of drifting. But the best times to deploy any investment capital is when no one else wants to so prices are low. Gold's summer doldrums come to swift ends in Augusts, which saw hefty average gains of 2.2% in these bull-market years!

And that's just the start of gold's major autumn seasonal rally, which has averaged strong 6.6% gains between mid-Junes and late Septembers. That's driven by Asian gold demand coming back online, first post-harvest-surplus buying and later Indian-wedding-season buying. June is the worst of gold's summer doldrums, and the first half of July is when to buy back in. It's important to be fully deployed before August.

These gold summer doldrums driven by investors pulling back from the markets to enjoy their vacation season don't exist in a vacuum. Gold's fortunes drive the entire precious-metals complex, including both silver and the stocks of the gold and silver miners. These are effectively leveraged plays on gold, so the summer doldrums in them mirror and exaggerate gold's own. Check out this same chart type applied to silver.

Since silver is much more volatile than gold, naturally its summer-doldrums-drift trading range is wider. The great majority of the time, silver meanders between +/-10% from its final May close. That came in at $16.39 this year, implying a summer-2018 silver trading range between $14.75 and $18.03. While silver suffered that extreme June-2006 selling anomaly too, its major seasonal low arrives a couple weeks after gold's.

On average in these same modern bull-market years of 2001 to 2012 and 2016 to 2017, silver dropped 4.2% between May's close and late June. That's much deeper than gold's 1.0% seasonal slump, which isn't surprising given silver's leverage to gold. Silver's summer performances are also much lumpier than gold's. Junes see average silver losses of 3.3%, but those are more than made back in strong rebounds in Julies.

Silver's big 4.1% average rally in Julies amplifies gold's gains by an impressive 4.6x. But unfortunately silver hasn't been able to maintain that seasonal momentum, with Augusts averaging a slight decline of 0.3%. Overall from the end of May to the end of August, silver's summer-doldrums performance tends to be flat. Silver just averaged a 0.4% full-summer gain, way behind gold's 2.9% through June, July, and August.

That means silver sentiment this time of year is often worse than gold's, which is already plenty bearish. The summer doldrums are more challenging for silver than gold. Being in the newsletter business for a couple decades now, I've heard from countless discouraged investors over the summers. While I haven't tracked this, it sure feels like silver investors have been disproportionately represented in this feedback.

Since gold is silver's primary driver, this white metal is stuck in the same dull drifting boat as gold in the market summers. Silver usually amplifies whatever is happening in gold, both good and bad. But again the brunt of silver's summer weakness is borne in Junes. Fully expecting this seasonal weakness and rolling with the punches helps prevent being disheartened, which in turn can lead to irrationally selling low.

The gold miners' stocks are also hostage to gold's summer doldrums. This last chart applies this same analysis to the flagship HUI gold-stock index, which is closely mirrored by that leading GDX VanEck Vectors Gold Miners ETF. The major gold stocks tend to leverage gold's gains and losses by 2x to 3x, so it's not surprising that the HUI's summer-doldrums-drift trading range is also twice as wide as gold's own.

The gold miners' stocks share silver's center-mass summer drift running +/-10% from May's close. This year the HUI entered the summer doldrums at 180.1, implying a June, July, and August trading range of 162.1 to 198.1. While gold stocks' GDX ETF is too new to do long-term seasonal analysis, in GDX terms this summer range translates to $20.11 to $24.57 this year. That's based off a May 31st close of $22.34.

Like gold, the gold stocks' major summer seasonal low arrives in mid-June. On average in these modern bull-market years of 2001 to 2012 and 2016 to 2017, by then the HUI had slid 2.3% from its May close. Then gold stocks tended to more than fully rebound by the end of June, making for an average 0.8% gain that month. But there's no follow-through in July, where the gold stocks averaged a modest 0.2% loss.

Overall between the end of May and the end of July, which encompasses the dark heart of the summer doldrums, the HUI averaged a trivial 0.6% gain. Again two solid months of grinding sideways on balance is hard for traders to stomach, especially if they're not aware of the summer-doldrums drift. The key to surviving it with minimum psychological angst is to fully expect it. Managing expectations in markets is essential!

But also like gold, the big payoff for weathering the gold-stock summer starts in August. With gold's major autumn rally getting underway, the gold stocks as measured by the HUI amplify it with strong average gains of 4.2% in Augusts! And that's only the start of gold stocks' parallel autumn rally with gold's, which has averaged 10.5% gains from late Julies to late Septembers. Gold-stock upside resumes in late summers.

Like everything in life, withstanding the precious-metals summer doldrums is much less challenging if you know they're coming. While outlying years happen, they aren't common. So the only safe bet to make is expecting gold, silver, and the stocks of their miners to languish in Junes and Julies. Then when these drifts again come to pass, you won't be surprised and won't get too bearish. That will protect you from selling low.

This summer actually has a pretty interesting setup for gold that's more bullish than usual. Gold's short-term price moves are dominated by speculators' gold-futures trading. These guys have been selling like crazy since late April in response to a major short-squeeze rally in the US dollar. That's left their gold-futures long positions exceptionally low entering this summer, which is very unusual and quite bullish.

With total spec longs near the bottom of their past-year trading range, that sizable gold-futures selling that can hit in summers is likely already exhausted. The usual summer-doldrums gold-futures dump was effectively pulled forward, short-circuiting gold's spring rally. That means gold is much more likely than usual to see mean-reversion futures buying in the coming weeks, especially after next week's big FOMC meeting.

The Fed is universally expected to hike rates for the 7th time in this cycle on June 13th. That is one of the every-other FOMC meetings also accompanied by the newest dot-plot federal-funds-rate forecast by top Fed officials. And afterwards the Fed's new chairman Jerome Powell will hold a press conference. If any of this is less hawkish on more rate hikes than traders expect, speculators could aggressively buy gold futures.

Another counter-seasonal bullish factor for gold is today's radical gold underinvestment coupled with these hyper-complacent bubble-valued stock markets. Whenever the inevitable next major stock selloff arrives, which could be this summer, gold investment demand will surge. Stock selloffs are great for gold since it tends to rally when stocks weaken. That makes gold the ultimate portfolio diversifier during such times.

And with the Fed both relentlessly ratcheting up interest rates and accelerating its young quantitative-tightening campaign to start to unwind QE, the stock markets are facing mounting headwinds. The extreme central-bank liquidity that drove them so high is being reversed, a dangerous omen. Gold investment demand will start returning to favor in a big way whenever they decisively roll over, even if it happens this summer.

Smart contrarians who want to buy low realize gold's summer doldrums are a gift. They offer the best seasonal buying opportunities of the year in gold, silver, and their miners' stocks. This is not the time to disengage, but to do your research and get deployed in great gold and silver stocks at bargain-basement prices. They are wildly undervalued and basing today, ready to scream higher when gold sentiment turns.

We've been hard at work at Zeal in recent weeks preparing for these great summer buying opportunities. I've been researching the latest fundamentals of the world's best gold and silver miners to make a shopping list for the summer-doldrums lows. These coming trades will easily have the potential to double before next summer as the precious-metals sector mean reverts higher. Buying low is the key to big gains later.

Now is the time to get ready, so we share our research and trades via acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what's going on in the markets, why, and how to trade them with specific stocks. As of the end of Q1, all 998 newsletter stock trades recommended since 2001 have averaged stellar annualized realized gains of +19.4%! For just $12 an issue, you too can learn to think, trade, and thrive like contrarians. Subscribe today!

The bottom line is gold, silver, and their miners' stocks usually drift listlessly during market summers. As investors shift their focus from markets to vacations, capital inflows wane. Junes and Julies in particular are simply devoid of the big recurring gold-investment-demand surges seen during much of the rest of the year, leaving them weak. Investors need to expect lackluster sideways action on balance this time of year.

Gold's summer doldrums shouldn't be a psychological burden, as they are a great opportunity to buy low before major autumn rallies. Those tend to be stealthily born in early-to-mid Julies before accelerating in Augusts. So investors must do their research homework in early summers, in order to be ready to deploy capital in mid summers before sizable late-summer rallies. Summer doldrums should be embraced, not dreaded.

Adam Hamilton, CPA

June 8, 2018

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