Gold Mining Stocks Winter Rally / Commodities / Gold and Silver Stocks 2019

The gold miners’ stockshave surged in 2019, blasting higher after gold’s first bull-market breakout seenin several years.  That powerful summer rallyleft them really overbought, necessitating a correction to rebalance exuberantsentiment.  That grinding consolidationlower has set them up nicely for their winter rally, this sector’sseasonally-strongest time of the year.  Theseseasonal tailwinds will amplify their next upleg.

Seasonality is the tendency for prices toexhibit recurring patterns at certain times during the calendar year.  While seasonality doesn’t drive price action,it quantifies annually-repeating behavior driven by sentiment, technicals, and fundamentals.  We humans are creatures of habit and herd,which naturally colors our trading decisions. The calendar year’s passage affects the timing and intensity of buyingand selling.

Gold stocks exhibit strong seasonalitybecause their price action mirrors that of their dominant primary driver,gold.  Gold’s seasonality generally isn’tdriven by supply fluctuations like grown commodities see, as its mined supply remains relatively steady year-round.  Instead gold’s major seasonality is demand-driven, with global investmentdemand varying considerably depending on the time in the calendar year.

This gold seasonality is fueled bywell-known income-cycle and culturaldrivers of outsized gold demand from around the world.  And the biggest seasonal surge of all is justgetting underway heading into winter.  Asthe Indian-wedding-season gold-jewelry buying that normally drives this metal’s big autumn rally windsdown, the Western holiday season ramps up. The holiday spirit puts everyone in the mood to spend money.

Men splurge on vast amounts of gold jewelryfor Christmas gifts for their wives, girlfriends, daughters, and mothers.  The holidays are also a big engagementseason, with Christmas Eve and New Year’s Eve being two of the biggest proposalnights of the year.  Between a third to ahalf of the entire annual sales ofjewelry retailers come in November and December!  And jewelry historically dominates overallgold demand.

According to theWorld Gold Council’s latest data, between 2014 to 2018 jewelry accountedfor fully 58%, 57%, 47%, 53%, and 51% of total annual global gold demand.  That averages out to 53%, which is far biggerthan investment demand.  During thosesame last 5 years, that weighed in at just 20%, 22%, 37%, 30%, and 26% toaverage 27% of the world total.  Jewelry is nearly twice as large as investmentdemand!

That frenzied Western jewelry buyingheading into winter shifts to pure investment demand after year-end.  That’s when Western investors figure out howmuch surplus income they earned during the prior year after bonuses andtaxes.  Some of this is plowed into goldin January, driving it higher.  Finallythe big winter gold rally climaxes in late February on major Chinese New Yeargold buying flaring up in Asia.

So during its bull-market years, gold hasalways tended to enjoy major winter rallies driven by these sequential episodesof outsized demand.  Naturally the goldstocks follow gold higher, amplifying its gains due to their great profitsleverage to the gold price.  Today goldstocks are now once again heading into their strongest seasonal rally of theyear, driven by this annually-recurring robustwinter gold demand.

Since it is gold’s own demand-drivenseasonality that fuels gold stocks’ seasonality, that’s logically the bestplace to start to understand what’s likely coming.  Price action is very different between bulland bear years, and gold remains in a younger bull market.  After falling to a 6.1-year secular low inmid-December 2015 as the Fed kicked off its latest rate-hike cycle, goldpowered 29.9% higher over the next 6.7 months.

Crossing the +20% threshold in March 2016confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthyselling was greatly exacerbated after Trump’s surprise election win.  Investors fled gold tochase the taxphoria stock-market surge.  Gold’scorrection cascaded to monstrous proportions, hitting -17.3% in mid-December2016.  But that remained shy of a newbear’s -20%.

Gold rebounded sharply from those anomaloussevere-correction lows, nearly fully recovering by early September 2017.  But gold failed to break out to newbull-market highs, then and several times after.  That left gold’s bull increasingly doubted, untilJune 2019.  Then gold surged to a major decisive breakout confirmingits bull remains alive and well!  Itstotal gains grew to 47.8% in early September, stillsmall for gold.

Gold’s last mighty bull market ran fromApril 2001 to August 2011, where it soared 638.2% higher!  And while gold consolidated high in 2012,that was technically a bull year too since gold just slid 18.8% at worst fromits bull-market peak.  Gold didn’t enterformal bear-market territory until April 2013, thanks to the crazy stock-market levitation drivenby extreme distortions from the Fed’s QE3 bond monetizations.

So the bull-marketyears for gold in modern history ran from 2001 to 2012, skipped the interveningbear-market years of 2013 to 2015, then resumed in 2016 to 2019.  Thus these are the years most relevant tounderstanding gold’s typical seasonal performance throughout the calendaryear.  We’re interested in bull-market seasonality, because goldremains in its younger bull today and bear-market action is quite dissimilar.

Prevailing gold pricesvaried radically throughout these modern bull-market years, running between $257when gold’s last secular bull was born to $1894 when it peaked a decade later.  All these years along with gold’s latest bullsince 2016 have to first be rendered in like-percentageterms in order to make them perfectly comparable.  Only then can they be averaged together todistill out gold’s bull-market seasonality.

That’s accomplished by individually indexing each calendaryear’s gold price action to its final close of the preceding year, which isrecast at 100.  Then all gold priceaction of the following year is calculated off that common indexed baseline, normalizingall years regardless of price levels.  Sogold trading at an indexed level of 105 simply means it has rallied 5% from theprior year’s close, while 95 shows it’s down 5%.

This chart averages theindividually-indexed full-year gold performances in those bull-market yearsfrom 2001 to 2012 and 2016 to 2018.  2019isn’t included yet since it remains a work in progress.  This bull-market-seasonality methodologyreveals that gold’s strongest seasonal rally by far is its winter one which tends to start in late October.  That portends big gains in coming months fromcorrection-depressed gold stocks.

During these modernbull-market years, gold has enjoyed a pronounced and strong seasonal uptrend.  This whole concept of seasonality relies onblending many years together, smoothing away outliers to reveal underlying coretendencies.  On average by year-ends, goldhas powered 14.8% higher from theprior-year-final-close 100 baseline!  Andthe majority of these major gains accrue during the winter rally.

On average gold’swinter rally starts powering higher in late October, right after the seasonalcorrection following gold’s autumn rally. This major winter-rally bottoming has technically averaged out to arriveon that month’s 16th trading day, which was October 22nd this year.  But gold’s powerful bull-breakout rally leftit with an extreme gold-futures-sellingoverhang, which sure ramps up the odds its bottoming will be delayed.

Seasonality defines meretendencies over long spans, not primary drivers.  And seasonals often exhibit mean-reversionpatterns after major price moves.  Thatmay moderate some of gold’s early-winter-rally potential this year.  Gold’s autumn rally naturally comes beforeits winter rally, running from mid-June to late September in these modernbull-market years.  These autumn rallies haveaveraged modest 5.7% gains.

But late this past Junesoon after that seasonal rally started, gold achieved that glorious decisivebull-market breakout.  That radicallyimproved psychology, unleashing a deluge of new buying from both gold-futures speculatorsand normal gold investors.  So over that usual autumn-rally span, goldsurged 13.6% higher this year!  That’s2.4x the seasonal average, major outsized gains, which may have pulled forwardbuying.

After its autumn rally,gold suffers a seasonal correction running from late September to late October.  It is the most severe of all gold’s seasonalcorrections, dragging this metal down from its seasonal uptrend’soverhead-resistance line back to its lower support.  That pre-winter-rally seasonal correction hasrun 1.9% on average.  This year gold fella worse-than-normal 2.8% in that span, part of a larger 5.2% pullback.

That still left goldentering its seasonally-strongest span at higher levels than normal, 1.080xits 200-day moving average this year! Over the past 5 years, at that late-October seasonal bottoming gold wasonly trading at a tight average of 0.987x its 200dma.  So gold being much higher than usual headinginto its strongest season may retard its coming winter-rally gains.  But they could still prove large on pure sentiment.

Rather than buying lowlike they are supposed to, investors instead love buying high.  They love chasing winners, throwing morecapital at them the higher they run. Gold’s powerful summer surge this year has left investors far more excitedabout and bullish on gold than they were in all recent late Octobers.  So gold’s self-reinforcing new-high psychologycould really unleash a much-larger-than-normal winter rally.

Whether gold’s coming seasonalgains prove smaller or bigger than usual, its strong season is still well worthriding.  It starts with November, whichhas seen big average gold gains of 2.7% from 2001 to 2012 and 2016 to2018.  That makes for gold’ssecond-strongest month of the calendar year! After that surge gold tends to consolidate high in December, which hasaveraged comparatively-unimpressive 1.0% gains.

But then comes January,which enjoys major gold demand after investors figure out how much surplusincome they generated the prior year. January’s average 3.1% gains are the largest seen out of all the calendarmonths!  That momentum coasts intoFebruary, which is no slouch either averaging 1.9% gains.  Gold’s 4.1-month-long winter rally is theonly seasonal one commanding a cluster of big-gold-rally months.

So late October to lateFebruary is when gold enjoys peak seasonal tailwinds.  This can really amplify gold’s gains if it isalready heading higher for sentimental, technical, or fundamental reasons.  After gold’s powerful decisive-bull-breakoutsurge this past summer, investors are more excited about gold than they’ve beenin years.  So the alluring new-high psychologycould unleash sentiment-fueled momentum buying.

The bigger gold’swinter rally, the better the gold miners’ stocks will perform during this samecoming seasonally-strong timeframe.  Thegold stocks enjoy powerful sentimental and fundamental boosts when gold ralliesconsistently.  Higher gold prices turntrader sentiment bullish on its miners, motivating them to deploy capital whichforces gold-stock prices higher.  Thatbullish psychology is fundamentally justified this year.

Gold-mining profits reallyamplify underlying gold gains.  Thehigher gold prices flow directly through to bottom lines, as production costsare largely fixed when mines are being planned. Gold miners’ profits leverage to gold is really important tounderstand, illuminating why gold stocks are the best way to ride gold’s majorseasonal rallies.  The gold miners’ earnings should explode higher ongold’s breakout surge!

The leading gold-stockinvestment vehicle is the GDX VanEck Vectors Gold Miners ETF.  It includes the world’s biggest and bestmajor gold miners.  Every quarter Ianalyze the latest operational and financial results from GDX’s elite goldstocks.  While this current Q3’19earnings season is well underway, it won’t be finished until mid-November.  So the latest full results available arestill Q2’19’s, which proved strong.

That quarter the GDXgold miners reported average all-in sustaining costs of $895 per ounce.  That was much lower than gold’s average priceof $1309, yielding industry profits of $414 per ounce.  But gold’s breakout-surge-fueled uplegcatapulted its prices radically higher in the recently-finished Q3’19.  That left the average gold price a stupendous 12.6% higher quarter-on-quarter near $1474!  That’s a massive jump.

These much-higher prevailinggold prices greatly amplify gold-mining earnings.  The major gold miners’ AISCs don’t changemuch quarter-to-quarter regardless of prevailing gold prices.  They averaged a tight $889 over the last 4quarters.  Assuming that holds in Q3, GDX’smajor gold miners’ profits have likely skyrocketed 41.3% QoQ!  Much-higher gold prices make huge gold-stockgains fundamentally-righteous.

A big gold-stock winterrally is certainly justified this year after gold’s bull-breakout surge.  This next chart applies this same seasonal methodologyto the traditional HUI NYSE Arca Gold BUGS Index.  We can’t use GDX here since its price historyis insufficient, it was only born in May 2006. But since GDX and the HUI hold most major gold miners in common, they closely mirror eachother.  Gold stocks see big winterrallies.

During these samemodern gold-bull-market years of 2001 to 2012 and 2016 to 2018, the gold stocksas measured by the HUI enjoyed average gains of 14.9% between late October tolate February.  That also makes the goldstocks’ winter rally their largest seasonal one of the year, bestingboth the spring rally’s 12.2% gain and autumn rally’s 9.3% upside.  Gold stocks enjoy their best cluster ofstrong monthly rallies now.

The monthlyperformances underlying these calendar-year seasonals are easier to understand ifgold-stock seasonality is instead sliced into months.  This next chart does just that, offering amore-granular perspective on seasonality. Each calendar month in these same modern bull-market years is individuallyindexed to 100 as of the previous month’s final close, then all like months’ indexesare averaged together.

From 2001 to 2012 and2016 to 2018, the major gold stocks averaged strong 4.1% gains in Novembers.  That ranks it as the third-best calendarmonth of the year for gold miners.  Theirdrop off in December is much milder than gold’s too, as that month still enjoysgood 2.9% average gains.  Then Januarypicks up quite dramatically with a 3.8% average surge, while February’s 4.2% isthe second best of the calendar year!

Gold stocks’ winterrally is unique in not seeing any significant weakness within its span, unlikeboth the spring and autumn rallies which suffer sizable mid-run pullbacks.  There’s been no better time seasonally to beheavily deployed in gold stocks in these modern bull-market years than this late-October-to-late-Februarywinter-rally span.  Gold stocks’ collectiveperformance in coming months largely depends on gold’s.

The more gold rallies,the more bullish speculators and investors will grow on its miners’stocks.  And the more capital they willdeploy, bidding gold-stock prices higher. If gold’s powerful autumn rally pulled forward too much buying, lower winter-rallygold gains will certainly weigh on gold stocks’ upside.  But if new-high psychology flourishesin gold driving it considerably higher, the gold stocks will certainly soaragain.

Their recent massiveautumn-rally surge highlights how fast they can rocket with gold rallyingmaterially.  Between mid-June to lateSeptember, the major gold stocks per the HUI blasted 28.4% higher.  That is 3.1x better than gold stocks’ averageautumn rally, a really-strong run.  Despitethat surge they still have real potential to see those outsized gainscontinuing during their coming winter rally, for multiple reasons.

Fundamentally lastquarter and the current Q4’19 are almost certain to see the gold minersenjoying their best earnings in years, both in absolute and growth terms.  That’s going to validate traders’ decisionsto allocate capital to this high-flying sector. Despite gold’s healthy bull-market correction, so far in Q4 its high $1494average price still rivals Q3’s $1474. Much-higher gold-mining profits will fuel big investment demand.

In addition the gold stocksremain really undervalued relative to gold, the dominant driver of theirprofits.  A quick proxy for this is foundin the GDX/GLD Ratio,the daily close in GDX divided by the daily close in the leading GLD SPDR GoldShares gold ETF.  This GGR hit 0.211x inearly September as the latest gold-stock upleg peaked, which was a 2.5-yearhigh.  At worst by mid-October the GGR slumpedback to 0.188x.

Since this gold-stockbull was born in mid-January 2016, its average GGR has run 0.187x.  But when gold is rallying consistently onbalance and gold-stock traders wax bullish, gold stocks tend to shoot wayhigher relative to gold.  In thesummer of 2016 when gold stocks were last in favor, the GGR averaged 0.244x.  To regain that GDX would have to rally about 25%from late-October levels, assuming gold is just flat.

And the GGR was much higherin the past when gold-stock psychology was much better.  Between GDX’s birth in May 2006 and August2008 before gold stocks were ravaged in the first stock panic in a century, theGGR averaged 0.583x.  From 2009 to 2012,the normal post-panic period before extreme Fed QE distortions started guttinggold, the GGR’s mean was 0.381x.  Recentyears’ low levels are an anomaly.

The gold miners’ stocksstill have vast lost ground to regain relative to gold.  That will gradually come as long as this goldbull continues powering higher on balance in the years ahead.  The GGR needs to mean revert dramaticallyhigher, arguing for better-than-normal gold-stock upside whenever goldrallies.  That includes in its seasonalwinter rally this year.  New-high psychologycould spawn outsized gold-stock buying.

Regardless of how itplays out over these next 4 months, gold and its miners’ stocks are now enteringtheir seasonally-strongest span of the year.  So once gold’s own indicators including speculators’ gold-futures positioning and gold’s overboughtness levels give the green light, traders shouldaggressively add fundamentally-superior gold and silver miners.  Their stock prices are likely to rally stronglyby late February.

The key to riding anygold-stock bull to multiplying your fortune is staying informed, both about broader markets and individualstocks.  That’s long been our specialtyat Zeal.  My decades of experience bothintensely studying the markets and actively trading them as a contrarian ispriceless and impossible to replicate.  Ishare my vast experience, knowledge, wisdom, and ongoing research through ourpopular newsletters.

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The bottom line is gold stocks are justentering their seasonally-strongest period of the year.  Their big winter rally is fueled by gold’sown, which is driven first by outsized demand from holiday jewelry buying andlater new-year investment buying.  Soboth the metal and its miners’ stocks have strong tendencies to rally betweenlate October to late February in bull-market years.  It’s the best calendar span to own goldstocks!

This year’s dawning winter rally has greatupside potential despite the big recent surges in gold and its miners’stocks.  Gold’s decisive bull-marketbreakout left traders way more excited about this sector than they’ve been inyears.  The resulting bullish new-highpsychology should feed on itself leading to growing capital inflows.  Gold stocks still have a long way up to go tonormalize relative to higher prevailing gold prices.

Adam Hamilton, CPA

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