Gold-Stock Summer Lows
Adam Hamilton
Archives
Jul 13, 2018
The gold miners' stocks have been drifting sideways to lower like usual in their summer doldrums. They are likely near their major seasonal lows ahead of a strong autumn rally, a great buying opportunity. Gold rebounding higher will be the primary driver fueling the gold-stock advance, dispelling today's bearish psychology. And strong Q2 production growth will likely play a sizable role in restoring favorable sentiment.
Market summers have long been gold's weakest time of the year seasonally. Junes and early Julies in particular are simply devoid of the big recurring demand spikes seen during most of the rest of the year. With traders vacationing to take advantage of warm sunshine and kids being out of school, markets take a back seat. So there's no outsized gold buying driven by income-cycle or cultural factors this time of year.
Back in early June I published my latest research on gold's summer doldrums, which forecast the usual sideways-to-lower early-summer grind this year. And as goes gold, so go silver and the stocks of their miners. Gold stocks struggle to make any significant headway when gold is drifting listlessly, which of course really taints precious-metals sentiment. These summer doldrums simply have to be endured.
With 2018's market summer half over, the gold stocks have tracked their typical seasonal trading pattern quite well. Both the benchmarkHUI NYSE Arca Gold BUGS Index and the leading gold-stock ETFs have largely ground sideways as expected. They are the GDX VanEck Vectors Gold Miners ETF including larger companies, and the GDXJ VanEck Vectors Junior Gold Miners ETF which actually holds mid-tier ones.
While growing in popularity, these dominant gold-stock ETFs are relatively new. GDX and GDXJ were born in May 2006 and November 2009 respectively. While they closely mirror the HUI's price action, they lack the extensive price history necessary to distill out seasonal trends. So this first chart updated from my summer-doldrums research uses the HUI to show gold-stock behavior in modern bull-market years.
Gold enjoyed a powerful bull market from 2001 to 2012, which catapulted the HUI an amazing 1664.4% higher over 10.8 years between November 2000 to September 2011! After gold's own bull-market gain of 638.2% in roughly that same span, it rolled over into a brutal bear market from 2013 to 2015. Then gold started marching higher in a new bull that still persists, so bull-market years resumed from 2016 to 2018.
Gold stocks' summer price action in all these modern bull-market years is rendered in this chart. All the yellow lines represent individual-year market summers starting with the HUI indexed at 100 as of the last pre-summer closes on Mays' final trading days. This indexing normalizes very-different prevailing levels of gold-stock prices over the years, making them all comparable. A 5% summer rally shows up as 105 indexed.
All this normalized summer trading action from 2001 to 2012 and 2016 to 2017 is then averaged together in the red line, revealing gold stocks' core underlying summer trend. Finally the current summer-of-2018 gold-stock price action is superimposed over the top in blue. The gold miners' stocks are doing exactly what they usually do this time of year, drifting sideways to lower. That shouldn't have surprised anyone.
The gold stocks rarely fare very well in Junes and Julies. On average the HUI rallied 0.8% in Junes in these modern bull-market years, before retreating 0.2% in Julies. That makes for the summer-doldrums drift clearly seen here. On average gold stocks slump 2.3% from the ends of Mays into their big seasonal lows in mid-Junes. This mean smoothes out a consolidation range mostly running +/-10% from Mays' final closes.
While this summer's gold-stock action has been weaker than the bull-year average, it still remains well within that trend. In this summer of 2018 the HUI fell 3.1% in June, driven by gold crumbling lower under extreme selling pressure from gold-futures speculators. Ultimately gold stocks mirror and amplify what gold is doing, since its price drives their profitability. Major gold stocks' leverage to gold generally runs 2x to 3x.
This sector's likely summer-doldrums nadir came later than usual in late June, when the HUI had fallen 5.3% month-to-date. But the gold stocks soon bounced and nearly regained their mean, returning them to flat summer-to-date earlier this week. So the summer-2018 gold-stock price action has been perfectly normal so far. This low consolidation doesn't need to dishearten students of market history who saw it coming.
Investors and speculators alike tend to get down on the gold miners in market summers, either worrying their stock prices are heading even lower or ignoring them entirely. That's a huge mistake, as the gold stocks' summer-doldrums lows mark the best seasonal buying opportunities of the entire year! After the first halves of market summers pass, gold stocks start powering higher in a series of major seasonal rallies.
Following those weak bull-market-year average performances of +0.8% in Junes and -0.2% in Julies, the HUI has surged 4.2% higher in Augusts on average! That's when gold stocks' major autumn rallies really begin marching higher, fueled by gold's own major autumn rallies. This chart looks at the overall gold-stock seasonals in these same modern bull-market years of 2001 to 2012 and 2016 to 2017. This is also indexed.
Each calendar year's HUI price action is individually indexed to 100 as of the final close of the preceding year. Then all years' indexes are averaged together to distill out gold stocks' core bull-market seasonal tendencies. A 120 level means the HUI has rallied 20% year-to-date. This sector's major seasonal lows this time of year are readily evident, showing the outstanding seasonal buying opportunities in Junes and Julies.
The gold miners' stocks tend to slide initially in early Junes, rally out of those lows, and then slump back near them again in late Julies. As these seasonal tendencies are mere averages, the exact summer lows are not precise. They can come anytime between early June and early August. The weaker gold stocks are earlier in market summers, the higher their odds of decisively bottoming. That concludes their weak season.
Following the summer doldrums, gold stocks tend to enjoy a series of major autumn, winter, and spring seasonal rallies. In these modern bull-market years of 2001 to 2012 and 2016 to 2017, the average HUI gain between late July and late September has run 10.5%. That's fairly large for a long-term average even though the autumn rally is the weakest major seasonal one of the year. Its upside is still well worth riding.
Last year was a great example. The gold stocks bottomed in early July 2017 on the same day as gold, Jobs Friday. From there they started climbing higher again with gold after speculators' extreme gold-futures selling had exhausted itself. Over the next 2.0 months, the HUI surged 22.7% higher in a nice autumn rally. That doubled gold's own autumn rally of 11.2% over that same span making for 2.0x upside leverage.
Both GDX and GDXJ had similar 2017 autumn rallies, weighing in at +20.2% and +20.4%. But plenty of the best mid-tier and junior gold miners with superior fundamentals had gains well exceeding the major gold miners that dominate the HUI. GDXJ in particular has seen radical composition changes in the past year shifting to mid-tier gold miners, so its coming autumn-rally upside ought to exceed the HUI's and GDX's.
Generally the smaller a gold miner in market-capitalization terms, and the better its fundamentals from a production-growth, mining-cost, and profitability standpoint, the more its stock-price gains outperform the major gold miners controlling the HUI and GDX. So a carefully-handpicked portfolio of the best mid-tier and smaller gold miners should enjoy autumn-rally gains much better than the overall sector average.
Investors and speculators alike ignore gold stocks during the summer doldrums until gold itself starts to recover. As its usual autumn rally starts modestly in Julies before accelerating in Augusts, gold-mining stocks see growing capital inflows. That shifts sentiment out of summers' bearishness and apathy back towards bullishness. The more gold stocks advance in this virtuous circle, the more traders pay attention to them.
In terms of news flow from individual gold miners, traders often prize production growth most highly of all. The gold miners have little control over their selling prices, which are dictated by the global gold markets. Their profit margins are the difference between prevailing gold prices and mining costs. So higher gold production increases both cash flows generated from operations and earnings, while lowering per-ounce costs.
At Zeal we've been taking advantage of these summer doldrums in recent weeks to aggressively deploy new gold-stock and silver-stock trades as explained in our newsletters. So I've spent lots of time going through individual miners to try and uncover the ones with superior fundamentals. That research has left me thinking a lot about how traders react to production news from individual miners. It's quite fascinating.
The new mid-tier gold miner Pretium Resources has been a great example in the past 9 months or so. It is ramping up its great new Brucejack gold mine in northwestern British Columbia, which first achieved commercial production a year ago in early July 2017. Ever since PVG's stock price has been a case study in how important production trends are for investment capital flows. We've traded and currently own this stock.
Bringing a new gold mine online for the first time is complicated and fluid. That's when actual real-world ore grades, mining efficiencies, and recoveries vary from the myriads of estimates made by geologists and engineers in the planning and construction phases. So mine managers have to go with the flow and adjust and optimize processes in real-time as gold mines ramp up. I've seen this many times over the decades.
But for some reason many traders don't understand this, and always assume the latest production report can be linearly extrapolated into the future. On October 11th, 2017, Pretium issued a press release right after its first full quarter of commercial production. It reported mining 82.2k ounces of gold in Q3'17, way better than traders were expecting. So they flooded into PVG stock bidding it 25.1% higher that day alone!
But on January 23rd, 2018, Pretium reported that Q4'17 production came in lighter at 70.3k ounces. It not only explained why in terms of new-mine operational challenges it was working to overcome, but it gave first-half-2018 guidance at a 175k-ounce midpoint. But excitable traders still freaked out about the declining production in Brucejack's second commercial quarter, pummeling PVG stock 26.5% lower that day!
On April 11th Pretium reported mining 75.7k ounces of gold in Q1'18, and reiterated that H1'18 guidance near 175k ounces confirming that production was forecast to surge in Q2'18. So PVG's stock soared 19.3% that day in exuberance. But again traders started to doubt whether Pretium could really deliver that implied huge production growth in Q2. So over the next several trading days PVG dropped 15.8%.
In our July 2018 Zeal Intelligence monthly newsletter published June 30th, I wrote regarding our open PVG trade "PVG ought to report excellent Q2 production in early July. It has given H1'18 guidance at a 175k-ounce midpoint as this new mine ramps up. Q1 was weaker at 75.7k, implying 100k+ ounces are likely in Q2! That would thrill unaware investors." Pretium would've warned if that guidance was in jeopardy.
Sure enough just this Monday July 9th, Pretium reported Q2'18 production large enough to exceed its H1'18 midpoint. Q2'18 saw a hefty 111.3k ounces of gold mined as Brucejack finally achieved steady-state production in its fourth quarter after going commercial. Yet the goofy oblivious traders still acted surprised, bidding PVG stock 14.6% higher that day alone! Traders really buy and sell on production news.
Pretium is just one small example, I could write books on what I've seen on this front over my decades of actively trading gold stocks. But the really interesting revelation I've had recently is Q2 production reports are what help end the summer doldrums! Gold rebounding remains the primary driver of the gold stocks' strong autumn rally, but I'm starting to think production growth plays a sizable role in turning sentiment around.
You'd think production is relatively constant year-round, as gold miners generally have the same capacity in terms of excavating, hauling, and processing ore quarter after quarter. But that's not the case because ore grades vary significantly to radically within gold deposits. With overall tonnage throughput fixed, ore grades translate into lower or higher quarterly production depending on the gold richness within that ore.
For some reason mine managers seem to universally choose to run lower-grade ores in Q1s, resulting in lower production. These Q1 results are published between early Aprils and mid-Mays, contributing to the weakening sentiment leading into the summer doldrums. My best guess is mine managers want to take production hits early in calendar years rather than later to help maximize stock-price gains into year-ends.
That's when stock-based compensation like options are decided. So any slower production necessary from digging through lower-grade ores on the way to better stuff is best absorbed early in years. Another factor is likely capital budgets, which are decided late in preceding years. Mine managers thus often feel flush with capital to invest in improving operations in early years, and that work sometimes disrupts mining.
This phenomenon is backed up by the best hard data in the world on global gold supply, which the World Gold Council publishes quarterly in its fantastic Gold Demand Trends reports. These offer the deepest fundamental view available on what's going on with gold, and are essential reading for everyone trading anything precious-metals-related. The WGC compiles the total global mined supply of gold every quarter.
Over the past 7 years between 2011 to 2017, the quarterly gold-production trends are quite pronounced. In quarter-on-quarter terms from Q4s to Q1s, global gold mine production fell sharply every single year in this span. Those absolute quarterly drops ranged from 6.9% to 11.7%, and averaged a hefty 9.1%! So when gold miners report their Q1 results late in market springs, sharply-lower quarterly production is the norm.
Investors and speculators unaware that this is typical start worrying, sometimes hammering stocks lower and usually getting more bearish on the gold miners in general. That feeds into the miserable psychology defining the summer doldrums. But once mine managers chew through their lower-grade ores in Q1s, and finish their mining-disrupting investments, production improves dramatically in both Q2s and Q3s.
Per that same comprehensive WGC data, Q2s from 2011 to 2017 saw absolute QoQ production growth averaging 6.4%. So when Q2 results are reported between early Julies to mid-Augusts, traders think the gold miners are growing strongly. That starts turning sentiment around, restoring some bullishness and beginning to return gold miners to favor. We're just entering that perspective-altering Q2 earnings season now.
Gold production continues growing into Q3s, which saw even-stronger 6.7% average absolute growth from Q2s in 2011 to 2017! The Q3 reporting season runs from early Octobers to mid-Novembers, which gives gold stocks nice boosts into year-ends. That's part of their major winter rallies, which are their strongest seasonal surges of the year. That leaves gold-stock prices high when year-end bonuses are calculated.
This same years-old gold-mining cycle is playing out again this year, which increases the odds the gold stocks are now bottoming near summer lows. As more and more of the good gold miners included in GDX and GDXJ report Q2 results, they will be bid higher as traders like their quarterly production growth. That also serves to lower per-ounce costs, spreading the big fixed costs of gold mining across more ounces.
Lower all-in sustaining costs driven by higher production make the gold miners more profitable, further improving traders' sentiment. All this means we are entering the psychological sweet spot for the gold miners over the next half-year or so. Now is the time to get deployed, to aggressively buy low before the gold miners stage another major autumn rally and head much higher. Gold stocks are dirt-cheap today!
While investors and speculators alike can certainly play gold stocks' coming powerful uplegs with the major ETFs like GDX and GDXJ, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will far exceed the ETFs, which are over-diversified with underperforming stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.
At Zeal we've literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when. As of the end of Q2, this has resulted in 1012 stock trades recommended in real-time to our newsletter subscribers since 2001. Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +19.3%!
The key to this success is staying informed and being contrarian. That means buying low before others figure it out, before undervalued gold stocks soar much higher. An easy way to keep abreast is through our 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale and see all our new trades!
The bottom line is gold stocks bottom around the middles of market summers. These major lows offer the best seasonal buying opportunities of the entire year. Gold stocks start powering higher again in mid-summers mainly because gold's own strong autumn rallies start getting underway. But the psychology surrounding gold stocks also gets a major boost from their big quarter-on-quarter production surges in Q2s.
As investors and speculators see Q2 results arrive between early Julies and mid-Augusts, they love the sharply-higher QoQ gold mined. That leaves the gold miners' fundamentals looking much stronger, also lowering costs and increasing profitability. Traders who want to ride these big autumn rallies need to be largely deployed before most of this parade of good Q2 results arrives. Get buying before summer lows pass!
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Jul 13, 2018
Adam Hamilton, CPA
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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