Gold Stocks' Rally Autumn 2022 / Commodities / Gold and Silver Stocks 2022

The gold miners’ stockshave been thrashed in recent months, crushed as heavy futures selling slammedgold.  That obliterated any residual sectorbullishness, leaving gold stocks wildly-oversold and deeply-out-of-favor.  But having weathered a rough early summer,the battered miners and their metal are trudging back into their traditionalstrong season.  That begins with robustautumn rallies really accelerating in August.

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 display strong seasonalitybecause their price action amplifies 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.  Starting in late summers, Asian farmers beginto reap their harvests.  As they figureout how much surplus income was generated from all their hard work during thegrowing season, they wisely plow some of their savings into gold.  Asian harvest is followed by India’s famouswedding season.

Indians believe getting married duringtheir autumn festivals is auspicious, increasing the likelihood of long,successful, happy, and even lucky marriages. And Indian parents outfit their brides with beautiful and intricate22-karat gold jewelry, which they buy in vast quantities.  That’s not only for adornment on their weddingdays, but these dowries secure brides’ financial independence within theirhusbands’ families.

So during its bull-market years, gold has usuallytended to enjoy major autumn rallies driven by these sequential episodes ofoutsized demand.  Naturally the gold stocksfollow gold higher, amplifying its gains due to their profits leverage to thegold price.  Today gold stocks are onceagain back at their most-bullish seasonal juncture, the transition betweenthe typically-drifting summer doldrums and big autumn rallies.

Since it is gold’s own demand-drivenseasonality that fuels gold stocks’ seasonality, that’s logically the best placeto start to understand what’s likely coming. Price action is very different between bull and bear years, and gold remainsin a middle-aged bull market.  Afterfalling to a 6.1-year secular low in mid-December 2015 as the Fed kicked offits last rate-hike cycle,gold powered 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’s correction cascaded to serious proportions, hitting -17.3% inmid-December 2016.  But that remained shyof a new bear’s -20%.

Gold rebounded sharply from those severe-correctionlows, nearly fully recovering by early September 2017.  But it failed to break out to new bull-markethighs, then and several times after. That left gold’s bull increasingly doubted, until June 2019.  Then gold surged to a major decisive breakout confirmingits bull remained alive and well!  Its total gains grew to 96.2% over 4.6 years by early August 2020,still modest.

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 only 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 2022.  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 latest bull today and bear-market action is quite dissimilar.

Prevailing gold pricesvaried radically through these modern bull years, running between $257 whengold’s last secular bull was born to August 2020’s latest record high of $2,062.  All those long years with that vast range of goldlevels 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 110 simply means it has rallied 10% fromthe prior year’s close, while 95 shows it is down 5%.

This chart averages theindividually-indexed full-year gold performances in those bull-market years from2001 to 2012 and 2016 to 2021.  2022isn’t included yet since it remains a work-in-progress.  This bull-market-seasonality methodology revealsthat late summers are when gold’slong parade of big seasonal rallies really gets underway.  That starts with the major autumn rally whichis born in gold’s summer doldrums.

Unfortunately severalmonths ago in mid-April, gold started seriously diverging from seasonal norms.  Fed officials panicked over the raging inflation unleashed by their own colossal QE4 money printing. So they embarked on the most-extreme hawkish pivot in thiscentral bank’s entire century-plus history! A violent big-and-fast rate-hike cycle was launched, quickly followed bystarting to reverse QE4 through QT2 bond selling.

All that actual and threatenedFed tightening catapultedthe US dollar parabolic in an extreme rally.  That scared gold-futures speculators into aggressivelydumping longs while ramping up shorts. The resulting falling gold prices undermined investors’ bullishness, sothey joined in the selling.  That culminatedin gold plunging 14.3% at worst into mid-July! That left it languishing down 7.3% year-to-date, huge underperformance.

Gold does tend to carvea major seasonal bottom in thesummer doldrums, which births its subsequent autumn rally.  But seasonally during these modern-bull-marketyears, that has tended to arrive earlier in mid-June.  And gold fared much better on average, up5.8% YTD at its summer lull.  So the yellowmetal is seriously behind its seasonal-performance precedent this year dueto that super-anomalous US-dollar mania.

But despite gold’sbearish deviation in recent months, seasonals still turn strongly-bullish inlate summers.  That strength is mostlydriven by big marginal demand returning for Asian post-harvest buying followedby that Indian wedding season.  On averagein these modern gold-bull years from 2001 to 2012 and 2016 to 2021, goldpowered 5.8% higher between mid-June to late September!  That makes for a strong autumn rally.

Those seasonal gainsrank ahead of the springrally’s 4.1% average but behind the winter rally’s hefty8.2%.  The autumn rally gathers steam as summersmature, with June, July, and August seeing average gains of 0.1%, 1.1%, and2.0% during these bull years.  That makesthis seasonal strength well worth chasing. A typical 5.8% autumn rally off of mid-July’s deeply-oversold lows wouldstill carry gold back up near $1,794.

But because it wasbludgeoned so low by heavy gold-futures selling, gold’s autumn-rally upsidepotential this year is far greater than usual. On average in late September, this big seasonal surge has peaked withgold up 11.9% YTD.  Merely mean revertingback up to those seasonal norms would necessitate a big 20.8% upleg to $2,047!  Outsized autumn-rally gains followingexcessive selloffs actually aren’t unusual.

That last happened onlya couple years ago in late-summer 2020, after gold was sucked into that year’spandemic-lockdown stock panic.  Betweenits summer-doldrums low in early June to mid-September, gold blasted 16.3%higher!  Much of those strong gains werefueled by momentum buying as investors chased gold’s upside.  After tumbling into mid-July this summer,gold is sure set up for bigger seasonal gains.

Interestingly the autumnrally’s usual gold demand from Asia should prove outsized this year.  After each quarter, the World Gold Councilreleases excellent Gold Demands Trends reports detailing global gold supply anddemand.  The latest-available as I writethis essay covered Q1’22.  Both Chineseand Indian consumer gold demand shrunk sharply in this year’s opening quarter, plunging18.8% and 18.3% year-over-year!

Beijing’s controversialCOVID-Zero policy slammed Chinese gold demand in both Q1 and Q2.  The WGC wrote back in late April, “As strictlockdowns were imposed in March across key cities such as Shanghai andShenzhen, demand all but halted.”  Back thenthe WGC warned, “The usual seasonal Q2 decline is likely to be exaggerated bythe negative impact on jewellery demand of continued lockdown restrictions...”

When Chinese consumersare imprisoned in their apartments to slow COVID-19’s spread, they aren’t outbuying gold jewelry like usual.  Beijingfinally starting easing its Draconian restrictions through June, but there havebeen some local lockdowns since.  Goldshould see big rebound demand as normal life resumes.  In Q2’20 after China’s preceding lockdownquarter, its consumer gold demand soared 28.7% sequentially!

Indians weren’t paranoidabout COVID-19, but these shrewd gold buyers shied away with surging gold prices.  In Q1’22 gold averaged a lofty $1,879 inUS-dollar terms.  And from early Januaryto early March gold blasted 14.7% higher, cresting weeks after Russia invaded Ukraine.  That left Indians less interested in gold,since they never want to buy high.  Theirgold demand should also rebound with much-weaker prices.

Between mid-April tothe end of June, US-dollar gold plunged 8.6%. And quarter-to-date in this young Q3 as of mid-July, gold had droppedanother 6.1%.  So Indian consumer golddemand is also likely to see a strong recovery in this autumn-rally timeframe.  Last year’s third quarter saw Indians dramaticallyramp up their gold-jewelry buying by 40.4% quarter-on-quarter!  Something similar this year would really boostgold.

But the biggest probabledriver of an outsized gold autumn rally in the next couple months is a sharpUS-dollar selloff.  Between mid-Aprilto mid-July, the benchmark US Dollar Index skyrocketed up 8.8% in that extremeparabolic surge!  That violent lurchhigher on epic Fed tightening catapulted the USDX to a stunning 20.1-year secularhigh!  The US dollar wasextraordinarily-overbought, at unsustainable extremes.

Gold-futuresspeculators aggressivelydumped longs and added shorts while the world’s reserve currency screamed higher,clubbing gold like a baby seal 13.5% lower in that same span!  All that heavy selling exhausted these traders’capital firepower, leaving them positioned for massive mean-reversion buying as that wildly-overcrowded euphoric long-dollar trade inevitably reverses.  That will catapult gold sharply-higher.

As gold surges in asymmetrical recovery first on gold-futures short covering then later onmomentum-chasing gold-futures long buying, investors will start moving capitalback in to ride those gains.  And a weakerUS dollar should also boost traditional Asian gold demand during this autumnrally.  Since global gold is mostlypriced in US dollars then translated into local currencies, Chinese and Indianprices act differently.

If the Chinese yuan andIndian rupee rebound inversely-proportionally to the USDX’s fall, local goldprices could remain flattish despite dollar-gold surging.  However it plays out, yuan- and rupee-gold pricesshould lag dollar-gold’s surge.  And oncedollar-gold mean reverts higher building decisive momentum, American investorswill amplify gold’s autumn rally as Fed-money-printing-unleashed red-hot inflationrages.

That recent anomalousparabolic dollar surge temporarilydisconnected gold from its millennia-old role as the ultimate inflation hedge.  But as the dollar and gold mean-revert out oftheir recent extremes, gold will be remembered. With even lowballed headline CPI inflation running 9.1% YoY now, this isthe biggest inflation super-spike since the 1970s!  Gold’s performances during the last couple inthat decade were epic.

In monthly-average-priceterms from trough-to-peak CPI months, gold nearly tripled duringthe 1970s’ first inflation super-spike before more than quadrupling throughthe second!  As investors see today’s newestinflation super-spike devour their disposable incomes and ravage stock markets,they will remember gold and reallocate larger chunks of their portfolios intoit.  Gold’s autumn-rally setup this yearis exceptionally-bullish!

This next chart appliesthis same modern-gold-bull-year seasonality methodology to gold stocks.  Since GDX was born later in May 2006, itsprice history is insufficient for longer-term studies.  Thus the classic HUI gold-stock index is usedinstead.  GDX and the HUI closely track each other, theyare functionally-interchangeable containing most of the same large goldstocks.  Gold’s gains fuel their ownautumn rally.

On average during thesesame modern-gold-bull years of 2001 to 2012 and 2016 to 2021, gold stocks’autumn rally witnessed 9.5% gains between mid-June to late September.  While solid, that’s relatively-weak comparedto gold’s 5.8% autumn rally.  That onlymakes for 1.6x upside leverage, compared to GDX normally amplifying material goldmoves by 2x to 3x.  Gold stocks’autumn rally took a big hit last year.

The light-blue lines inthese charts show seasonals before 2021 was added in.  Prior to that gold stocks had averagedmuch-better autumn-rally seasonal performance of 11.2%.  Last year Fed hawkishness mounted duringthis late-summer timeframe, igniting big US-dollar buying and thus gold-futuresselling.  First Fed officials started predictingrate hikes, then began discussing slowing their extreme QE4 money printing.

So gold and gold stocks plunged sharply into late September, greatly dragging down seasonalaverages.  But those counter-seasonal lowsbirthed new uplegs in both gold and GDX, which powered 18.9% and 41.4% higherover the next 5.3 and 6.6 months!  So 2021’sautumn selloff skewing seasonals lower was an anomaly spawned by heavygold-futures selling as the USDX surged on Fed hawkishness, like recent months.

Seasonality merely revealstendencies over long spans.  Sentiment, technicals,and fundamentals remain the primary drivers of gold and its miners’ stocks.  While seasonals reflect how these average outacross calendar years, primaries can easily override seasonals in any givenyear.  Think of these primary driverslike engines in airplanes, with seasonals like tailwinds or headwinds that accelerateor retard their paths.

Because gold has outsizedautumn-rally potential this year, so do the deeply-oversold gold stocks.  At GDX’s normal summer-doldrums low in mid-June,the major gold stocks average 13.7% YTD gains. But at its brutal recent low in late July, GDX was down a dreadful 23.2%YTD!  That makes room for hugemean-reversion buying as gold recovers. That could catapult gold stocks back to normal autumn-rally levels.

Even after last year’sanomalous selloff dragged down gold-stock seasonals, GDX still averaged beingup 24.5% YTD in late September.  Just to regainthose normal levels, it would have to rocket 62.2% out of late July’s lows to $39.88!  While such a big run in sucha short period of time probably won’t happen, it gives an idea of how deeply-oversoldthe gold stocks are.  Even half thatwould make for a great autumn rally!

Like gold, gold-stock seasonalsimprove later in summers.  On average inthese modern-gold-bull years, the HUI or GDX climbed 1.3% in June, slumped backto a 0.8% gain in July, then really accelerated to big 3.5% gains in August!  That final month of summer has actuallyproven the fourth best of the year for the major gold stocks.  And this August could prove a blockbuster ifthese dollar and gold reversals accelerate.

This last chart slicesgold-stock seasonals into calendar months, using a similar methodology.  Each is indexed to 100 at the previous month’sfinal close, then all like-months’ indexes are averaged together.  These same modern-gold-bull years of 2001 to2012 and 2016 to 2021 are included. Between now and late September is an important time to be fully-deployed in gold stocks to ride their usual autumn rally!

While gold’s autumnrally gathers steam in July, the gold stocks lag.  Vacation season has to be a factor, withfewer traders paying close attention to the markets.  But gold stocks are ultimately leveragedplays on the metal they mine.  So even outsideof lazy summers, gold stocks only attract capital after gold has ralliedlong-enough and high-enough to start convincing traders it has decisive sustainablemomentum.

Thus gold stocks tendto enjoy strong catch-up gains in August as their metal’s autumn rallysolidifies.  The more gold and its minersrally, the more speculators and investors rush to buy to chase thosegains.  Another factor boosting thissector in late summers is Q2 earnings season, which runs from late July to mid-August.  The gold miners often report bigsequential production growth and lower costs in second quarters.

Better fundamentalresults combined with rallying gold prices and traders’ kids going back toschool have often proven a potent driver for big gold-stock gains.  And again this year’s setup for gold isexceptionally-bullish.  Huge gold-futuresmean-reversion buying is coming as the radically-overbought US Dollar Indexturns sharply-lower.  The faster goldsurges, the more capital will pour into gold stocks driving them higher.

While the major goldstocks of the HUI and GDX will amplify gold’s coming autumn-rally gains by 2xto 3x like usual, smaller fundamentally-superior mid-tier and junior goldminers will way-outperform.  Theyare more able to consistently grow their outputs, which lowers costs, boostsprofitability, and generates more cashflows for expansion.  These smaller gold miners are in the sweetspot for upside potential as gold runs.

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The bottom line is goldand its miners’ stocks are reentering their strong season.  That starts with nice autumn rallies mostlyin August and September, normally fueled by Asian seasonal gold demand.  That has excellent potential to prove largerthan usual this year as China rebounds from more lockdowns.  But much more important for gold this year isthe recent anomalous parabolic US-dollar rally decisively rolling over.

That will reverse theheavy gold-futures selling that pounded gold lower as the dollar soared into massivebuying.  First gold-futures short-covering,then momentum-chasing long buying, and finally investors piling on willcatapult gold and gold stocks sharply-higher. That could make for a heck of an autumn rally, mean reverting out of anomalousmid-summer lows during this super-gold-bullish first inflation super-spikesince the 1970s.

Adam Hamilton, CPA

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