Gold Stocks Seasonal Autumn Rally / Commodities / Gold and Silver Stocks 2019

The gold miners’ stockshave surged dramatically this summer, catapulted higher by gold’s majorbull-market breakout.  That atypicalstrength bucking the normal summer-doldrums slump has carried this sector rightback to its traditional strong season. That begins with a robust autumn rally starting in late summers.  This year’s autumn-rally setup is veryunusual, but investment buying could still fuel further gains.

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 supplyremains relatively steady year-round.  Instead gold’s majorseasonality is demand-driven, withglobal investment demand varying considerably depending on the time in thecalendar 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 theirwedding days, but these dowries secure brides’ financial independence withintheir husbands’ families.

So during its bull-market years, gold hasalways tended to enjoy major autumnrallies driven by these sequential episodes of outsized demand.  Naturally the gold stocks follow gold higher,amplifying its gains due to their profits leverage to the gold price.  Today gold stocks are once again back attheir most-bullish seasonal juncture, the transition between theusually-drifting summer doldrums and big autumn rallies.

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’s correction cascaded to monstrous proportions, hitting -17.3% inmid-December 2016.  But that remained shyof a new bear’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 since.  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 37.5% at best in mid-July, 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 driven by 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, and 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 inlike-percentage terms 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 late summers are whengold’s long parade of big seasonal rallies gets underway.  And that starts with the major autumn rallywhich is born in gold’s summer doldrums.

During these modernbull-market years, gold has enjoyed a strong and pronounced seasonaluptrend.  From thatprior-year-final-close 100 baseline, it has powered 14.8% higher on average byyear-ends!  These are major gains by anystandard, well worth investing for. While this chart is rendered in calendar-year terms since theseincrements are easiest for us to grasp, gold’s seasonal year actually starts in the summers.

Remember this wholeconcept of seasonality relies on blending many years together, smoothing awayoutliers to reveal core underlying tendencies. Seasonally gold tends to bottom in mid-June, but then still largelydrifts sideways in its summerdoldrums until early July.  Gold surebucked its weakest season this year, blasting sharply higher in June to that huge decisive bull-market breakout!  But seasonals remain relevant.

Tremendous buying was necessary to negate gold’s summer doldrumsin the last couple months, which largely came from gold-futuresspeculators.  But that nearly exhaustedtheir capital firepower available to buy, leaving a high selloff risk.  They could rapidly unwind theirexcessively-bullish bets if the right catalyst convinces them to exit.  The resulting quickly-cascading gold-futuresselling would kill gold’s autumn rally.

But gold’sbull-breakout momentum carrying it to its best levels in 6.2 years by mid-Julycould stave off the bearish mean reversion in spec gold futures.  Seeing gold hold over $1400 again hasunleashed new-high psychology, which powerfully motivates investors tobuy.  Investment capital inflows couldgrow and feed on themselves, amplifying gold’s upside during its autumn-rallyspan.  We still have to consider theseseasonals.

Interestingly at gold’stypical mid-June summer-doldrums lows that birth its major autumn rallies, ithas still been 5.8% higher year-to-date on average.  On that same trading day this year, gold hadalready been rallying but was still only up 4.6% YTD!  So gold remained relatively low thissummer compared to seasonal precedent when its autumn rallies normally getunderway.  There was lots of room forseasonal buying.

Gold’s autumn ralliesgenerally start grinding higher in Julies, which have seen modest average gainsof 0.5% in these modern bull-market years per this dataset indexed fromprior-year closes.  They accelerateconsiderably in Augusts, which is when that Asian harvest buying kicks intofull swing.  Gold averaged big 1.9% gainsin Augusts, which is its 4th-best month seasonally!  So traders need to be longgold by late Julies.

The upside momentum ingold’s strong autumn rallies only builds from there.  From 2001 to 2012 and 2016 to 2018,Septembers enjoyed hefty additional average gains of 2.5%!  That makes for gold’s 3rd best month of theyear, only behind Januaries’ 3.1% and Novembers’ 2.7%.  Gold’s autumn rallies generally running frommid-Junes to late Septembers have enjoyed sizable5.7% average gains in these bull years!

That’s certainly a nicerun higher in just 3.4 months.  For comparisonthe US benchmark S&P 500 stock index has averaged 8% annual returnshistorically.  So gold surging almost3/4ths that much in just over 1/4th the time is impressive.  And these autumn rallies are only thefirst third of gold’s strong season, which includes the much-larger winter rallies averagingbig 9.3% gains and smaller springrallies running 3.3%.

Together gold’s troikaof autumn, winter, and spring rallies carve its strong seasonal uptrendrendered in this chart.  These sequentialseasonal rallies begin right after gold’s weakest time of the year, normallythose summer doldrums which were short-circuited this year.  Speculators and investors alike can ride gold’sstrong bull-market seasonality in physical bullion or the leading GLD SPDR GoldShares gold ETF.

But the gold miners’ stocks well outperform gold’sunderlying seasonal gains, amplifying gold’s trio of big seasonal rallies.  The gold stocks enjoy powerful sentimentaland fundamental boosts when gold rallies materially.  Higher gold prices shock traders out of theirusual apathy for this small contrarian sector, restoring capital inflows.  The resulting gold-stock gains start shiftingsentiment back to bullish, fueling more buying.

And that is fundamentally-justified,as gold-mining profits really amplify underlying gold gains.  The higher gold prices flow directly throughto bottom lines, as production costs are largely fixed when mines are beingplanned.  Gold miners’ profits leverage to gold is important tounderstand, illuminating why gold stocks are the best way to ride gold’sseasonal uptrend.  The latest real-worlddata drives home this point.

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 financial and operational results from GDX’s elite goldstocks.  While this current Q2’19 earnings season iswell underway, it won’t be finished until mid-August.  So the latest full results available arestill Q1’19’s, which proved quite robust.

The GDX gold minersreported average all-in sustaining costs of $893 per ounce, whichis what it costs them to produce and replenish each ounce of gold.  AISCs don’t change much regardless ofprevailing gold prices, as mining still requires the same levels ofinfrastructure, equipment, and employees quarter after quarter.  From Q2’18 to Q1’19, the GDX gold miners’AISCs averaged $856, $877, $889, and $893.

That makes for $879AISCs over the past year.  Gold-miningprofits are the difference between prevailing gold prices and AISCs.  Q1’19’s $1303 average gold price and averageAISCs yielded industry profits of $410 per ounce.  So far in Q3’19, gold has averaged $1415which is a hefty 8.5% higher!  Assuminggold holds these levels and past-year AISCs persist like usual, gold miners areearning about $536 this quarter.

That is big 30.7%earnings growth on a mere 8.5% gold rally, making for 3.6x upside leverage!  This corefundamental relationship between mining profits and gold prices is why major goldstocks tend to amplify gold’s gains by 2x to 3x.  That leverage can grow much larger after goldstocks are really undervalued and out of favor. In roughly the first half of 2016, GDX skyrocketed 151.2% on a 29.9%gold upleg for 5.1x upside!

So gold stocks’ ownstrong bull-market seasonality is fully justified fundamentally.  This next chart applies this same seasonalmethodology to the flagship HUI NYSE Arca Gold BUGS Index.  We can’t use GDX for this study since itsprice history is insufficient, it was only born in May 2006.  But since GDX and the HUI hold most majorgold miners in common, they closelymirror each other.  Gold stocks seebig autumn rallies.

During these same modern gold-bull-marketyears of 2001 to 2012 and 2016 to 2018, the gold stocks as measured by the HUIenjoyed average gains of 9.3% between late Julies to late Septembers.  Augusts and Septembers are actually thissector’s second-strongest 2-month span, averaging big respective gains of 3.7%and 3.5%.  Speculators and investors needto be fully deployed before Augusts,just like in gold.

The gold stocks’ 9.3% average autumn rallyonly leverages gold’s 5.7% one by 1.6x, behind the 2x to 3x expected.  But that evens out over the winter and springrallies, where gold stocks climb another 14.9% and 12.2%.  That works out to 1.6x and 3.7x upsideleverage to gold.  In full-calendar-yearterms, the gold stocks’ bull-market seasonal gains averaging 25.9% amplified gold’s 14.8% by 1.8x.  That wasstill short of 2x to 3x.

Prior to this summer’s dazzling goldbreakout, gold stocks had underperformedthe metal they mine for years.  Withgold unable to hit new bull highs, investors largely forgot about it and itsminers’ stocks.  That has dragged downgold stocks’ average upside relative to gold. But it has picked up dramatically with gold’s decisive bull-marketbreakout starting to wake up traders. Recent gold-stock gains well outpaced gold’s.

At best in mid-July,GDX had rocketed 30.8% higher summer-to-date!  That was 2.9x gold’sown 10.7% gain over that span.  Goldstocks’ powerful counter-seasonal summer surge extended GDX’s upleg-to-dategains to 60.8% over 10.2 months by mid-July.  That also proved 2.9x upside leverage to gold’sown 20.7% upleg over that same time frame. That’s at the high side of that historical 2x-to-3x outperformancerange.

Since gold stocks mirror and amplifyunderlying moves in gold, their autumn-rally setup this year is verysimilar.  Rather than drifting like usualin June and July, gold-stock prices soared higher on gold’s decisivebull-market breakout.  That’s left them relativelyhigh heading into their normal autumn-rally span.  While that increases the risks of a counter-seasonalselloff slaughtering this year’s autumn rally, it all depends on gold.

Gold stocks will follow and leverage goldin the next couple months, whether the metal retreats or keeps rallying.  Again gold faces a major selloff ifgold-futures selling starts snowballing, rapidly unwinding the speculators’excessively-bullish bets.  But ifinvestors entranced by the alluring new-high psychology keep buying, gold willcontinue powering higher.  Gold stocks’ near-termfortunes depend on gold investment demand.

This final chart slices up gold-stockseasonals into calendar months instead of years.  Each is indexed to 100 at the previousmonth’s final close, and then all like calendar months’ indexes are averagedtogether across these same modern bull-market years of 2001 to 2012 and 2016 to2018.  Again gold’s autumn rally makesAugusts and Septembers gold stocks’ second-best 2-month span after Januariesand Februaries.

There’s no doubt gold-stockseasonals are very favorable in these next couple months.  Gold miners only enjoy strong back-to-backmonths a couple times a year, and this autumn-rally span is one of them.  Late summers offer the best seasonal buying opportunities of the year to deploy capital in gold stocks.  That’s when they transition fromseasonally-weak summers to seasonally-strong autumns, winters, then springs.

That being said, seasonality reveals meretendencies.  The primary drivers of goldand its miners’ stocks are sentiment, technicals, and fundamentals.  Seasonality reflects how these average out acrosscalendar years over long spans, but they can easily override seasonals in any given year.  This summer so far isa key case in point.  The usual summerdoldrums failed to materialize as gold surged on the Fed pivoting dovish.

This year’s autumn-rally setup is wellon the bearish side with gold-futures speculators effectively all-in longupside bets and all-out short downside bets. Their buying firepower is nearing exhaustion,leaving vast room to sell and hammer gold and thus gold stocks lower.  That remains a serious risk if the rightcatalyst arises to ignite cascading selling. But the power of new-high psychology to attract investors is strong.

Investment capital inflows can drive goldhigher for many months or even years, regardless of what gold-futures speculatorsare doing.  The higher gold rallies, themore investors want to own it.  The morethey buy, the higher gold climbs.  Buyingbegets buying, and nothing fuels this virtuous circle like new secularhighs.  So while we need to remain waryentering the autumn rally relatively high, it could certainly still happen.

Exactly a year ago gold’ssetup heading into its autumn-rally span was incredibly bullish.  As I explained in last year’s essay updatingthis research thread, extreme gold-futures selling had pushed spec shorts to all-time-record highs.  Spec longs were really low too, leaving lotsof room to buy and push gold much higher. Yet what happened?  Speculators kepton aggressively shorting anyway, battering gold even lower!

Gold was trading at$1302 in mid-June when its summer seasonal low tends to be hit.  It fell hard from there, hitting $1224 at theend of July.  Then it plunged even lowerstill to $1174 by mid-August, and only rebounded modestly to $1199 by lateSeptember when the autumn rally tends to end. Gold had terrible autumn-rally performance in 2018 despite the super-bullishsetup.  Strong momentum tends to build onitself.

Last year bearishpsychology grew even more bearish in August and September, leading to even moreselling beyond normal limits.  This yearwe could see self-reinforcing bullish sentiment as gold’s best prices inyears fuel greed.  That new-highpsychology motivating investors to return could gradually push gold higher as theybuy.  The resulting high resilient goldprices could retard the big overhang of gold-futures selling.

Regardless of whathappens in August and September, gold and its miners’ stocks are entering theirstrong season which runs until late next spring.  So material selloffs can be used toaccumulate positions in gold and silver miners with superior fundamentals.  But make sure to protect your capital with trailingstop losses, as speculators’ excessively-bullish gold-futures bets still have tonormalize via selling sooner or later.

To multiply yourcapital in the markets, you have to trade like a contrarian.  That means buying low when few others arewilling, so you can later sell high when few others can.  Earlier this year well before gold’s breakout,we recommended buying many fundamentally-superior gold and silver miners in ourpopular weekly and monthly newsletters.  This week their unrealized gains ran as highas 130.2%, 122.6%, and 106.6%!

To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles thatdrive them.  Our newsletters are a greatway, easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off summer-doldrums sale!  Thebiggest gains are won by traders diligently staying abreast so they can ride entireuplegs.

Thebottom line is gold and gold stocksare entering their strong season, starting with their autumn rally.  In modern bull-market years, Augusts andSeptembers have averaged out to the second-best couple-month span.  This is normally fueled by Asian seasonal golddemand coming back online, driving this metal considerably higher.  Gold stocks’ profits leverage to gold enablesthem to nicely amplify its gains.

This year’s autumn-rallysetup is very unusual, as gold skipped its summer-doldrums slump after breakingout to major new bull-market highs.  Thatwas driven by massive gold-futures buying, leaving speculators’ positioningquite bearish.  But rare new-highpsychology is a powerful motivating force for investors to buy.  Sustained capital inflows from them couldeasily overpower or retard gold-futures selling for months.

Adam Hamilton, CPA

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