Gold Stocks Seasonal Bull Spring Rally 2018 / Commodities / Gold and Silver Stocks 2018

The gold miners’ stockshave mostly been consolidating low this year, exacerbating bearishsentiment.  Even with gold grindinghigher in a solid uptrend and nearing a major upside breakout, the gold stocksjust can’t get any love.  But that may beabout to change, with gold and its miners’ stocks in the midst of their springrally.  Strong seasonal tailwinds makeMay one of the best months of the year in gold-stock bulls.

Gold-stock performance is highly seasonal, which certainly sounds odd.  The gold miners produce and sell their metalat relatively-constant rates year-round, so the temporal journey throughcalendar months should be irrelevant. Based on these miners’ revenues, there’s little reason investors shouldfavor them more at certain times of the year than others.  Yet history proves that’s exactly whathappens in this sector.

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 experience, as its minedsupply remains fairly steady all year long. Instead gold’s major seasonality isdemand-driven, with global investment demand varying dramatically dependingon the time within the calendar year.

This gold-demand seasonality iswell-known and heavily studied.  Theseasonal gold year starts in late July as Asian farmers begin reaping theirharvests.  They plow some of theirsurplus income into gold.  That’sfollowed by the famous Indian wedding season in autumn, with its heavy goldbuying for brides’ dowries.  That culturebelieves festival-season weddings have greater odds of yielding long,successful marriages.

After that comes the Western holidayseason, where gold jewelry demand surges for Christmas gifts for wives,girlfriends, daughters, and mothers. Following year-end, Western investment demand balloons after bonuses andtax calculations as investors figure out how much surplus income the prior yeargenerated for investment.  Then Chinese NewYear gold buying flares up after that heading into February.

These understandable cultural factors drivesurges of outsized gold demand between summer and late winter.  But interestingly there is one moregold-demand spike in spring.  Over theyears I’ve seen a variety of theses explaining this April-and-May seasonal goldrally, but nothing definitive like for the rest of the year’s goldseasonality.  As silly as it sounds, Isuspect spring itself is the reasonfor this demand surge.

Sentiment exceedingly influences investing,which requires optimism for the future. Investors won’t risk deploying their scarce capital unless they believeit will grow.  And the glorious expandingsunshine and warming temperatures of spring naturallybreed optimism.  The vast majority ofthe world’s investors are far enough into the northern hemisphere that springhas a major impact.  This seasonality extends to stocks too.

Since it’s gold’s own demand-driven seasonalitythat fuels the gold stocks’ seasonality, that’s logically the best place tostart to understand what’s likely coming. Price action is very different between bull and bear years, and gold isabsolutely in a young bull market.  After being crushed to a 6.1-year secular lowin mid-December 2015 on the Fed’s first rate hike of thiscycle, gold powered 29.9% higher over the next 6.7 months.

Crossing the +20% threshold in early March2016 confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthyselling was greatly exacerbated following Trump’s surprise election win.  Investors fled gold to chasethe taxphoria stock-market surge.  Gold’scorrection cascaded to monstrous proportions, hitting -17.3% inmid-December.  But that was shy of a newbear’s -20%.

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 at -20% 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 2017.  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 young bull today and bear-market action is quite dissimilar.

This chart averages theindividually-indexed full-year gold performances in those bull-market yearsfrom 2001 to 2012 and 2016 to 2017.  2018isn’t included yet since it remains a work in progress.  This chart distills out gold’s bull-marketseasonal tendencies in like percentage terms. Quantifying gold’s bull-market seasonal tendencies requires all relevantyears’ price action to be recast to be perfectly comparable.

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,normalizing all years regardless of price levels.  So gold trading at an indexed level of 105simply means it has rallied 5% from the prior year’s close, while 95 shows it’sdown 5%.

This methodologyrenders all bull-market-year gold performances in like percentage terms. That’s critical since gold’s price range has been so vast, from $257 inApril 2001 to $1894 in August 2011. Finally each calendar year’s individually-indexedgold prices are averaged together to arrive at this illuminating gold-bullseasonality.  Gold has always tended to enjoystrong rallies in the spring months of April and May.

During these modernbull-market years from 2001 to 2012 and 2016 to 2017, gold’s spring rallytended to start in mid-March onaverage.  From that major seasonal lowfollowing the winter rally, gold often starts grinding higher before its gainsaccelerate through April and most of May. This spring rally has generally run its course by late May.  Across the 14 bull years in this study, goldaveraged nice spring rallies of 3.7%.

This spring rallyunfolds rapidly, with an average duration of just 2.2 months.  That makes it the smallest and shortest of gold’s three major seasonal rallies, fallingway behind the champion 9.5% winter rally that precedes it and strong 6.6%autumn rally that follows thesummer doldrums.  Nevertheless, it isstill well worth trading.  3.7% gains stillreally make a difference, and naturally about half of years exceed thisaverage.

This year gold’sspring-rally bottoming came on March 20th, when gold closed at $1310 the daybefore the Fed was universally expected to hike for the 6th time in thiscycle.  That was March’s 14th trading daythis year, right in line with gold’s average seasonal low on March’s 10thtrading day.  And so far gold has largelyfollowed the spring-rally seasonal pattern since, gradually grinding higherfrom late March to mid-April.

Climbing the typical3.7% from that spring low into May’s spring-rally topping would propel gold to$1358.  That’s right on the verge ofbeing a major decisive breakout fromthe horizontal $1350 resistance line that gold-futures speculators watch likehawks.  And it isn’t far from newbull-market highs above July 2016’s $1365 bull-to-date peak.  As I wrote last week, this spring rallyreally ups the odds gold is nearinga bull breakout!

And given itsperformance in April, gold ought to see abigger May rally than usual this year. On average in these 14 modern bull-market years, gold climbed 1.8% inAprils then another 1.3% into its late-May spring-rally toppings.  But as of the middle of this week, gold wasactually down 0.1% month-to-date in April. That’s poor performance by April standards, setting up this May for astrong mean-reversion rally.

Historically thisspring-rally April-May span is often self-equalizing.  If gold materially underperforms oroutperforms its seasonal averages in April, its May performances tend to meanrevert and overshoot in the opposite direction. Back in 2009 for example, gold fell 3.4% in April but then blasted 10.0%higher in May!  In 2016 gold surged 5.1%in April before dropping 6.1% in May.  WeakAprils often lead to strong Mays.

If gold is bid tooaggressively in April, the resulting excitement entices in and exhausts allavailable near-term buying before the summer doldrums.  That certainly hasn’t happened thisyear.  Gold rallied into mid-April, butreversed sharply on a strong short-covering rally in US Dollar Indexfutures.  Thus gold has largely driftedsideways on balance this month.  So the usualspring buying likely hasn’t even startedyet!

That leaves traderswith full capital firepower to flood back in in May, likely as the sharp USDXrally runs out of steam.  The delayedspring-rally gold buying this year can all be compressed into May, which reallyincreases the odds of outsized gains. While nothing is guaranteed in seasonals since they merely usemulti-year averages to reveal trend tendencies, strong Mays are definitely morelikely following weak Aprils.

And as goes gold, so go gold stocks.  Goldstocks also exhibit strong seasonality, which is of course the direct result ofgold’s own seasonality.  Sincegold-mining costs are largely fixed when mines are being planned, fluctuationsin gold’s price flow directly into amplified moves in gold-mining profits.  Higher gold prices drive much-higher earningsfor the gold miners, which attract in more investors to bid up stock prices.

The ironclad historical relationship betweenthe price of gold, gold-miningprofitability, and therefore the gold-stock price levels is exceedinglyimportant to understand.  If you need toget up to speed, I wrote an essay looking at gold-stock price levels relative to gold early lastmonth.  Fundamentally gold stocks areleveraged plays on gold.  Thus they really outperform in the spring due togold’s strong seasonal rally.

This next chart applies this samebull-market-seasonality methodology used on gold directly to the goldstocks.  It looks at the average annualindexed performance in the flagship HUI NYSE Arca Gold BUGS Index in these samebull-market years of 2001 to 2012 and 2016 to 2017.  Because of gold’s dominant influence overgold-mining earnings, gold-stock seasonality naturally mirrors and amplifies gold’s own seasonality.

Gold stocks’ seasonal springrally is much stronger than gold’s, buttressing that spring-optimism-drives-stock-buyingthesis.  Between mid-March and earlyJune, the gold stocks have averaged hefty 12.8% rallies in these 14 modernbull-market years.  That makes forexceptional 3.5x upside leverage togold’s 3.7% seasonal spring rally! Interestingly this is gold stocks’ best seasonal leverage to gold’sgains by far.

While the HUI averaged15.5% surges during gold’s winter rally, that only made for 1.6x upsideleverage to gold’s big 9.5% gain.  Andthe HUI’s 10.5% average gain during gold’s autumn rally also only amplifiedgold’s 6.6% gain by 1.6x.  So while the gold-stockspring rally’s 12.8% average gains rank second out of these three seasonalrallies, it offers the most bang for the buck in gold-stock upside compared togold!

This year the goldstocks’ spring-rally bottoming happened on March 20th, the same day as gold’s.  The HUI slumped to 169.2 that day.  Since then this leading gold-stock index hasrecovered 6.9% as of the middle of this week, trouncing gold’s 1.0%spring-rally gains so far.  A merely-averagespring rally would take the HUI to 190.9 by late May or early June, which isanother 5.6% higher from here.  That’sworth riding.

But if gold’s seasonal springrally is compressed into May, and strong buying forces it over $1350 or evenbetter its $1365 bull-to-date high, the gold miners’ stocks have far morenear-term upside potential.  For the mostpart gold stocks remain deeply out of favor, forgotten or ignored.  But they will explode back on to speculators’and investors’ radars if major new gold highs attract the financial media’sinterest and attention.

Again as I discussedlast week, gold’s nearing bullbreakout will work wonders for not only psychology but hard gold-miningprofits.  The gold stocks are radically undervalued today compared totheir actual underlying fundamentals.  InQ4’17 gold averaged about $1276 per ounce, but the major gold miners of theleading GDX VanEck Vectors Gold Miners ETF reported average all-in sustainingcosts of just $858 per ounce!

So they were alreadycollectively earning fat operating profits of $418 per ounce.  And these are going to soar in Q1’18, becausethe average gold price surged 4.1% quarter-on-quarter to $1329.  Since mining costs are largely fixed, all-insustaining costs will likely stay flat from Q4. That means major gold miners’ operating profits are likely to rocket 12.7% QoQ to $471 per ounce!  That will delight contrarian investors.

The gold miners will bereleasing these latest Q1 results between now and mid-May, right when gold ispowering higher in its seasonal spring rally. So the gold stocks are certainly set up for an outsized spring rallythis year!  The potent combination ofabsurdly-cheap gold-stock prices, surging earnings forcing their valuationseven lower, and higher gold prices attracting financial-media attention shouldreally stoke traders’ interest.

This last chart breaks down gold-stockseasonality into even-more-granular monthly form.  Each calendar month between 2001 to 2012 and2016 to 2017 is individually indexed to 100 as of the previous month’s finalclose, then all like calendar months’ indexes are averaged together.  Slicing up seasonal tendencies this way showsMay has averaged the second-strongest monthly gold-stock gains in modern bull-market years.

During these 14 Aprilsin modern gold bull-market years, the gold stocks as measured by the HUI sawaverage gains of 1.6%.  But the lion’sshare of the spring-rally gains came inMay, where average gains more than tripled to 5.0%!  For decades if not longer, May has been oneof the best and most-important months to be heavily long gold miners’stocks.  Only February proved betterseasonally at a +5.4% average.

The key to gold stocks’spring rally is to get your capital deployed in mid-March, when gold stocksswoon to their spring-rally bottoming. In intra-month terms the initial gains are often fast in late March asgold stocks rebound out of oversold lows. But then the spring rally tends to slow down in April, discouragingimpatient and short-sighted traders.  Thereal gains come in May, and next month’s setup is exceptionally bullish.

Of course the standard seasonality caveatapplies that these are mere tendencies,not primary drivers of gold or gold stocks. Seasonal tailwinds can be easily drowned out by bearish sentiment,technicals, and fundamentals. Seasonality doesn’t always work, especially when it doesn’t align withthe primary drivers of sentiment, technicals, and fundamentals in thatorder.  Thankfully that certainly isn’tthe case this year.

The gold miners’ stocksaren’t entering their second-strongest month of the year overbought after a bigrally.  Quite the contrary, they have reallyunderperformed year-to-date on excessive bearishness.  This week the HUI was actually still down6.0% so far in 2018, far behind gold’s modest 1.6% gain!  Since gold-mining profits amplify gold pricemoves, gold-stock prices tend to leverage gold by 2x to 3x much of the time.

Thus spring rally asidethe HUI should already be up 3.1% to 4.7% year-to-date, or trading between198.3 to 201.4 compared to this week’s anomalously-low 180.8.  That’s another 9.6% to 11.3% higher from hereeven if gold merely stays near $1325. The gold stocks are overdue tomean revert higher no matter what gold does!  Gold’s spring rally will simply hasten andenlarge gold stocks’ long-delayed next upleg.

The farther goldrallies in May in one of its strongest spans of the year seasonally, the closerit will get to major breakouts and new highs. The higher gold climbs, the more attention it will get from thefinancial media, investors, and speculators. As their sentiment turns bullish again, capital will flood back into thebeaten-down gold stocks.  The goldminers’ coming surging earnings in their Q1 results are icing on the cake.

While investors and speculators alike cancertainly play gold stocks’ coming spring rally with the major ETFs like GDX,the best gains by far will be won in individual gold stocks with superiorfundamentals.  Their upside will trouncethe ETFs’, which are burdened by over-diversification and underperforming goldstocks.  A carefully-handpicked portfolioof elite gold and silver miners will generate much-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researchingindividual gold stocks and markets, so we can better decide what to trade andwhen.  As of the end of Q4, this hasresulted in 983 stock trades recommended in real-time to our newslettersubscribers since 2001.  Fighting thecrowd to buy low and sell high is very profitable, as all these trades averagedstellar annualized realized gains of +20.2%!

The key to this success is staying informed and being contrarian.  That means buying low before others figure itout, before undervalued gold stocks soar much higher.  An easy way to keep abreast is through ouracclaimed 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. For only $12 per issue, you can learn to think, trade, and thrive likecontrarians.  Subscribe today, and getdeployed in the great gold and silver stocks in our full trading books!

The bottom line is gold stocks experience astrong spring rally seasonally.  This isdriven by gold’s own seasonality, where outsized investment demand arises atcertain times during the calendar year. Gold usually enjoys a strong spring rally likely driven by the universaloptimism this season brings.  And sincegold drives gold miners’ profitability, their stock prices naturally follow ithigher while amplifying its gains.

And gold stocks’ already-strong springrally is likely to prove exceptional this year. Gold stocks have really lagged gold so far in 2018, despite fat earningsrapidly growing with higher gold prices. Once gold nears breakouts, traders are going to remember the gold minersand be amazed by their dirt-cheap stock prices wildly disconnected from fundamentals.  They will flood back into this small sectorcatapulting it higher.

Adam Hamilton, CPA

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