Gold Stocks Spring Rally 2021 / Commodities / Gold and Silver Stocks 2021

Following a necessary correction,the gold miners’ stocks have spent much of recent months bottoming.  This healthy basing process is rebalancingsentiment, preparing the way for this sector’s next bull-market upleg.  That is looking to coincide with gold stocks’spring rally, one of their strongest times of the year seasonally.  That stiff tailwind blowing behind bullish technicalsand fundamentals should make for big 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 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.  The seasonal gold year starts in late July asAsian farmers begin reaping their harvests. They plow some of their surplus income into gold.  That’s soon followed by the famous Indianwedding season in autumn, with its heavy gold buying for brides’ dowries duringmarriage-auspicious festivals.

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 afterthat Chinese New Year gold buying flares up heading into February.

These understandable cultural factors drivesurges of outsized gold demand between late 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 mid-March-to-early-June goldrally, but nothing definitive like for the rest of the year’s seasonality.  As silly as it sounds, I suspect spring itself is the reason for thisdemand 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 psychological impact, buoying their spirits.

While spring’s seasonal impact on golditself is more muted, the gold stocks tend to blast higher anyway as capitalfloods in.  That optimism fuels goldstocks’ most upside leverage to gold seasonally throughout the calendaryear.  And this year’s spring rally has realpotential to grow considerably larger than usual.  Gold stocks’ recent correction short-circuitedtheir winter rally, leaving major catch-up buying for this spring.

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’scorrection cascaded to serious proportions, hitting -17.3% in mid-December 2016.  But that remained shy of 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 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 2021.  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 early August’s newest 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 105 simply means it has rallied 5% from theprior 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 2020.  2021isn’t included yet since it remains a work in progress.  This bull-market-seasonality methodology revealsthat gold’s spring rally is its last push higher before the summer doldrums arrive.  While this is gold’s smallest seasonal rallyof the year, the gold stocks greatly leverage it.

2020 proved anamazing year for gold, with this leading alternative investment blasting25.1% higher!  At gold’s early-Augustall-time-record peak before the recent healthy correction, this metal hadsoared a huge 35.9% year-to-date.  Andfrom mid-March’s stock-panic-driven low to that last upleg topping, gold clockedin with a giant 40.0% gain in just 4.6 months! Any way you slice it, gold enjoyed a phenomenal year.

Such outsizedperformance really skews the indexed seasonal average, even though 2020 was the17th year added to this modern-gold-bull span. So I added a new data series in these charts, the light-blue lines showinglast year’s seasonality before 2020 entered the mix.  Gold’s huge gains during that crazy pandemic yearreally shifted its seasonal average considerably higher, which certainly doesn’thappen often.

Overall across these last17 gold-bull calendar years, gold averaged major 15.6% gains.  With this kind of growth rate compounded, it takesless than five years for gold prices to double. That’s held true during gold’s current bull too, as gold powered from$1,051 in December 2015 to $2,062 in August 2020.  That’s up 1.96x in 4.6 years!  Gold’s strong seasonals are the fuel behindgold stocks’ powerful seasonal rallies.

Gold’s own spring rallygenerally starts in mid-March, after the seasonal pullback following the winter-rallytopping in late February.  That has pushedgold an average of 1.7% lower in these modern bull-market years.  Then from mid-March to early June, gold’s springrally has averaged relatively-modest 3.8% gains.  That makes for gold’s weakest seasonal rally,way behind the winter and autumn rallies’ +8.9% and +6.4%.

In March, April, May,and June, gold has averaged monthly performances of -0.4%, +1.8%, +0.8%, and+0.5%.  April is the linchpin of gold’sspring seasonal rally, clocking in at this metal’s 4th-best month onaverage.  But this year’s spring rallyhas much-greater upside potential than usual. Like many things in the financial markets, seasonality tends to meanrevert and overshoot after being forced out of whack.

Normally that massive8.9% winter rally is gold’s most-powerful seasonal one, running from about lateOctober to late February.  But because a healthy bull-market correction overrode that seasonal strength, gold actually fell 5.4% during its latestwinter-rally span.  Normally when thattops in late February, gold is up 5.3% year-to-date.  But this year the yellow metal remained down 5.0%YTD, a serious seasonal disconnect.

So gold’s 2021 springrally will likely both start earlier and grow bigger than normal, as seasonalitymean reverts and overshoots after the recent counter-seasonal correction.  Gold needs to see some outsized spring-rally gainsto catch up with where it ought to be per seasonal norms.  By early June, gold tends to be up 7.4% YTDin seasonal-average terms.  Rebounding backto there would boost gold up near $2,038!

If anything remotelyclose to that happens, this is a super-bullish omen for gold stocks in comingmonths.  Their own spring seasonal rallyis directly driven by gold’s.  The GDXVanEck Vectors Gold Miners ETF is the leading gold-stock benchmark and trading vehicle.  It tends to amplify material gold-price moves by 2x to 3x.  So if gold surges about11% higher to catch up, GDX could see huge 22%-to-33% spring-rally gains!

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,they are functionally interchangeable containing most of the same large goldstocks.  Gold’s gains fuel their major springrally.

The gold stocks’ springrally is much stronger than gold’s, averaging hefty 13.2% gains duringthese same modern-gold-bull years of 2001 to 2012 and 2016 to 2020.  Like gold, last year proved very strong forthe gold stocks as viewed through the GDX lens. Driven by gold’s massive post-panic upleg, this dominant gold-stock ETFsoared 134.1% higher in about that same span! But this sector’s overall performance was weak.

In 2020 GDX merelyrallied 23.0%, lagging way behind gold’s 25.1% gain.  That’s why these gold-stock seasonals didn’tchange as much last year as gold’s did, as evident in the difference between thesedark-blue and light-blue lines.  Goldstocks’ underperformance last year resulted from the timing of gold uplegs andcorrections, leaving the HUI pretty oversold at year-end.  On average it has seen 27.2% annual gains.

Like gold, the goldstocks are set up for a much-larger-than-normal mean-reversion-and-overshootspring rally.  Normally this sector surges13.2% higher between mid-March to early June, really amplifying gold’s own anemic3.8% spring rally.  After decades ofstudy, I still suspect this sector’s strong outperformance results from springoptimism.  Speculators and investors aremore willing to deploy capital when they feel good.

Broken out intocalendar months, in March, April, May, and June the HUI has averaged performancesof -0.2%, +3.5%, +4.3%, and +2.4%.  Apriland May together are an exceptionally-strong span for the gold stocks, theirfourth- and first-best months of the year seasonally in these modern-gold-bullyears!  This is actually new, as GDX skyrocketing40.0% higher in April 2020 out of the stock panic greatly skewed these seasonals.

April’sradically-improved seasonals are very clear on this next chart, which slicesgold-stock seasonals into calendar months instead of years.  This uses the same methodology discussedabove, but applied to months rather than years. Each calendar month is individually indexed to 100 as of the previousmonth’s final close, then all like-months’ indexes are averaged together.  This offers a more-granular perspective.

So seasonally goldstocks have some big months approaching, which are what make theirspring rally so strong.  Again averaging13.2%, this year’s has the potential to grow much larger because of gold’slikely mean reversion and overshoot.  Onaverage by early June’s spring-rally topping, the HUI has powered up 17.5%year-to-date.  To regain that seasonalbenchmark would certainly require an outsized surge from here.

As of this week, GDX isdown 6.4% YTD due to gold’s lingering bottoming and base-building process.  To mean revert back up to +17.5% by earlyJune, GDX would have to soar up to $42.32. That isn’t a stretch absolutely, this leading gold-stock ETF closed at$44.48 in early August as the last parallel uplegs in gold and gold stocks weretopping.  And getting back on the averageseasonal track would require a major rally.

GDX would have to power25.6% higher from this week’s levels to hit its normal early-summer gainsin seasonal terms.  With the large goldstocks’ typical 2x-to-3x leverage to major gold moves, those kinds of GDX gainswould only need a 9%-to-13% gold spring rally. That is right in line with what is likely if gold itself mean reverts seasonallyafter its recent correction.  The comingmonths look really bullish for this sector.

Strong spring seasonalityis just a minor reason.  Seasonals are asecondary driver, unable to override gold stocks’ primary drivers ofsentiment, technicals, and fundamentals. Seasonals act more like prevailing winds, either boosting or hinderingwherever gold stocks would normally be heading based on gold’s price action.  But given this year’s spring-rally setup,these strong seasonals are likely to prove stiff tailwinds.

Because of the recentgold and gold-stock corrections, and subsequent long bottomings and basings, sectorpsychology is really bearish. Traders are seriously pessimistic on gold stocks, expecting to see themkeep spiraling lower with the metal they mine. This is the perfect sentimental backdrop to birth a major new bull-marketupleg!  Everyone susceptible to beingduped into selling low is out, leaving only buyers.

Technically the goldstocks have been really beaten down in recent months, first when theircorrection initially bottomed in late November at a 24.9% GDX loss.  A nice uptrend formed inDecember, but faded in January as a sharp gold selloff dragged the miners lower.  That ultimately culminated in a miserable correction-low retest in late February.  Bombed-out oversoldtechnicals birth new bull-market uplegs.

Bearish traders areoverlooking fantastic fundamentals for the gold miners.  Their Q4’20 earnings season underway is likely to prove their most profitable ever as a sector.  The GDX-top-25 gold miners dominating that ETFand the HUI are likely to report unit profits soaring around 65% year-over-year!  That will make for their sixth quarter in arow seeing 50%+ YoY growth!  The gold minersare thriving with higher gold levels.

With gold stocks deeplyout of favor sentimentally and battered technically despite super-strongprofits fundamentals, this year’s spring-rally setup is outstandingly-bullish.  The gold stocks are poised for major gains intheir next upleg, which will likely partially coincide with that spring-rallyspan.  That means this sector’s strongseasonals in April and May will likely act as fierce tailwinds helping catapultgold stocks higher.

Add in that seasonal-mean-reversiondynamic after this sector’s winter rally failed due to that correction, and those22%-to-33% spring-rally gains in GDX aren’t a stretch at all.  If gold stocks’ next upleg really getshumming, powering higher attracting in lots of capital, 50%+ is possible!  Last year’s spring rally saw GDX skyrocket79% higher, although much of that was anomalous rebounding out of a rare stockpanic.

With so much upsidepotential in this contrarian sector, it is important to get deployed infundamentally-superior gold stocks and silver stocks if you haven’t yet.  We’ve been doing that in our newsletterssince late November, layering into great gold and silver miners.  The current count is up to 19 and 8 newtrades in our weekly and monthly.  These excellentgold stocks should well outperform GDX during the spring rally.

At Zeal we walk thecontrarian walk, buying low when few others are willing before later selling highwhen few others can.  We overcome populargreed and fear by diligently studying market cycles.  We trade on time-tested indicators derived fromtechnical, sentimental, and fundamentalresearch.  That’s why all 1178 stocktrades recommended in our newsletters since 2001 averaged hefty +24.0% annualizedrealized gains!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’sgoing on in this sector.  Stayingsubscribed to our popular and affordable weekly and monthly newsletters is agreat way.  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.  Subscribetoday and take advantage of our 20%-off sale!  Heading into the next gold-stock upleg is agreat time to get deployed.

The bottom line is gold stocks often experiencea strong spring rally seasonally.  Thisis driven by gold’s own seasonality, where outsized investment demand arises atcertain times during the calendar year. Gold usually enjoys a solid spring rally likely fueled by the universaloptimism this season brings.  And sincegold drives gold miners’ profitability, their stock prices naturally follow ithigher and amplify its gains.

This year’s spring-rally upside potentialis much bigger than usual.  After acorrection steamrolled their winter rally, the gold stocks are way behindseasonally.  That positions them for amajor mean-reversion surge on very-bullish sentiment, technicals, andfundamentals.  The strong spring seasonalsshould act as a stiff tailwind accelerating gold stocks’ gains in their next upleg.  This is one heck of a spring-rally setup!

Adam Hamilton, CPA

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