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

The gold miners’ stockshave mostly been consolidating sideways over this past half-year.  They’ve been held down by periodic bouts ofheavy gold-futures dumping on Fed-tightening fears.  But as those traders exhaust their selling firepower,gold stocks have formed a strong technical base that is birthing their nextmajor bull-market upleg.  And a stifftailwind is mounting as gold stocks enter their strongest season of the year.

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.  Like clockwork these power major spring, autumn,and winter seasonal rallies in gold and thus its miners’ stocks.  Interestingly market forces behind the formerare the least-understood out of all gold’s seasonal surges.  Maybe that’s why this imminent spring rallyhas also proven gold’s weakest.

Yet surprisingly gold stocks still enjoytheir best seasonal outperformance relative to their metal during thesesame coming months!  So gold stocks’ springrally has proven their strongest seasonal one during gold’s modern bull-marketyears.  This contradictory mismatchbetween gold’s worst seasonal rally and its miners’ best one offers animportant clue on the spring rally’s motivating impetus, sentiment is the key.

Traders’ psychology exceedingly influencestheir capital-allocation decisions.  Theywon’t buy gold or gold stocks or anything unless they are optimistic priceswill climb on balance.  After dark coldwinters in the northern hemisphere where the vast majority of the world’s traderslive, spring naturally breeds optimism. Its glorious expanding sunshine and warming temperatures universally buoythe spirits of nearly everyone.

The lengthening daylight hours and improvingweather from March to May bring joyful anticipation of the summervacation season.  That’s such a wonderfulcontrast to January and February, which often seem like nose-to-the-grindstonemonths of relentless busyness.  With thingslooking up and traders generally feeling happier during springs, their optimismmakes them more bullish on much including gold and gold stocks.

This glass-half-full sentiment leaves tradersmore willing to deploy capital to chase expected gains.  And their optimistic buying feeds on itself, fuelingvirtuous circles of strength.  The more tradersbuy gold and its miners’ stocks, the more they rally.  Those resulting gains attract in still-moretraders, accelerating the upside.  Springis exceptionally-favorable for nurturing this positive psychological feedbackloop in markets.

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 6.7months.

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 previous 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 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 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.

Gold’s 2021 performancewas relatively-weak, with this metal ultimately drifting 3.6% lower in a highconsolidation.  Early on last year goldremained in a healthy correction after a pair of massive bull-market uplegscrested in 2020.  Then during the pasthalf-year or so starting mid-summer, gold was slammed by periodic bouts ofheavy-to-extreme gold-futures selling on Fed-tightening fears.  That left gold really out of favor.

Before 2021, goldaveraged excellent 15.6% annual gains in these modern bull-market years.  This pre-2021 seasonality is rendered inlight-blue in this chart.  But last year’s major seasonal underperformance dragged down the average to thedark-blue dotted line.  That’s a rather-largedrop, especially considering this data series is fully 18 years averaged together.  But gold’s strong bull seasonality remainsvery much intact.

Including last year’s Fed-tightening-fear-stuntedgold action, this metal still averaged hefty 14.5% yearly gains acrossthis long secular span.  Those remainvery impressive, enough to double investors’ capital every five years.  Gold’s average indexed seasonal performance from2001 to 2012 and 2016 to 2021 formed a tight seasonal uptrend.  Gold’s trio of major seasonal rallies pushed ithigher within that rising channel.

Chronologically thosestart with gold’s spring rally, again the weakest averaging 4.1% gains betweenmid-March to early June.  I suspect thisis the case because this seasonal rally is driven more by sentiment thanfundamentals.  That ethereal springmarket optimism seems to push gold higher during the coming months.  Gold’s other two seasonal rallies are directlyfueled by large bullion buying from Asia and the West.

The autumn rally enjoys larger5.8% average gains in these modern gold-bull years, from mid-June to lateSeptember.  Indian-wedding-season jewelrybuying is its main driver.  Then gold’ssubsequent winter rally from late October to late February grows much bigger, averaging fat 8.3% gainsmore than doubling the spring rally!  BigWestern jewelry buying heading into Christmas then later Chinese New Yearbuying contribute.

But gold’s spring rallyis nothing to sneeze at, as 4.1% average gains over just 2.7 months annualizeout to +18.2%.  That’s considerably betterthan that 14.5% seasonal gold advance in these modern bull-market years.  Gold’s spring rally is the fastest of theseseasonal ones, giving the yellow metal less time to power to bigger gains.  The autumn and winter rallies unfold over 3.4and 4.1 months, helping them grow larger.

April is the heart ofgold’s spring seasonal rally, averaging strong calendar-month gains of 1.9%during this span.  That ranks as this metal’sthird-best month seasonally, behind January’s massive 2.8% and August’s big2.0%.  So these spring months have provenan important and profitable time to be deployed in gold.  And this imminent 2022 gold spring seasonal rallyhas much-better upside potential than usual.

Multiple major bullish drivers areconverging that should fuel an accelerating bull-market upleg.  In recent essays I analyzed each in turn.  Gold just made a major upside breakout froma gigantic chart formation, a bullish pennant pattern!  That is working wonders to attract legions ofgold-futures speculators, who love chasing upside momentum.  Their buying will drive gold high-enough forlong-enough to entice back investors.

Big investment buyingis necessary to fuel major gold uplegs, since investors’ vast pools of capital dwarfgold-futures speculators’.  Investorshave already started returning to gold, as evident in the holdings of its leading and dominant gold exchange-tradedfunds.  American stock-market capital ismigrating back into gold through the GLD SPDR Gold Shares and IAU iShares GoldTrust ETFs, a bullish omen for this metal.

Gold investment demandwill see a massive boost from the raging inflation unleashed by this profligateFed.  Despite being intentionally-lowballed,the latest US Consumer Price Index print soared 7.5% year-over-year!  That was its hottest read since February 1982!  These fast-rising prices are fueled by theFed expanding its balance sheet an insane 114.3% or $4,752b in just 23.7 monthssince March 2020’s stock panic!

During the last similarserious inflation spikes in the 1970s, gold tripled during the first andmore than quadrupled in the second! Gold should at least double before this current inflation spike runs itscourse, this ultimate inflation hedge can’t keep dramatically lagging inflation for long.  Radically-more money has beenforce-fed into the system, competing for and bidding up the prices on far-slower-growinggoods and services.

Gold-futures speculators’deep fears of rate hikes are highly-irrational. The Fed has executed fully twelve rate-hike cycles since 1971.  Gold averaged 29.2% gainsacross the exact spans of all dozen.  Itrallied during eight, averaging huge 49.0% absolute gains!  In the other four, gold only fell an asymmetrically-small10.5% on average.  Gold fared best whenit entered rate-hike cycles relatively-low and they were gradual.

That means no more thanone quarter-point hike per regularly-scheduled FOMC meeting.  Gold is low technically today after grinding lowerto sideways since August 2020, and the Fed can’t risk hiking too fast.  That would tank these extreme QE-levitatedstock markets trading at dangerous bubble valuations.  And the Fed has caved on past tightenings oncestock markets threaten new bears at 20%+ total losses.

So gold investmentdemand should strengthen considerably in this usual spring-rally timeframe,really amplifying those seasonal gains. American stock investors have vast room to buy, since they remain radically-underinvestedin gold.  Exiting January, total GLD+IAUgold-bullion holdings were only worth $87.3b. That was just 0.2% of the elite S&P 500 stocks’ collective $39,866.7bmarket cap, effectively zero!

Naturally the goldminers’ own seasonality is directly driven by gold’s.  The GDX VanEck Gold Miners ETF remains the leadinggold-stock benchmark and trading vehicle. It tends to amplify material gold-price moves by 2x to 3x.  That means an outsized gold spring rallyshould translate into way-larger gold-stock gains.  Gold stocks’ young upleg growing on mountingupside momentum in gold will attract traders back in.

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 still 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 major gold miners.  Their spring rally is fueled by gold’s.

That spring optimism drivinggold higher proves much more potent for gold miners’ stocks.  Between mid-March to early June in these samemodern gold-bull years of 2001 to 2012 and 2016 to 2021, the HUI averaged outstanding13.5% gains!  That makes for goldstocks’ biggest and fastest seasonal rally of the year, way outperforming themetal that drives their profits.  Springgold-stock upside leverage to gold runs a big 3.3x!

That doubles thesubsequent autumn and winter seasonal rallies’ upside leverage of 1.6x each.  The best time seasonally to be long goldstocks is during this imminent spring rally. That’s when this sector wins the biggest fraction of its annual gains.  And those have been extraordinary, averaging fantastic25.0% yearly gains during these gold-bull years!  Compounding such hefty returns doubles capitalin just three years.

And that’s after goldstocks’ average seasonal trajectory was dragged down last year by very-weakprice action.  In 2021 GDX dropped 11.1%,amplifying gold’s loss by 3.1x.  Prior tothat, gold-stock seasonality was stronger as seen in this light-blue line.  The HUI averaged incredible 27.2% annualgains over the 17 gold-bull years prior to 2021!  That’s why contrarian traders are willing totolerate this sector’s big volatility.

When gold is reallyrunning, gold miners’ big inherent profits leverage to it help drive far-largeroutsized gains.  The last example was inspring 2020, which proved exceptionally-extreme due to that pandemic-lockdownstock panic.  From mid-March to late May,GDX skyrocketed an astonishing 95.8% higher on a parallel massive 18.7% goldsurge!  That won’t happen this spring,but gold-stock gains should still be ample.

As always theirfortunes depend on gold’s.  If golddoubles its usual spring strength to power 8% higher on all those bullish drivers,GDX should amplify that upside by 2x to 3x. That implies 16% to 24% gold-stock gains, much better than theirgold-bull average.  But if Fed rate hikesand quantitative tightening hammer these lofty stock markets hard enough, gold’sspring gains could grow larger boosting gold stocks’.

A strong mean-reversioncomponent could come into play too.  Goldstocks’ recent technicalbasing has left them really out of favor. Midweek, GDX was trading at just 108.4 in seasonally-indexed terms.  Just to mean revert to their average early-Juneindexed topping of 116.9, GDX would have to rally 7.8% from here.  And since mean reversions tend to see opposingproportional overshoots, gold stocks could double that.

Gold stocks’ strongspring seasonals are also apparent at a finer monthly scale.  From 2001 to 2012 and 2016 to 2021, the HUIaveraged weak 0.1% gains in March, big 3.6% surges in April, and massive 4.9% catapultingsin May before spring rallies peter out to 1.3% average June gains.  April and May together form gold stocks’ strongestseasonal streak of the year, ranking third and first out of all thecalendar months!

That’s clear in thisnext chart, which slices gold-stock seasonals into calendar months insteadof years.  This uses the same methodologydiscussed above, but applied to months rather than years.  Each calendar month is individually indexedto 100 as of the previous month’s final close, then all like-months’ indexesare averaged together.  This more-granularanalysis confirms spring is the best time to own gold stocks.

After gold stocks’post-winter-rally seasonal slump bottoms in mid-March, this sector tends to blastnearly straight higher until early June. No other two-calendar-month span comes close to the average upside thegold stocks have achieved in April and May.  That optimistic spring psychology that affectsbroader stock markets has proven particularly influential over the gold stocks.  Traders love this sector this time of year!

Still seasonality ismerely a secondary driver, tendencies that provide tailwinds or headwinds togold stocks’ primary drivers of sentiment, technicals, and fundamentals.  So if popular greed reigned in gold stocksand had just driven them up to very-overbought levels without supportingearnings jumps, GDX would face a correction despite spring seasonals.  But the polar opposite is true heading intothis spring 2022.

Battered for over eightmonths now by periodic bouts of heavy-to-extreme gold-futures selling on irrationalFed-tightening fears, the gold stocks are seriously out of favor.  This poor sentiment has been fueled by themfalling then grinding sideways near lows for most of that span since Fed-rate-hikefears initially flared in mid-June.  Thathas left this sector deeply-undervalued fundamentally, trading at dirt-cheap valuations.

In recent months plentyof gold stocks have been sporting incredibly-low trailing-twelve-monthprice-to-earnings ratios in the teens and even single-digits!  Their low stock prices don’t reflect themearning money hand-over-fist with these high prevailing gold prices.  So gold stocks’ very-bullish sentiment,technicals, and fundamentals are closely aligned for this coming springrally.  Its seasonal tailwind should boostupside.

Leading into thisseasonally-strongest span of the year is a great time to get deployed in fundamentally-superior mid-tier and junior gold miners.  With better output growth and lower market capitalizations,their stock-price gains as gold powers higher well-outperform the GDXmajors.  Our newsletter trading books arefull of these high-potential gold stocks. The earlier traders get deployed, the more upside they can ride.

If you regularly enjoymy essays, please support our hard work! For decades we’ve published popular weekly and monthly newsletters focusedon contrarian speculation and investment. These essays wouldn’t exist without that revenue.  Our newsletters 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.

That holistic integratedcontrarian approach has proven very successful. All 1,247 newsletter stock trades realized since 2001 averaged outstanding+21.3% annualized gains!  Today ourtrading books are full of great fundamentally-superior mid-tier and junior goldand silver miners to ride their uplegs.  Thesestocks are surging as gold breaks out, but still have massive room to run.  Subscribe today and get smarterand richer!

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.

That infectious spring exuberance hasproven exceptionally-potent for gold stocks. This time of year their gold outperformance far exceeds that seen in theirautumn and winter rallies.  This sector’sspring rally is its strongest of the year seasonally.  And 2022’s has excellent potential to growmuch larger than normal.  Gold stocks shouldsurge dramatically, leveraging big gold gains on raging inflation and rolling-overstock markets.

Adam Hamilton, CPA

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