Gold Stocks Spring Rally / Commodities / Gold and Silver Stocks 2019

The gold miners’ stockshave been climbing higher on balance, enjoying a solid upleg that is gatheringsteam.  That’s fueling improvingsentiment, driving more interest in this small contrarian sector.  This gold-stock upleg is likely to grow incoming months, partially because of very-favorable spring seasonals.  The gold stocks’ second-strongest seasonalrally of the year typically unfolds between mid-March to early June.

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 year-round. Instead gold’s major seasonality isdemand-driven, with global investment demand varying dramatically dependingon 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-late-May 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.

Since it is gold’s own demand-drivenseasonality that fuels the 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 youngbull market.  After being crushed toa 6.1-year secular low in mid-December 2015 on the Fed’s first rate hike of this cycle, gold blasted29.9% 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 mammoth proportions, hitting -17.3% inmid-December 2016.  But that remained shyof a new bear’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, thatwas technically a bull year too since gold just slid 18.8% at worst from itsbull-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 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 latest bull today and bear-market action is quite dissimilar.

Prevailing gold prices variedradically throughout these modern bull-market years, running between $257 whengold’s last secular bull was born to $1894 when it peaked a decade later.  All these years along with gold’s currentbull since 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,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 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 gold’s spring rally is its last push higher before the summerdoldrums arrive.  While this is gold’ssmallest seasonal rally of the year, the gold stocks greatly leverage it.

During these modernbull-market years from 2001 to 2012 and 2016 to 2018, 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 gains acceleratethrough April and much of May.  Thisspring rally has generally run its course by late May.  Across the 15 bull years in this study, goldaveraged modest spring rallies of 3.3%.

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 9.3% winter rally that precedes it and the strong 5.7%autumn rally that follows thesummer doldrums.  Nevertheless, it isstill well worth trading.  3.3% gains do reallymake a difference, and naturally about half of years exceed this mean.

On average gold’sspring-rally bottoming occurred on March’s 10th trading day, which will be the14th this year.  If today’s seasonals staytrue to form, gold will slump in the first couple weeks of March.  But that seasonal pullback between the winterand spring rallies is pretty modest, averaging just 1.3% over a few weeks atmost.  The resulting mid-March lull ingold prices spawns an excellent gold-stockbuying opportunity.

Gold’s average seasonalperformances in March, April, and May during these modern bull-market years ran-0.3%, +1.6%, and +0.6%.  While evenApril is just gold’s 6th-best month of the year, it still has an outsized impact on gold-stock prices.  This has to be sentiment-driven.  Optimism runs high in the spring anyway, andplenty of bullish psychology lingers following gold stocks’ strong winter rallyin preceding months.

This year’s spring goldrally has excellent potential to come in on the large side.  Gold investment demand surged in Q4’18 as globalstock markets crumbled.  They are likelyrolling over into a long-overduemajor bear.  When investors startworrying its next major downleg is brewing, they will again flood into gold to continuediversifying their stock-heavy portfolios. Surging gold investment demand propels gold strongly higher.

That may push gold tothe verge of a major decisivebreakout to new bull highs!  At best in February, gold hit $1341 on close.  Assuming a 1.3% early-March seasonal pullbackbefore a typical 3.3% spring rally, gold would hit $1367.  That’s just above its bull-to-date peak of$1365 seen way back in early July 2016. Investor and speculator interest in gold, and capital inflows into it,will explode as new bull highs are achieved.

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 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 are leveraged plays on gold, and greatlyoutperform in the spring on gold’s seasonals and general optimism.

This next chart applies this same bull-market-seasonalitymethodology used on gold directly to the gold stocks.  It looks at the average annual indexedperformance in the flagship HUI NYSE Arca Gold BUGS Index in these samebull-market years of 2001 to 2012 and 2016 to 2018.  Using the HUI is necessary because the popularGDX VanEck Vectors Gold Miners ETF was only born in May 2006, missing bullyears.

That was halfway into the last secular gold-stockbull, which ran from November 2000 to September 2011.  Over that long 10.8-year span, the HUI skyrocketeda life-changing 1664.4% higher on gold’s parallel 638.2% bull!  Gold-stock prices naturally mirror and amplify gold action since it dominatesgold-mining earnings.  That’s true acrossentire secular bulls, within individual uplegs, and even in calendar-yearseasons.

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 12.2% rallies in these 15 modernbull-market years.  That makes forexceptional 3.7x upside leverage togold’s 3.3% seasonal spring rally! Interestingly this is gold stocks’ best seasonal leverage to gold’sgains by far.

While the HUI averaged14.9% surges during gold’s winter rally, that only made for 1.6x upsideleverage to gold’s big 9.3% gain.  Andthe HUI’s 9.3% average gain during gold’s autumn rally also only amplifiedgold’s 5.7% gain by 1.6x.  So while the gold-stockspring rally’s 12.2% average gains rank second out of these three seasonalrallies, it offers the most bang for the buck in gold-stock upside compared togold!

Like gold, the gold miners’stocks suffer a seasonal slump from late February to mid-March.  That has averaged 2.7% in these modernbull-market years.  So don’t be worriedinto selling if we see a typical early-March slump in this sector.  That’s usually just a mild pullback beforegold stocks’ strong spring rally gets underway. Any seasonal weakness is a great opportunity to add new gold-stock trades relatively low.

The gold stocks’post-winter-rally pre-spring-rally lull tends to bottom on March’s 11th tradingday, which will be the 15th this year. From there the HUI surges 12.2% higher on average over the next 2.7months into early June.  Interestinglythe gold stocks tend to top a coupleweeks after gold peaks in late May. That’s likely the result of momentum fueled by spring optimism and stronggains since the prior summer.

Assuming this year’sgold-stock seasonals conform to their bull-year precedent in coming months, someimpressive levels are coming before summer. If the HUI first retreats 2.7% from its February peak into mid-March beforepowering 12.2% higher into early June, we are looking at 193.0 heading intothis year’s summer doldrums.  Those wouldbe the best gold-stock levels since February 2018 on merely normal seasonals.

But this year’s springseasonal rally has real potential to grow much larger than usual.  Of course if gold’s own spring rally becomesoutsized due to stock-market-selloff-driven surging gold investment demand, thegold miners’ stocks will leverage those gains. And the higher gold stocks climb, the more bullish theirpsychology.  Speculators and investors alikelove chasing momentum and piling into winning trades en masse.

More importantly thissector’s strengthening fundamentals shouldsupport bigger seasonal gains.  Gold’sprice averaged $1228 in Q4’18.  While thegold miners are still finishing reporting their results for last quarter and full-year2018, odds are their collective all-in sustaining costs will remain flat.  Every quarter I wade through the latestresults of the major gold miners of GDX, and usually publish the Q4 ones in mid-March.

Over the last four fully-reportedquarters ending in Q3’18,the GDX gold miners averaged AISCs of $858, $884, $856, and $877.  That makes for an $869 mean, but let’s roundthat to $875 for easier calculations.  AtQ4’s average gold price of $1228 and $875 AISCs, the major gold miners of GDXand the HUI likely earned profits near $353 per ounce last quarter.  But so far in Q1, the average gold price hassurged to $1305!

With AISCs this quarterlikely to be stable too around that usual $875, the gold miners are likelyearning profits of $430 per ounce so far in Q1. That is a massive 21.8% higher quarter-on-quarter!  If investors expect Q1’19 earnings to come inthis strong, there’s no way gold stocks will merely see a seasonally-averagespring rally.  Strong operational resultsin both Q4 and Q1 reporting should fuel amajor gold-stock bid.

Seasonal spring ralliescan balloon very large in rising-gold-price environments, which drive excellentfundamentals for the gold miners.  Thelast example happened in spring 2016, when the HUI powered 32.3% higher withinits normal spring-rally span!  That was justa fraction of a monster 182.2% upleg that skyrocketed over just 6.5months.  Gold-stock buying is fast andfurious when momentum fuels enthusiasm.

This last chart breaks down gold-stockseasonality into even-more-granular monthly form.  Each calendar month between 2001 to 2012 and2016 to 2018 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 actually averaged gold stocks’ strongestmonth of the year in modern bull-market years!

During the 15 Aprils inthese 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 nearly tripled to 4.7%!  For decades if not longer, May has been oneof the best and most-important months to be heavily long gold miners’ stocks.  Only February and November have managed torival it.

The key to gold stocks’spring rally is to get your capital deployed by mid-March, when gold stocks swoon to their spring-rallybottoming.  In intra-month terms theinitial gains are often fast in late March as gold stocks rebound out of their seasonallull.  But then the spring rally tends toslow down in mid-April, which invariably discourages impatient and short-sightedtraders.  The real gains come in May, whengold stocks surge.

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.

Gold-stock sentiment is growing increasinglybullish as this sector’s solidupleg gathers steam.  Seeing higherlows and higher highs on balance further feeds into positive psychology, andtraders love to chase momentum inrallying sectors.  Mounting stock-marketfears of a young bear getting underway should continue to push gold investment demandhigher.  The resulting higher goldprices really boost mining profits.

Outsized gold-stock gains during thisspring-rally timeframe are fully justifiedfundamentally when gold itself is rallying. When sentiment, technicals, fundamentals, and seasonals all align behindgold stocks, they often surge dramatically higher.  Unfortunately most speculators and investors won’trealize this until most of the spring-rally gains have already been won.  Buy low in mid-March instead of buying highin early June!

While you can ride gold stocks’ springrally higher in GDX, the major miners dominating it are struggling to grow theirproduction.  Far-better gains will be wonin smaller mid-tier and junior gold miners with superior fundamentals.  The best are increasing their output through newmine builds and expansions, which also lowers their costs further boosting theirprofits.  Their upside potential utterly trounces that ofthe GDX majors.

The earlier you getdeployed, the greater your gains will be. That’s why the trading books in our popular weekly and monthly newsletters are currentlyfull of better gold and silver miners mostly added in recent months.  The gains we won in 2016 were amazing the lasttime American stock investors returned to gold. Our newsletter stock trades that year averaged +111.0% and +89.7% annualizedrealized gains respectively!

The gold-stock gainsshould get really big as today’s young gold and gold-stock uplegs grow.  The gold miners are the last undervalued sector in these still-expensive stock markets, and rally with gold during stock-marketbears unlike anything else.  To multiplyyour wealth in the stock markets you have to do your homework and stay abreast,which our newsletters really help.  Theyexplain what’s going on in the markets, why, and how to trade them with specificstocks.  You can subscribe today for just $12per issue!

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 driven by the universaloptimism this season brings.  And sincegold drives gold miners’ profitability, their stock prices naturally follow ithigher while amplifying its gains.

This year’s coming spring rally is due tostart in mid-March, with great potential to grow much larger than normal.  Gold-stock sentiment is slowly improving asthis sector’s current upleg continues grinding higher on balance.  And higher gold prices driven by renewedinvestment demand on stock-market-selloff fears is really boosting gold-mining earnings.  All this with strong seasonal tailwindsshould fuel an outsized spring rally.

Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2019 Zeal Research ( www.ZealLLC.com )

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.