Gold Stocks Summer Lows / Commodities / Gold and Silver Stocks 2018

The gold miners’ stockshave been drifting sideways to lower like usual in their summer doldrums.  They are likely near their major seasonallows ahead of a strong autumn rally, a great buying opportunity.  Gold rebounding higher will be the primarydriver fueling the gold-stock advance, dispelling today’s bearishpsychology.  And strong Q2 productiongrowth will likely play a sizable role in restoring favorable sentiment.

Market summers havelong been gold’s weakest time of the year seasonally.  Junes and early Julies in particular aresimply devoid of the big recurring demand spikes seen during most of the restof the year.  With traders vacationing totake advantage of warm sunshine and kids being out of school, markets take aback seat.  So there’s no outsized goldbuying driven by income-cycle or cultural factors this time of year.

Back in early June Ipublished my latest research on gold’s summer doldrums,which forecast the usual sideways-to-lower early-summer grind this year.  And as goes gold, so go silver and the stocksof their miners.  Gold stocks struggle tomake any significant headway when gold is drifting listlessly, which of coursereally taints precious-metals sentiment. These summer doldrums simply have to be endured.

With 2018’s marketsummer half over, the gold stocks have tracked their typical seasonal tradingpattern quite well.  Both the benchmark HUI NYSE ArcaGold BUGS Index and the leading gold-stock ETFs have largely ground sideways as expected.  They are the GDX VanEck Vectors Gold MinersETF including larger companies, and the GDXJ VanEck Vectors Junior Gold MinersETF which actually holds mid-tier ones.

While growing inpopularity, these dominant gold-stock ETFs are relatively new.  GDX and GDXJ were born in May 2006 andNovember 2009 respectively.  While they closelymirror the HUI’s price action, they lack the extensive price history necessaryto distill out seasonal trends.  So thisfirst chart updated from my summer-doldrums research uses the HUI to showgold-stock behavior in modern bull-market years.

Gold enjoyed a powerfulbull market from 2001 to 2012, which catapulted the HUI an amazing 1664.4%higher over 10.8 years between November 2000 to September 2011!  After gold’s own bull-market gain of 638.2%in roughly that same span, it rolled over into a brutal bear market from 2013to 2015.  Then gold started marchinghigher in a new bull that still persists, so bull-market years resumed from2016 to 2018.

Gold stocks’ summer priceaction in all these modern bull-market years is rendered in this chart.  All the yellow lines representindividual-year market summers starting with the HUI indexed at 100 as of thelast pre-summer closes on Mays’ final trading days.  This indexing normalizes very-differentprevailing levels of gold-stock prices over the years, making them allcomparable.  A 5% summer rally shows upas 105 indexed.

All this normalizedsummer trading action from 2001 to 2012 and 2016 to 2017 is then averagedtogether in the red line, revealing gold stocks’ core underlying summertrend.  Finally the currentsummer-of-2018 gold-stock price action is superimposed over the top in blue.  The gold miners’ stocks are doing exactlywhat they usually do this time of year, drifting sideways to lower.  That shouldn’t have surprised anyone.

The gold stocks rarely fare very well inJunes and Julies.  On average the HUIrallied 0.8% in Junes in these modern bull-market years, before retreating 0.2%in Julies.  That makes for thesummer-doldrums drift clearly seen here. On average gold stocks slump 2.3% from the ends of Mays into their bigseasonal lows in mid-Junes.  This meansmoothes out a consolidation range mostly running 10% from Mays’ final closes.

While this summer’s gold-stock action hasbeen weaker than the bull-year average, it still remains well within thattrend.  In this summer of 2018 the HUIfell 3.1% in June, driven by gold crumbling lower under extreme selling pressure from gold-futures speculators. Ultimately gold stocks mirror and amplify what gold is doing, since itsprice drives their profitability.  Major goldstocks’ leverage to gold generally runs2x to 3x.

This sector’s likely summer-doldrums nadircame later than usual in late June, when the HUI had fallen 5.3%month-to-date.  But the gold stocks soonbounced and nearly regained their mean, returning them to flat summer-to-dateearlier this week.  So the summer-2018gold-stock price action has been perfectlynormal so far.  This lowconsolidation doesn’t need to dishearten students of market history who saw itcoming.

Investors and speculators alike tend to getdown on the gold miners in market summers, either worrying their stock pricesare heading even lower or ignoring them entirely.  That’s a huge mistake, as the gold stocks’summer-doldrums lows mark the bestseasonal buying opportunities of the entire year!  After the first halves of market summerspass, gold stocks start powering higher in a series of major seasonal rallies.

Following those weak bull-market-yearaverage performances of +0.8% in Junes and -0.2% in Julies, the HUI has surged 4.2% higher in Augusts on average!  That’s when gold stocks’ major autumn ralliesreally begin marching higher, fueled by gold’s own major autumn rallies.  This chart looks at the overall gold-stock seasonals inthese same modern bull-market years of 2001 to 2012 and 2016 to 2017.  This is also indexed.

Each calendar year’s HUI price action isindividually indexed to 100 as of the final close of the preceding year.  Then all years’ indexes are averaged togetherto distill out gold stocks’ core bull-market seasonal tendencies.  A 120 level means the HUI has rallied 20%year-to-date.  This sector’s majorseasonal lows this time of year are readily evident, showing the outstandingseasonal buying opportunities in Junes and Julies.

The gold miners’ stocks tend to slideinitially in early Junes, rally out of those lows, and then slump back nearthem again in late Julies.  As theseseasonal tendencies are mere averages, the exact summer lows are not precise.  They can come anytime between early June and earlyAugust.  The weaker gold stocks areearlier in market summers, the higher their odds of decisively bottoming.  That concludes their weak season.

Following the summer doldrums, gold stockstend to enjoy a series of major autumn, winter, and spring seasonalrallies.  In these modern bull-marketyears of 2001 to 2012 and 2016 to 2017, the average HUI gain between late Julyand late September has run 10.5%.  That’sfairly large for a long-term average even though the autumn rally is theweakest major seasonal one of the year.  Itsupside is still well worth riding.

Last year was a great example.  The gold stocks bottomed in early July 2017on the same day as gold, Jobs Friday.  Fromthere they started climbing higher again with gold after speculators’ extremegold-futures selling hadexhausted itself.  Over the next 2.0months, the HUI surged 22.7% higher in a nice autumn rally.  That doubled gold’s own autumn rally of 11.2%over that same span making for 2.0x upside leverage.

Both GDX and GDXJ had similar 2017 autumnrallies, weighing in at +20.2% and +20.4%. But plenty of the best mid-tier and junior gold miners with superiorfundamentals had gains well exceeding the major gold miners that dominate theHUI.  GDXJ in particular has seen radical composition changes in the past year shifting to mid-tiergold miners, so its coming autumn-rally upside ought to exceed the HUI’sand GDX’s.

Generally the smaller a gold miner in market-capitalization terms, and thebetter its fundamentals from a production-growth, mining-cost, andprofitability standpoint, the more its stock-price gains outperform the majorgold miners controlling the HUI and GDX. So a carefully-handpicked portfolio of the best mid-tier and smallergold miners should enjoy autumn-rally gains much better than the overall sectoraverage.

Investors and speculators alike ignore goldstocks during the summer doldrums until golditself starts to recover.  As itsusual autumn rally starts modestly in Julies before accelerating in Augusts,gold-mining stocks see growing capital inflows. That shifts sentiment out of summers’ bearishness and apathy backtowards bullishness.  The more goldstocks advance in this virtuous circle, the more traders pay attention to them.

In terms of news flow from individual goldminers, traders often prize productiongrowth most highly of all.  The goldminers have little control over their selling prices, which are dictated by theglobal gold markets.  Their profitmargins are the difference between prevailing gold prices and miningcosts.  So higher gold productionincreases both cash flows generated from operations and earnings, while loweringper-ounce costs.

At Zeal we’ve been taking advantage ofthese summer doldrums in recent weeks to aggressively deploy new gold-stock andsilver-stock trades as explained in our newsletters.  So I’ve spent lots of time going throughindividual miners to try and uncover the ones with superior fundamentals.  That research has left me thinking a lotabout how traders react to productionnews from individual miners.  It’s quitefascinating.

The new mid-tier gold miner Pretium Resourceshas been a great example in the past 9 months or so.  It is ramping up its great new Brucejack goldmine in northwestern British Columbia, which first achieved commercialproduction a year ago in early July 2017. Ever since PVG’s stock price has been a case study in how importantproduction trends are for investmentcapital flows.  We’ve traded andcurrently own this stock.

Bringing a new gold mine online for thefirst time is complicated and fluid. That’s when actual real-world ore grades, mining efficiencies, andrecoveries vary from the myriads of estimates made by geologists and engineersin the planning and construction phases. So mine managers have to go with the flow and adjust and optimizeprocesses in real-time as gold minesramp up.  I’ve seen this many times overthe decades.

But for some reason many traders don’tunderstand this, and always assume the latest production report can be linearlyextrapolated into the future.  On October11th, 2017, Pretium issued a press release right after its first full quarterof commercial production.  It reportedmining 82.2k ounces of gold in Q3’17, way better than traders wereexpecting.  So they flooded into PVGstock bidding it 25.1% higher that dayalone!

But on January 23rd, 2018, Pretium reportedthat Q4’17 production came in lighter at 70.3k ounces.  It not only explained why in terms ofnew-mine operational challenges it was working to overcome, but it gave first-half-2018 guidance at a 175k-ouncemidpoint.  But excitable traders stillfreaked out about the declining production in Brucejack’s second commercialquarter, pummeling PVG stock 26.5% lower that day!

On April 11th Pretium reported mining 75.7kounces of gold in Q1’18, and reiterated that H1’18 guidance near 175k ouncesconfirming that production was forecast tosurge in Q2’18.  So PVG’s stocksoared 19.3% that day in exuberance.  Butagain traders started to doubt whether Pretium could really deliver thatimplied huge production growth in Q2.  Soover the next several trading days PVG dropped 15.8%.

In our July 2018 Zeal Intelligence monthlynewsletter published June 30th, I wrote regarding our open PVG trade “PVG oughtto report excellent Q2 production in early July.  It has given H1’18 guidance at a 175k-ounce midpoint as this new mine ramps up.  Q1 was weaker at 75.7k, implying 100k+ ounces arelikely in Q2!  That would thrill unawareinvestors.”  Pretium would’ve warned ifthat guidance was in jeopardy.

Sure enough just this Monday July 9th,Pretium reported Q2’18 production large enough to exceed its H1’18midpoint.  Q2’18 saw a hefty 111.3kounces of gold mined as Brucejack finally achieved steady-state production inits fourth quarter after going commercial. Yet the goofy oblivious traders still acted surprised, bidding PVG stock14.6% higher that day alone!  Tradersreally buy and sell on production news.

Pretium is just one small example, I couldwrite books on what I’ve seen on this front over my decades of actively tradinggold stocks.  But the really interestingrevelation I’ve had recently is Q2production reports are what help end the summer doldrums!  Gold rebounding remains the primary driver ofthe gold stocks’ strong autumn rally, but I’m starting to think productiongrowth plays a sizable role in turning sentiment around.

You’d think production is relativelyconstant year-round, as gold miners generally have the same capacity in termsof excavating, hauling, and processing ore quarter after quarter.  But that’s not the case because ore gradesvary significantly to radically withingold deposits.  With overall tonnagethroughput fixed, ore grades translate into lower or higher quarterlyproduction depending on the gold richness within that ore.

For some reason mine managers seem touniversally choose to run lower-gradeores in Q1s, resulting in lower production.  These Q1 results are published between early Aprils and mid-Mays, contributing to the weakeningsentiment leading into the summer doldrums. My best guess is mine managers want to take production hits early incalendar years rather than later to help maximize stock-price gains intoyear-ends.

That’s when stock-based compensation likeoptions are decided.  So any slowerproduction necessary from digging through lower-grade ores on the way to betterstuff is best absorbed early in years. Another factor is likely capital budgets, which are decided late inpreceding years.  Mine managers thusoften feel flush with capital to invest in improving operations in early years,and that work sometimes disrupts mining.

This phenomenon is backed up by the besthard data in the world on global gold supply, which the World Gold Councilpublishes quarterly in its fantastic Gold Demand Trends reports.  These offer the deepest fundamental viewavailable on what’s going on with gold, and are essential reading for everyonetrading anything precious-metals-related. The WGC compiles the total global mined supply of gold every quarter.

Over the past 7 years between 2011 to 2017,the quarterly gold-production trends are quite pronounced.  In quarter-on-quarter terms from Q4s to Q1s,global gold mine production fell sharply every single year in this span.  Those absolute quarterly drops ranged from6.9% to 11.7%, and averaged a hefty 9.1%!  So when gold miners report their Q1 results latein market springs, sharply-lower quarterly production is the norm.

Investors and speculators unaware that thisis typical start worrying, sometimes hammering stocks lower and usually gettingmore bearish on the gold miners in general. That feeds into the miserable psychology defining the summerdoldrums.  But once mine managers chewthrough their lower-grade ores in Q1s, and finish their mining-disruptinginvestments, production improvesdramatically in both Q2s and Q3s.

Per that same comprehensive WGC data, Q2sfrom 2011 to 2017 saw absolute QoQ production growth averaging 6.4%.  So when Q2results are reported between early Julies to mid-Augusts, traders think thegold miners are growing strongly.  Thatstarts turning sentiment around, restoring some bullishness and beginning toreturn gold miners to favor.  We’re justentering that perspective-altering Q2 earnings season now.

Gold production continues growing into Q3s, which saw even-stronger 6.7% averageabsolute growth from Q2s in 2011 to 2017! The Q3 reporting season runs from early Octobers to mid-Novembers, whichgives gold stocks nice boosts into year-ends. That’s part of their major winter rallies, which are their strongestseasonal surges of the year.  That leavesgold-stock prices high when year-end bonuses are calculated.

This same years-old gold-mining cycle isplaying out again this year, which increases the odds the gold stocks are now bottoming near summer lows.  As more and more of the good gold minersincluded in GDX and GDXJ report Q2 results, they will be bid higher as traderslike their quarterly production growth. That also serves to lower per-ounce costs, spreading the big fixed costsof gold mining across more ounces.

Lower all-in sustaining costs driven by higher production make the gold miners more profitable, furtherimproving traders’ sentiment.  All thismeans we are entering the psychological sweet spot for the gold miners over thenext half-year or so.  Now is the time toget deployed, to aggressively buy low before the gold miners stage another major autumn rally and head muchhigher.  Gold stocks are dirt-cheap today!

While investors and speculators alike cancertainly play gold stocks’ coming powerful uplegs with the major ETFs like GDXand GDXJ, the best gains by far will be won in individual gold stocks withsuperior fundamentals.  Their upside willfar exceed the ETFs, which are over-diversified with underperformingstocks.  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 Q2, this hasresulted in 1012 stock trades recommended in real-time to our newsletter subscriberssince 2001.  Fighting the crowd to buylow and sell high is very profitable, as all these trades averaged stellarannualized realized gains of +19.3%!

The key to this success is staying informedand being contrarian.  That means buyinglow before others figure it out, before undervalued gold stocks soar muchhigher.  An easy way to keep abreast isthrough our acclaimed weekly and monthly newsletters.  They draw on my vastexperience, knowledge, wisdom, and ongoing research to explain what’s going onin the markets, why, and how to trade them with specific stocks.  Subscribetoday and take advantage of our 20%-offsummer-doldrums sale and see all our new trades!

The bottom line is gold stocks bottomaround the middles of market summers. These major lows offer the best seasonal buying opportunities of theentire year.  Gold stocks start poweringhigher again in mid-summers mainly because gold’s own strong autumn ralliesstart getting underway.  But thepsychology surrounding gold stocks also gets a major boost from their bigquarter-on-quarter production surges in Q2s.

As investors and speculators see Q2 resultsarrive between early Julies and mid-Augusts, they love the sharply-higher QoQgold mined.  That leaves the gold miners’fundamentals looking much stronger, also lowering costs and increasingprofitability.  Traders who want to ridethese big autumn rallies need to be largely deployed before most of this paradeof good Q2 results arrives.  Get buyingbefore summer lows pass!

Adam Hamilton, CPA

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