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

The gold miners’ stockshave been battered over this past half-year, bludgeoned relentlessly lower withgold.  Heavy gold-futures selling fueledby the US dollar shooting parabolic in a mania has slammed the yellow metal.  Gold’s normal seasonal trends have been overpoweredby speculators’ leveraged gold-futures dumping. But with their selling capital firepower exhausted, gold’s usual winter rallyshould roar back.

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 behaviors 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 display strong seasonalitybecause their price action amplifies 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.  And the biggest seasonal surge of all is justgetting underway heading into winter.  Asthe Indian-wedding-season gold-jewelry buying that normally drives this metal’s big autumn rally windsdown, the Western holiday season ramps up. The holiday spirit puts everyone in the mood to spend money.

Men splurge on vast amounts of gold jewelryfor Christmas gifts for their wives, girlfriends, daughters, and mothers.  The holidays are also a major engagementseason, with Christmas Eve and New Year’s Eve being two of the biggest proposalnights of the year.  Between a third to halfof the entire annual sales of jewelryretailers come in November and December! And jewelry historically dominates overall gold demand.

The World Gold Council closelytracks global gold supply and demand, publishing the latest data eachquarter.  During the last five calendaryears, jewelry demand averaged 49.1% of overall total world gold demand.  That is much larger than investment demand,which averaged 31.9% during that same 2017-to-2021 span.  Year to date in 2022 as of the end of Q2,jewelry demand is tracking at a similar 45.7% of total.

The usual frenzied Western jewelry buyingheading into Christmas shifts to pure investment demand after year-end.  That’s when Western investors figure out howmuch surplus income they earned during the prior year after bonuses andtaxes.  Some of this is plowed into goldin January, driving it higher.  Finallythe big gold winter rally climaxes in late February on major Chinese New Yeargold buying flaring up in Asia.

So during its bull-market years, gold hasalways tended to enjoy powerful winter rallies driven by these sequentialepisodes of outsized demand.  Naturallythe gold stocks follow gold higher, amplifying its gains due to their great profitsleverage to the gold price.  Today goldstocks are now once again heading into gold’s strongest seasonal rally of theyear, driven by this annually-recurring robustwinter gold demand.

Since it is gold’s own demand-drivenseasonality that fuels gold stocks’ seasonality, that’s logically the best placeto start to understand what normally happens in coming months.  This latest gold-winter-rally analysis iscomplicated by recent technical events. Between early March’s anomalous geopolitical-spike high on Russiainvading Ukraine to late September, heavy gold-futures selling pummeled gold20.9% lower.

So the yellow metal was just slammed into bear-marketterritory, technically making 2022 a bear year! Gold’s price action in bull years and bear years is quite different, andit’s bull-market seasonality we’re interested in.  That certainly calls into question whetherthis old research thread is applicable this winter.  But because of what drove gold’s recent 20%+ plunge,odds are it is an oversized correction in a secular bull.

Gold’s geopolitical spike to $2,051 lasteda single trading day, leaving gold unsustainably overbought as I warned at thetime.  Without that short-lived peak,gold’s total selloff over the next 6.6 months would have been 18.8%.  That’s a large major correction, but not anew bear.  And the dominant driver of therecent big selling was speculators’ heavy-to-extreme gold-futuresdumping, which is anomalous and self-limiting.

These hyper-leveraged traders’ capital firepoweravailable for selling is very finite.  Andthat sure looks exhausted based on historical precedent.  They’ve liquidated about as many long contractsas they are likely able to, recently crushing total speclongs to a deep 3.4-year low!  Andthey’ve pretty much hit their probable limit on short selling too, with totalspec shorts soaring to a stunning 3.8-year high inlate September!

Such spec-gold-futures bearish-positioningextremes never last long, soon giving way to massive mean-reversion buying thatcatapults gold sharply higher.  After thelast similar episode in May 2019, gold rocketed up 21.5% in just 3.3 months!  This inevitable coming big gold-futuresbuying will be accelerated by the wildly-overcrowded long-US-dollar trade rollingover.  So gold’s recent lows aren’tlikely to last very long.

Technically gold’s next bull-market upleg couldalready be underway, and will likely be confirmed during this year’swinter-rally span.  Specs’ mandatorygold-futures short-covering buying quickly pushes gold high enough to attractback other long-side speculators.  Their largerbuying soon drives enough upside momentum to entice investors to chase gold withtheir vastly bigger pools of capital, supercharging its gains.

So with gold barely in bear territory measuredfrom an artificial high, and the recent selloff mostly fueled byheavy-to-extreme gold-futures selling that has to soon reverse, we oughtto give gold the benefit of the doubt seasonally.  2022 might yet end up being a gold-bull year,and it certainly isn’t a normal gold-bear one! The gold-bull years for seasonal analysis in modern history ran from 2001to 2012 and 2016 to 2021.

Gold’s earlier 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 only 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.

That bear ultimately mauled gold to a 6.1-yearsecular low in mid-December 2015, which birthed another bull.  Over the next 4.6 years into early August 2020,gold gradually powered 96.2% higher to $2,062. That latest young-and-small secular bull was technically just staked bythis summer’s anomalous extreme gold-futures selling.  Again huge mean-reversion buying will likelyleave this new baby bear short-lived.

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 early 2022.  These are the years most relevant tounderstanding gold’s typical seasonal performance throughout the calendar year,including its powerful winter rallies. The exceedingly-bearish gold-futures specs normalizing their lopsidedbets would amplify that.

Prevailing gold pricesvaried greatly through these modern bull years, running from way down at $257in April 2001 to that latest $2,062 record high in August 2020.  To render that enormous range of gold pricesspanning two secular bulls perfectly comparable, they must first be convertedinto like-percentage terms.  Onlythen can these long years of gold prices be averaged together to distill outgold’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.  With its bull-bearstatus uncertain, 2022 isn’t included yet. This bull-market-seasonality methodology reveals that gold’s strongestseasonal rally by far is its winter one which tends to start in late October!  That portends big gains in coming months fromselloff-depressed gold stocks.

Gold’s averageperformances during these modern bull years have proven impressive, clocking inwith 14.5% gains.  And those were draggedlower by a poor 2021, where gold slumped 3.6%. Essentially the same dynamics that have plagued gold this year also dogged it last year.  Extreme Fed hawkishness ignited big US-dollarsurges, which goaded the hyper-leveraged gold-futures speculators into heavyselling.

Gold actually got offto a strong start in 2022, up 8.1% YTD in mid-April even after that earliergeopolitical spike had faded.  That was wayahead of the +4.7% seasonal average at that point.  But as Fed officials panicked about the raging inflation unleashed by their own extreme money printing,the wheels starting falling off gold.  TheFed embarked on its most-extreme hawkish pivot ever, catapulting the US dollarparabolic.

That prematurelytruncated gold’s spring rally, obliterated its usually-stronger autumn rally,and forced the yellow metal into that technical bear market.  The magnitude of spec gold-futures selling necessaryto fuel such a colossal seasonal deviation was utterly enormous.  From March’s earlier geopolitical-spike high,specs dumped a mind-boggling 165.5k long contracts while adding another 66.0kshort ones in just 6.6 months!

That added up to staggeringgold-equivalent selling of 720.1 metric tons, far too much too fast for globalmarkets to absorb!  That hammered gold waydown to $1,623 in late September, super-oversold prices last seen emerging fromMarch 2020’s brutal pandemic-lockdown stock panic.  That left gold down 11.3% YTD as specs’capital firepower available for selling dwindled to nothing, dreadfully belowtypical seasonals.

Normally gold’s autumnrally is cresting in late September, leaving the metal up about 11.9% YTD.  That is followed by a short seasonal correctioninto late October, from which gold’s winter rally launches.  This has proven gold’s strongest seasonalrally by far during these modern gold-bull years, averaging hefty 8.3% gainsinto a late-February peak!  That easilybests the spring rally’s +4.1% and autumn rally’s +5.8%.

Even at late October’swinter-rally bottoming before that big seasonal gold demand gets underway, goldhas averaged 10.1% YTD gains.  Had thathappened this year without that epic gold-futures selling, gold would’ve beenseeing major seasonal lows in recent weeks around $2,015!  But those extreme gold-futures distortionsdrove terrible underperformance, which greatly ups the odds for an outsizedwinter rally.

With spec gold-futuresselling spent, late September’s deep 2.5-year gold low should prove a durablebottom.  From there a seasonal-average8.3% winter rally would carry gold back up near $1,758.  While those are solid gains, that’s not animpressive level absolutely.  Gold was runningaround $1,975 in mid-April before that heavy-to-extreme gold-futures sellingerupted, and could surge back up there in coming months.

That would make for amighty 21.7% winter rally, which is likely too big to be driven solely by gold’susual big holiday jewelry buying and new-year investing.  But the massive gold-futures mean-reversionbuying necessary to restore normal spec positioning out of late September’sbearish extremes could easily fuel a rapid 20%+ gold upleg.  Again gold soared 21.5% in mid-2019 after thelast time spec bets were this lopsided.

To fully return tomid-April spec gold-futures positioning, these traders would have to do 702.8tof gold-equivalent buying.  Imagine halfthat as a mean reversion with no typical overshoot, or about 350t of justgold-futures buying.  That doesn’tinclude the normal winter-rally seasonal demand surges, nor the bigger gold investment buying that arises to chase futures-driven upside momentum.  So 350t is really conservative.

Emerging from March2020’s pandemic-lockdown stock panic the last time gold prices were battered thislow, the yellow metal skyrocketed 40.0% higher in just 4.6 months!  The total identifiable gold investment buyingand gold-futures buying necessary to propel gold in such a big-and-fast movewas just 382t.  So a 20%+ gold upleg confirminga new bull during coming months’ winter-rally span really isn’t a tall order atall.

Huge self-feeding gold-futuresmean-reversion buying is inevitable as this wildly-overextended parabolicUS dollar reverses lower.  Multiplecatalysts could trigger big dollar selling, ranging from US inflation datacoming in cooler than expected to accelerating rate hikes by competing majorcentral banks.  Once that overdue dollarselling and resulting gold-futures buying gets underway, it has a long way torun to completion.

The battered gold miners’stocks will be the biggest beneficiaries of a supercharged gold winterrally.  This next chart applies this samemodern-gold-bull-year seasonality methodology to gold stocks.  Since GDX was born later in May 2006, its pricehistory is insufficient for longer-term studies.  Thus the classic HUI gold-stock index is usedinstead.  Closely tracking each other,GDX and the HUI are functionally interchangeable.

The major gold stockshave solidly leveraged gold’s upside during these same modern-gold-bull years, averaging25.0% seasonal gains!  And those wereeven better up 27.2% prior to 2021 before these recent serious gold-pricedistortions from heavy gold-futures selling on Fed hawkishness.  Just like the metal that drives theirearnings and stock prices, gold stocks enjoy big seasonal spring, autumn, and winterrallies.

Gold stocks’ upcomingwinter one averaged 12.9% gains between late October to late February, makingit their second-biggest seasonal rally after spring’s +13.5%.  Typically at the seasonal-correction bottomingthis time of year before their winter rally starts marching, the major GDX andHUI gold stocks are still up 17.2% YTD.  Butshockingly in late September, GDX had plummeted 31.7% YTD to literal stock-panic levels!

But that colossalseasonal disconnect is an unsustainable extreme anomaly driven by that unsustainableextreme gold-futures selling.  As thatreverses into big mean-reversion buying catapulting gold sharply higher, thegold stocks will follow and amplify its gains. Normally GDX leverages material gold moves by 2x to 3x.  While gold dropped 17.9% between mid-April tolate September, GDX collapsed 46.5% or 2.6x.

Gold stocks’ winter-rallypotential this year is totally dependent on gold’s fortunes.  A merely average 8.3% winter gold rally woulddrive GDX somewhere between 17% to 25% higher. But the bigger 20%+ one likely on massive gold-futures mean-reversionbuying would catapult GDX up 40% to 60%! Those are big gains worth chasing. To end this year with normal seasonal gains, GDX would have to soar near$40.

Though that would makefor a huge 83% run off gold stocks’ recent anomalous lows, that would merelyreturn GDX to mid-April levels.  Againgold was trading near $1,975 then after that geopolitical spike had passed,with GDX challenging $41.  So if themajority of recent months’ enormous gold-futures selling is unwound throughmean-reversion buying in this winter-rally span, gold stocks ought to fullyrecover.

Traders tend to warm togold stocks in the coming months, as this final chart slicing gold-stockseasonals into calendar months shows.  Eachis indexed to 100 at the previous month’s final close, then all like months’ indexesare averaged together across these same modern-gold-bull years.  Together November, December, January, and Februaryhave long proven this sector’s strongest cluster of big seasonal gains.

During these upcomingwinter-rally months, the HUI has averaged excellent gains of 2.8%, 3.6%, 3.0%,and 2.3% through these long secular spans! While other individual months can see bigger gains, there is no other streakof months enjoying such large and consistent gold-stock rallies.  So gold stocks respond very favorably to higher gold prices during its winter rally. Outsized gains are likely this time of the year!

The better gold performsbetween now and late February, the greater the upside for the beaten-down gold stocks.  Unfortunately only a small fraction of contrariansrealize this, as this sector’s dreadful recent technical action fuelingdismally-bearish sentiment has led traders to abandon gold stocks.  Speculators and investors alike need to understandthat miserable sector performance is an extreme unsustainable anomaly.

Gold was crushed inmid-2022 by heavy-to-extreme gold-futures selling, driven by the US dollarrocketing parabolic to extreme multi-decade highs.  That dollar mania was fueled by extremehawkishness from Fed officials, both jawboning and aggressive tightening actions.  But the shock value of those has passed,setting up the heavily-distorted US dollar and specs’ gold-futures trading toreverse sharply and mean revert.

That will catapult theunloved gold stocks far higher, with GDX amplifying gold’s underlying gains by2x to 3x like usual.  And the smaller fundamentally-superior mid-tier and junior goldminers will way outperform in this coming outsized winter rally.  They are better able to consistently grow theiroutputs, which lowers costs and boosts profitability.  These smaller gold miners are in the sweetspot for upside potential as gold runs.

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The bottom line is goldand thus gold stocks are just entering their strongest seasonal span of theyear.  Gold’s big winter rally is fueledby outsized demand first from holiday jewelry buying then later new-yearinvestment buying.  So both the metal andits miners’ stocks have strong tendencies to rally big between late October tolate February.  The major gold stocks tendto amplify gold’s underlying gains by 2x to 3x.

And this year’s dawningwinter rally has exceptional upside potential after all the gold carnage thisyear.  Gold was hammered to panic-level extremelows by a half-year of heavy gold-futures selling.  But that left speculators’ positioning exceedinglybearish and their selling firepower exhausted, paving the way for massive mean-reversionbuying.  That should soon catapult goldand gold stocks dramatically higher.

Adam Hamilton, CPA

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