Gold Stocks Winter Rally / Commodities / Gold and Silver Stocks 2018
The gold miners’ stockssuffered a rough late summer this year. A rare forced capitulation walloped them to deep new lows,short-circuiting their usual autumn rally. That’s left this sector anomalously low as the subsequent winter rallygets underway, gold stocks’ strongest seasonal surge of the year. Starting from beaten-down levels afterskipping the prior seasonal rally gives gold stocks exceptionally-bullishupside potential.
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. And the biggest seasonal surge of all is justnow getting underway heading into winter. As the Indian-wedding-season gold-jewelry buying that normally fuelsthis metal’s big autumnrally winds down, the Western holiday season ramps up. The holiday spirit puts everyone in the moodto spend money.
Men splurge on vast amounts of gold jewelryfor Christmas gifts for their wives, girlfriends, daughters, and mothers. The holidays are also a big engagementseason, with Christmas Eve and New Year’s Eve being two of the biggest proposalnights of the year. Between a third to ahalf of the entire annual sales ofjewelry stores come in November and December! And jewelry historically dominates overall gold demand.
According to theWorld Gold Council’s latest data, between 2013 to 2017 jewelry accountedfor fully 60%, 58%, 56%, 47%, and 53% of total annual global gold demand. That averages out to 55%, which is far biggerthan investment demand. During thosesame past 5 years, that weighed in at just 18%, 20%, 22%, 37%, and 30% toaverage 26% of the world total. Jewelrydemand is over twice as large asinvestment demand!
That frenzied Western jewelry buyingheading into winter 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 winter gold 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 major winter rallies driven by these sequential episodesof outsized demand. Naturally the goldstocks follow gold higher, amplifying its gains due to their great profitsleverage to the gold price. Today goldstocks are now once again heading into their strongest seasonal rally of theyear driven by this annually-recurring robustwinter gold demand.
Since it’s 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, goldpowered 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’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,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 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 2018. 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 stalled 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 latest bullsince 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 2017. 2018isn’t included yet since it remains a work in progress. This bull-market-seasonality methodologyreveals that gold’s strongest seasonal rally by far is its winter one which tends to start in late October. That portends big gains in coming months fromstill-beaten-down gold stocks.
During these modernbull-market years, gold has enjoyed a pronounced and strong seasonal uptrend. This whole concept of seasonality relies onblending many years together, smoothing away outliers to reveal underlying coretendencies. On average by year-ends,gold has powered 16.0% higher fromthe prior-year-final-close 100 baseline! And the majority of these major gains accrue during gold’s winter rally.
On average gold’swinter rally starts powering higher in late October, right after the seasonalcorrection following gold’s autumn rally. This major winter-rally bottoming has technically averaged out to arriveon that month’s 16th trading day, which was October 22nd this year. But in 2018 gold bottomed early after getting blasted lower by a wild frenzy ofextreme all-time record gold-futures short selling by speculators.
Initially ignited by asharp rally in the US dollar, that incredible leveraged shorting soon took on alife of its own and snowballed. Sogold’s usual autumn rally was obliterated this year, it didn’t even exist! Insteadof climbing the typical 6.6% between mid-June to late September, gold washammered a serious 9.1% lower in that autumn-rally span. Both gold-futures speculators and gold-ETF investors dumpedit aggressively.
Seasonality definesmere tendencies over long spans, not primary drivers. So seasonal tailwinds can sometimes bedrowned out or bucked entirely when sentiment, technicals, or fundamentals getsufficiently bearish. That just happenedto an extreme degree this year, as negating an entire seasonal rally is fairlyrare. But the bright side of this isseasonals often exhibit strongmean-reversion patterns after price extremes.
Somuch-smaller-than-normal seasonal rallies like 2018’s missing-in-action autumnone generally lead to larger-than-normal subsequent ones. Gold powers higherfaster to make up for lost ground! Thusthis year’s young winter rally enjoys good odds for growing exceptionallylarge. On average in these modernbull-market years, gold’s winter rally ran 9.5%. That already dwarfs the spring and autumnrallies’ 3.7% and 6.6%.
Gold’s winter rally isso powerful because November, January, and February see some of its bestaverage monthly gains. This month clocksin at 2.9%, making it gold’s 2nd-best calendar month. That peters out in December which averages just0.7% upside. But January more than makesup for it with really big 3.1% average gains, which is gold’s best month of theyear seasonally. February ranks 5th with2.1%.
So gold’s 4.2-monthwinter-rally span enjoys its best average seasonal performance of the entireyear. This is the time witnessing peak seasonal tailwinds. So if gold is already heading higher forsentimental, technical, or fundamental reasons, this strong seasonality willamplify its gains. And that is certainlythe case this year. Both gold futuresand gold ETFs suffered serious late-summer selling that needs to be unwound.
Gold’s autumn rallyvanished this year because extreme record gold-futures shorting way overpowered it. Between mid-June andlate-August which is the majority of that normal autumn-rally span, speculatorsadded an astounding record 156.4k gold-futures short contracts! Since shorting gold futures effectivelyrequires borrowing them first, these excessive shorts must soon be closed bybuying offsetting long contracts.
Speculators’ collectivegold-futures positions are reported weekly in the famous Commitments of Tradersreports. The latest-available CoT databefore this essay was published is current to October 23rd. At that point speculators still had another 93.6k contracts of short-coveringbuying necessary to bleed off their huge bearish bets back down to mid-Junelevels. That’s the equivalent of 291.2metric tons of marginal demand!
All that remainingcovering buying out of those epic record shorts will almost certainly occur inthis year’s winter rally. That’s on topof normal strong seasonal demand. Andthat extreme speculator gold-futures shorting blasting gold sharply lowerreally tainted investor psychology too. So they started fleeing in sympathy and dumping gold-ETF shares. That was readily evident in the leading GLDSPDR Gold Shares’ holdings.
Between mid-June andearly October they collapsed 11.9% or 98.6t! As of this week, investors still had to buy enough GLD shares to pushits holdings another 74.7t higher in order to mean revert back up to thoseearly-summer pre-gold-selloff levels. Sospeculators and investors alike have farmore gold buying than usual to do in this year’s winter rally. That odd outsized autumn-rally selling allneeds to be reversed.
Normally gold’s winterrally starts with gold up an average of 10.9% year-to-date in lateOctober. But this year’s extreme sellinganomaly had hammered gold down 9.9% YTD at its mid-August lows. While it did recover some to -6.7% YTD bylate October, that still left a massive negative seasonal divergence around 18%. All that lost ground needs to be regained,giving this year’s winter rally far-larger-than-usual upside potential.
And the bigger gold’swinter rally, the better the gold miners’ stocks will perform over this samecoming seasonally-strong timeframe. Thegold stocks enjoy powerful sentimental and fundamental boosts when gold ralliesconsistently. Higher gold prices startshifting psychology back to bullish in this small contrarian sector, restoringcapital inflows. And the resultinggold-stock price gains are also justified fundamentally.
Gold-mining profits really leverage underlying goldgains. The higher gold prices flowdirectly through to bottom lines, as production costs are largely fixed whenmines are being planned. Gold miners’ profits leverage to gold is really important to understand, illuminating why gold stocks are the bestway to ride gold’s major seasonal rallies. Recent real-world data illustrates the fundamental impact of higher goldprices.
The leading gold-stockinvestment vehicle is the GDX VanEck Vectors Gold Miners ETF. It includes the world’s biggest and bestmajor gold miners. Every quarter Ianalyze the latest operational and financial results from GDX’s elite goldstocks. While this current Q3’18earnings season is well underway, it won’t be finished until mid-November. So the latest full results available arestill Q2’18’s, which proved quite strong.
The GDX gold minersreported average all-in sustaining costs of just $856 per ounce,which is what it costs them to produce and replenish each ounce of gold. AISCs don’t change much regardless ofprevailing gold prices, as mining still requires the same levels ofinfrastructure, equipment, and employees quarter after quarter. Between Q3’17 to Q2’18, the GDX gold miners’AISCs averaged $868, $858, $884, and $856.
That makes for apast-year average of $867. Gold-miningprofits are the difference between prevailing gold prices and AISCs. At gold’s $1174 low in mid-August driven bythat record gold-futures shorting, the major gold miners would’ve earned $307per ounce. Assuming gold’s winter rally ismerely average at +9.5%, that would carry gold back to $1286. Gold-mining profits would surge 36.5% higherto $419 per ounce!
This example showsgold-mining earnings leveraging a garden-variety gold winter rally by3.8x. This core fundamental relationshipbetween gold-mining profits and gold levels is why gold-stock prices tend toamplify gold’s gains by 2x to 3x. That leverage grows larger after gold stocksare wildly undervalued and deeply out of favor. In roughly thefirst half of 2016, GDX soared 151.2% on a 29.9% gold upleg for 5.1x upside!
So gold stocks’ ownstrong bull-market seasonality is fullyjustified fundamentally. This nextchart applies this same seasonal methodology to the flagship HUI NYSE Arca GoldBUGS Index. We can’t use GDX for thisstudy since its price history is insufficient, it was only born in May2006. But since GDX and the HUI hold manymajor gold miners in common, they closely mirror eachother. Gold stocks see big winterrallies.
During these samemodern gold-bull-market years of 2001 to 2012 and 2016 to 2017, the gold stocksas measured by the HUI enjoyed average gains of 15.5% between late October tolate February. That also makes the goldstocks’ winter rally their largest seasonal one of the year, besting both thespring rally’s 12.8% gain and autumn rally’s 10.5% upside. But gold stocks’ average winter-rallyleverage to gold is lacking.
Their 15.5% seasonal rallyon 9.5% gold gains makes for relatively-weak leverage of only 1.6x. That’s well behind the 2x to 3x expectedbased on historical precedent. Even infull-calendar-year terms, the 28.9% average gold-stock gains per the HUI onlyamplify gold’s 16.0% by 1.8x. This isthe result of gold stocks dramatically underperforming gold in recent years, which dragged down and skewed their average gains.
That was mostly theresult of euphoric recordstock markets retarding gold investment demand. Gold is the ultimate portfolio diversifiersince it tends to rally when stock markets weaken. So as stock markets appeared to do nothingbut rally indefinitely for years on extreme central-bank easing and later massiveUS corporate-tax cuts, investors felt little need to own counter-moving goldand the stocks of its miners.
That’s starting tochange though. When the US stock marketsplunged 5.3% out of the blue in two trading days in mid-October, frightenedinvestors suddenly rememberedgold and bid it 2.8% higher. Thegold stocks blasted up 9.1% on that, making for excellent 3.2x upside leverage! Because gold miners’ profits are fullydependent on prevailing gold prices, they can defy major stock-market selloffs to power higher with gold.
So if the stock marketsare rolling over into their long-overdue next bear market driven by the record Fed tightening underfull-speed QT, gold and gold stocks will return to favor in a major way. That ought to at least restore gold stocks’normal leverage to gold, if not boost it well above historical precedent forquite some time in a mean-reversion overshoot. This could very well begin in coming months in this year’s winter rally.
Also after gold stocks’autumn rally was short-circuited by that record gold-futures shorting, theirwinter-rally upside potential is much greater than usual. Between late July and late September, thegold miners’ stocks as measured by the HUI typically climb 10.5%. But this 2018 period was an unmitigateddisaster. Gold stocks plummeted 26.4%between mid-June and early September when a brutal forced capitulation climaxed!
Normally when goldstocks’ winter rally is getting underway in late October, the HUI is already up20.3% YTD on average. But this year onOctober’s 19th trading day which is the average winter-rally bottoming, the HUIwas still down a colossal 25.4% YTD. Sogold stocks are entering their strongest seasonal period of the year at agigantic 46% negative divergence! That’s a mountain of lost ground they stillneed to make up.
And you could arguethat gold stocks’ winter rally isn’t really righteous until they’ve first meanreverted back up to normal year-to-date levels. So this small contrarian sector’s upside potential in the coming 4months or so is truly exceptional. Goldbeing driven much higher by speculators’ enormous gold-futures buying andinvestors returning will act like rocket fuel catapulting a major gold-stockupleg much higher.
This last chart slicesgold-stock seasonality into months instead of years, which offers amore-granular perspective. Each calendarmonth in these same modern bull-market years is individually indexed to 100 asof the previous month’s final close, then all like months’ indexes are averagedtogether. Gold stocks’ winter-rallyperiod encompassing November to February enjoys some of this sector’s strongestmonths of the year.
Between 2001 to 2012and 2016 to 2017, the HUI averaged hefty 4.2% gains in November. That ranks as their 4th-best month of theyear. Then like and because of gold,there is a winter-rally lull in December which retreats to 2.4% averagegains. But gold stocks tend to powerhigher early in new years, with a return to strong 3.9% average gains inJanuary. The winter rally is finallycapped by February’s beast-mode surge.
February’s massive 5.4%average gold-stock gains per the HUI across all these bull-market years win outas their best month of the calendar year! This unbroken winter-rally streak is what makes this period between lateOctober and late February the best timeof the year to be heavily long gold stocks. There is no other seasonal span with such unparalleled consistency ofbig gold-stock gains, it is remarkably strong!
And this year’swinter-rally setup is way more bullish than most. Both gold and gold stocks got bashed far belowwhere they ought to be this time of year. These enormous negative-divergence anomalies need to be unwound withmajorly-outsized winter rallies. Andwith both gold-futures speculators and gold-ETF investors needing to do massive buying to normalize their wildly-bearish positions, fuel abounds to drive them.
The gold miners mayhave a sentimental and fundamental ace up their sleeve as well. According to WGC data, global gold productionsurges dramatically quarter-on-quarter fromQ2s to Q3s. The past 5 years haveseen gold mined in Q3s surge 9.0%, 9.1%, 7.4%, 7.1%, and 4.8% QoQ! This 7.5% average growth is huge. I suspect it is timed to maximize stock gainsinto year-ends, when most bonuses are calculated.
While gold miners’quarterly tonnage throughput doesn’t change much, mine managers decide whatkinds of ore grades to feed into mills. They seem to prefer to process lower-grade ores in years’ first halves, thenmove on to higher-grade mixes in second halves. The gold miners’ Q3 earnings season will wrap up over the next coupleweeks, and this typical higher production should lead to proportionally-lowerAISCs.
Average per-ounce costsnaturally fall when there are more ounces mined to spread the big fixed costsacross. And there’s nothing that warmsgold-stock investors’ contrarian hearts more than growing production and itsaccompanying lower costs. So gold-stocksentiment could improve considerably soon independent of gold’s recovery uplegas collective Q3 results look betterfundamentally fueling nice buying.
The greatest gains inthis coming winter rally won’t be won in the popular ETFs like GDX and GDXJ, asthey are far-overdiversified and burdened with way too many underperforming goldminers. So it’s much more prudent todeploy capital in the best individual gold miners with superiorfundamentals. Their gains will handilytrounce the ETFs, further amplifying the already-huge upside potential of this sector as a whole.
The key to riding anygold-stock bull to multiplying your fortune is staying informed, both about broader markets and individualstocks. That’s long been our specialtyat Zeal. My decades of experience bothintensely studying the markets and actively trading them as a contrarian ispriceless and impossible to replicate. Ishare my vast experience, knowledge, wisdom, and ongoing research through ourpopular newsletters.
Published weekly and monthly, they explain what’sgoing on in the markets, why, and how to trade them with specific stocks. They are a great way to stay abreast, easy toread and affordable. Walking thecontrarian walk is very profitable. Asof Q3, we’ve recommended and realized 1045 newsletter stock trades since2001. Their average annualized realizedgains including all losers is +17.7%! That’s double the long-termstock-market average. Subscribe today and getinvested before gold stocks soar way higher!
The bottom line is gold stocks are justentering their seasonally-strongest period of the year. Their big winter rally is fueled by gold’sown, which is driven first by outsized demand from holiday jewelry buying andlater new-year investment buying. Soboth the metal and its miners’ stocks have strong tendencies to rally betweenlate October and late February in bull-market years. It’s the best calendar span to own goldstocks!
Andthis year’s coming winter rally looks exceptionallybullish with far more upside potential than normal. Gold and the gold stocks both skipped theirusual autumn rallies on record gold-futures shorting and the sympatheticinvestor flight. So they have huge lostground to make up as traders normalize excessively-bearish positions with bigmean-reversion buying. That should sooncatapult the gold stocks sharply higher.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 - 2018 Zeal Research ( www.ZealLLC.com )
Zeal_LLC Archive |
© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.