Gold Stocks Winter Seasonal Rally / Commodities / Gold and Silver Stocks 2023

Gold stocks have mostlyground lower to sideways since spring, leaving this contrarian sector reallyout of favor again.  Yet both the metaland its miners’ stocks are early on in their strongest seasonal rallies of theyear.  From late October to late February,gold tends to enjoy excellent gains which the gold stocks leverage.  Given 2023’s great winter-rally setup, gold’sbullish seasonals should prove potent tailwinds ahead.

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, and daughters.  The holidays are also a major engagementseason, with Christmas Eve and New Year’s Eve being two of the biggest proposalnights of the year.  Something like a thirdto half of the entire annual sales ofmany jewelry retailers come in November and December!  And jewelry historically dominates overallgold demand.

The World Gold Council closelytracks global gold supply and demand, publishing the latest data eachquarter.  During the last five calendaryears, jewelry demand averaged 42.7% of overall total world gold demand.  That is much larger than investment demand,which averaged 26.6% during that same 2018-to-2022 span.  Year-to-date in 2023 at the end of Q3,jewelry demand is tracking at a similar 42.9% of the 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.  Finally gold’sbig winter rally climaxes in late February on major Chinese New Year gold buyingflaring up in Asia.

So during its bull-market years, gold has usuallytended to enjoy powerful winter rallies driven by these sequential episodes of outsizeddemand.  Naturally the gold stocks followgold higher, amplifying its gains due to their excellent profits leverage tothe gold price.  Today gold stocks are nowonce again early on in gold’s strongest seasonal rally of the year, driven bythis annually-recurring robust winter golddemand.

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. This old research thread focuses on modern bull-market seasonality, as bulland bear price action are quite different. Gold enjoyed a mighty 638.2% bull run from April 2001 to August 2011, fueling gold stocks skyrocketing 1,664.4% per their leading index then!

Following that secular juggernaut, gold consolidatedhigh then started correcting into 2012. But the yellow metal didn’t enter formal bear territory down 20%+ untilApril 2013.  That beast mauled gold on andoff over several years, so 2013 to 2015 are excluded from these seasonalaverages.  Gold finally regained bull statuspowering 20%+ higher in March 2016, then its gains grew to a modest 96.2% by August2020.

Another high consolidation emerged afterthat, where gold avoided relapsing into a new bear despite a seriouscorrection.  Later the yellow metalstarted powering higher again, coming within 0.5% of a new nominal record in earlyMarch 2022 after Russia invaded Ukraine. So 2016 to 2021 definitely proved bull years too, with 2022 reallylooking like one early on.  Then Fedofficials panicked, unleashing market chaos.

Inflation was raging out of control thanksto their extreme money printing.  In just25.5 months following the March 2020 pandemic-lockdown stock panic, the Fed balloonedits balance sheet an absurd 115.6%!  Thateffectively more than doubled the US monetary base in just a couple years,injecting $4,807b of new dollars to start chasing and bidding up the prices on goodsand services.  That fueled an inflation super-spike.

With big inflation running rampant, Fedofficials frantically executed the most-extreme tightening cycle in this central bank’s history.  Theyhiked their federal-funds rate an astounding 450 basis points in just 10.6months, while also selling monetized bonds through quantitative tightening!  That ignited a huge parabolic spike in the USdollar, unleashing massivegold-futures selling slamming gold 20.9% lower into early September.

That was technically a new bear market, albeitbarely and driven by an extraordinary anomaly that was unsustainable.  Indeed gold soon rebounded sharply,exiting 2022 with a trivial 0.3% full-year loss.  Gold kept on powering higher, reentering bullterritory up 20.2% in early February 2023! So I’m also classifying 2022 as a bull year for seasonality research.  Gold’s modern bull years include 2001 to 2012and 2016 to 2023.

Prevailing gold pricesvaried radically across these secular spans, running just $257 when gold’s mighty2000s bull was born to August 2020’s latest record high of $2,062.  That vast range of gold levels spread overall those long years has to first be rendered in like-percentage terms in order to make them perfectly comparablewith each other.  Then they can be averagedtogether to distill 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.  So gold trading at 110 simplymeans it has rallied 10% off the prior year’s close.  Gold’s previous seasonality before 2022 was addedis shown in light blue.

During fully 19 of the last22 years, gold has averaged excellent 13.8% annual gains!  This great recent-decade track record shouldleave gold widely respected as an essential portfolio diversifier.  All investors should deploy some smallfraction of their financial assets into gold, like the traditional 5% to 10%which was considered prudent for centuries. Gold allocations stabilize returns, while protecting against marketshocks.

Gold’s hefty modern-bull-yearseasonal gains mostly accrued in three distinct rallies, autumn, winter, andspring ones.  They respectively averaged5.1%, 8.6%, and 3.6% gains during this secular span.  While all are worth riding, gold’s winterrally is easily the seasonal champion sporting the biggest upside.  Surging 8.6% higher in just 4.1 months annualizesnear a fast 25% rallying pace!  Gold’swinter rally is quite powerful.

Again it is usuallyborn around late October, where gold has already averaged 9.1% year-to-dategains.  This year’s winter-rallybottoming proved different, pulled earlier and lower by a monster bear rally in the USDollar Index on expectations for more Fed rate hikes.  While gold’s pre-winter-rally seasonal low averagesOctober’s 16th trading day, this year it arrived on the 4th.  Gold was also more battered than usual.

Thanks to more heavy gold-futures selling in reaction to that soaring US dollar, the yellow metal actually drooped to a slight0.2% YTD loss!  But more-oversold lowerlows herald bigger mean-reversion-rebound rallies, and this underway winter oneis no exception.  Igniting from geopoliticalfears then largely fueled by slipping Fed rate expectations, gold blasted up10.2% in just a few weeks!  This winterrally is already big.

That sharp symmetrical V-bounceleft gold up a more-normal-for-this-time-of-year 9.9% YTD.  While such gains already exceeded thewinter-rally average, that doesn’t mean this year’s seasonal run prematurely exhausteditself.  Gold suffered an unusual breakdownleading into early October, plunging 5.8% over just 12 trading days after hawkishFOMC officials upped their year-end-2024 forecast for the federal-funds rate.

Interestingly fully6/10ths of gold’s strong winter rally since was just regaining that lost technicalground!  Had those aggressive FOMC dotsnot blindsided gold, its winter-rally bottoming in 2023 would have likely provenconsiderably higher.  Maybe closer to$1,900 than that distorted $1,820 nadir. With the majority of this winter rally’s surge being a mean-reversionbounce out of an anomalous breakdown, it doesn’t look mature.

These winter-rallyaverages yield gold upside targets.  An8.6% average gain from early October’s deep low would merely leave gold near$1,976, under current levels.  That wouldbe disappointing, implying gold would just grind sideways on balance into lateFebruary.  But if that early-October selloffanomaly that quickly reversed is ignored, from a more-normal $1,900 bottomingan 8.6% seasonal surge yields $2,063.

That sure makes for apowerful level psychologically.  Gold’s nominalall-time-record closing high was again $2,062 in early August 2020.  This newest winter rally could easily pushgold to the verge of forging into record territory.  Gold nearing, challenging, and achieving newrecords will win widespread financial-media coverage stoking soaring popularbullishness and greed!  Investors will flockback to chase those gains.

These guys generally ignoregold until it surges long enough and high enough to recapture their attention.  Then they rush to buy to ride that upsidemomentum, amplifying gold’s gains with their massive capital inflows.  So if this young winter rally boosts goldnear record territory, it will almost certainly mushroom outsized before givingup its ghost.  There’s another average-winter-rallytarget even more bullish for gold.

These seasonal winter ralliesrun from late in years to early in subsequent ones.  Across all these modern gold-bull years, onaverage winter rallies peaked 18.5% above gold’s final closes entering thefirst years.  Think of this as ayear-to-date measure extended into the second years when winter rallies crest.  Gold climbing 18.5% above its year-end-2022levels yields an average-winter-rally target way up at $2,161!

These absolute levelsaren’t the point here, they can never be precisely predicted.  But it’s important to realize this young 2023seasonal winter rally lifting gold to new nominal records in coming months isn’t a stretch at all.  And that willchange everything psychologically for gold, quickly shifting herd sentimentback to very-bullish.  Gold will be impossibleto ignore as new records generate excited financial-media hype.

Major price trends aredriven by sentiment, technicals, and fundamentals, not seasonals.  But when the former three prime movers arepushing gold higher, strong seasonals act like nice tailwinds ballooning thosegains.  The dominant bullish case forgold today is speculators’ bearish positioning in gold futures, which will requiremassive buying to normalize.  My recentessay on gold’s new majorupleg analyzed that in depth.

Bullish seasonals are simplythe icing on the cake, not necessary but nice to have to enhance in-progressuplegs.  And if gold hitting new recordcloses soon gets speculators and investors excited, demand for unloved goldstocks will skyrocket.  They will followtheir metal higher like usual, really amplifying its gains.  Gold stocks also tend to see solid winterrallies thanks to gold’s, their strongest seasonal time of the year.

Gold miners’ stockswill be the biggest beneficiaries of a record-supercharged gold winter rally.  This next chart applies this same modern-gold-bull-yearseasonality methodology to gold stocks. Since GDX was born later in May 2006, its price history is insufficientfor longer-term studies.  Thus theclassic HUI gold-stock index is used instead. Closely tracking each other, GDX and the HUI are functionally interchangeable.

The major gold stocksenjoy parallel seasonal autumn, winter, and spring rallies mirroring andleveraging gold’s.  Those averaged solid8.1%, 13.3%, and 12.1% gains during these same 19 modern gold-bull years.  That made for respective upside leverage togold of 1.6x, 1.5x, and 3.4x.  It alsohelped the HUI achieve big average annual gains of 23.1% over this longsecular span!  Gold stocks have proven majorwinners.

Like gold, the goldstocks’ winter rallies begin in late October then run into late February.  This gold-stock surge starts a few tradingdays after gold’s, but ends at the same time. This year’s pre-winter-rally low came a few weeks earlier than usual, forcedby gold’s anomalous post-FOMC plunge.  Slammedto its own very-oversold unsustainable low, GDX’s initial mean-reversionrebound was symmetrically sharp and violent.

In the first coupleweeks after that gold-futures-selling-driven winter-rally bottoming, GDX blastedup 14.0% amplifying gold’s own 5.6% V-bounce by 2.5x.  That was right in the middle of major goldstocks’ normal leverage range to material gold moves of 2x to 3x.  But over the next couple weeks or so as goldcontinued surging, GDX fell way behind. By the time gold had recovered 10.2%, GDX had merely rallied 12.7%.

That’s really poor,gold stocks have to leverage their metal to compensate traders for the majoradditional risks they bear.  I analyzed why gold stocks were lagging in another essay a few weeks ago.  The generalstock markets falling sharply in that span contributed, universally tainting sentiment.  Bearishness surged on that, leaving tradersless willing to add any stock trades. But gold-stock performance is also just lumpy.

Gold stocks tend tosurge then drift, advance sharply then retreat some to consolidate thosegains.  This is even evident in thewinter-rally seasonals in this chart. Gold stocks’ outperformance to gold also tends to grow as gold uplegsmature.  Early on traders are skepticalabout their staying power, so they remain reluctant to add gold stocks.  But the longer and higher gold runs, the moreattractive gold stocks become.

So disproportionalgold-stock buying tends to occur later in major gold uplegs as popular greedflares.  That often leads leverage to goldto improve considerably as gold uplegs age. GDX could easily end up amplifying gold’s mounting winter rally closerto 3x in the coming months.  Gold’s new recordhighs will help drive that, greatly increasing sector interest and bullishness.  Great gold-stock fundamentals will help.

Last week I analyzedthe GDX-top-25 gold miners’ latestQ3’23 results.  The were fantastic,making for one of the best quarters gold stocks ever reported.  Lower mining costs combined with higher goldprices led sector unit earnings to nearly double!  Revenues, profits, and operating cash flowswere strong, and this trend is likely to continue.  Better earnings drive down valuations andattract back institutional investors.

To hit that $2,161winter-rally target in late February, gold’s new upleg would only have to growto 18.8% gains.  That’s fairly modest, asits last upleg cresting in early May soared 26.3%.  If gold rallied around 19%, the GDX goldstocks ought to double to triple that at 38% to 57% winter-rally gains!  Right in the middle at 2.5x leverage would leaveGDX near $38.25 in a few months, which would be well worth riding.

Traders tend to warm togold stocks in coming winter 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 four winter-rallymonths, the HUI has averaged strong 3.6%, 3.4%, 2.6% and 2.9% gains inthese modern-gold-bull years.  November,December, and February rank as the 2nd, 3rd, and 4th best calendar months forgold-stock seasonal gains!  While May isstronger up 4.1% on average, no other seasonal span rivals the winter rally’sgrouping of big up months.  Outsizedrallies are likely this time of year.

The closer gold advancesto new record territory, the more popular bullishness will mount.  As sentiment improves, interest in thebattered gold stocks should soar.  Whilethe larger majors of GDX should amplify gold’s upside by 2x to 3x, smaller mid-tiers and juniors ought to really outperform.  Our newslettertrading books are full of fundamentally-superior ones, better able to consistentlygrow their production off littler bases.

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The bottom line is goldand thus gold stocks are early on in their strongest seasonal rallies of theyear.  Gold’s big winter rally is fueledby outsized demand first from holiday jewelry buying, then later new-yearinvestment buying.  That has long helpeddrive the metal and its miners’ stocks considerably higher from late October tolate February.  And 2023’s young winterrally has great potential to grow much bigger than usual.

Gold is forging towardsnominal all-time-record territory again for the first time in severalyears.  As gold nears, challenges, and achievesnew records, bullish financial-media coverage will soar helping to entice backlegions of investors.  The longer and highergold runs, the more they’ll rush to chase its gains amplifying them.  Meanwhile gold miners’ earnings are soaring,leaving their stocks even more undervalued.

Adam Hamilton, CPA

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