The gold miners’ stocks have surged dramatically this summer, catapulted higher by gold’s major bull-market breakout. That atypical strength bucking the normal summer-doldrums slump has carried this sector right back to its traditional strong season. That begins with a robust autumn rally starting in late summers. This year’s autumn-rally setup is very unusual, but investment buying could still fuel further gains.
Seasonality is the tendency for prices to exhibit 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 buying and selling.
Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Gold’s seasonality generally isn’t driven 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 investment demand varying considerably depending on the time in the calendar year.
This gold seasonality is fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world. Starting in late summers, Asian farmers begin to reap their harvests. As they figure out how much surplus income was generated from all their hard work during the growing season, they wisely plow some of their savings into gold. Asian harvest is followed by India’s famous wedding season.
Indians believe getting married during their autumn festivals is auspicious, increasing the likelihood of long, successful, happy, and even lucky marriages. And Indian parents outfit their brides with beautiful and intricate 22-karat gold jewelry, which they buy in vast quantities. That’s not only for adornment on their wedding days, but these dowries secure brides’ financial independence within their husbands’ families.
So during its bull-market years, gold has always tended to enjoy major autumn rallies driven by these sequential episodes of outsized demand. Naturally the gold stocks follow gold higher, amplifying its gains due to their profits leverage to the gold price. Today gold stocks are once again back at their most-bullish seasonal juncture, the transition between the usually-drifting summer doldrums and big autumn rallies.
Since it is gold’s own demand-driven seasonality that fuels gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming. Price action is very different between bull and bear years, and gold remains in a younger bull market. After falling to a 6.1-year secular low in mid-December 2015 as the Fed kicked off its latest rate-hike cycle, gold powered 29.9% higher over the next 6.7 months.
Crossing the +20% threshold in March 2016 confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthy selling was greatly exacerbated after Trump’s surprise election win. Investors fled gold to chase the taxphoria stock-market surge. Gold’s correction cascaded to monstrous proportions, hitting -17.3% in mid-December 2016. But that remained shy of a new bear’s -20%.
Gold rebounded sharply from those anomalous severe-correction lows, nearly fully recovering by early September 2017. But gold failed to break out to new bull-market highs, then and several times since. That left gold’s bull increasingly doubted, until June 2019. Then gold surged to a major decisive breakout confirming its bull remains alive and well! Its total gains grew to 37.5% at best in mid-July, still small for gold.
Gold’s last mighty bull market ran from April 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 from its bull-market peak. Gold didn’t enter formal bear-market territory until April 2013, thanks to the crazy stock-market levitation driven by extreme distortions from the Fed’s QE3 bond monetizations.
So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2019. Thus these are the years most relevant to understanding gold’s typical seasonal performance throughout the calendar year. We’re interested in bull-market seasonality, because gold remains in its younger bull today and bear-market action is quite dissimilar.
Prevailing gold prices varied radically throughout these modern bull-market years, running between $257 when gold’s last secular bull was born to $1894 when it peaked a decade later. All these years along with gold’s latest bull since 2016 have to first be rendered in like-percentage terms in order to make them perfectly comparable. Only then can they be averaged together to distill out gold’s bull-market seasonality.
That’s accomplished by individually indexing each calendar year’s gold price action to its final close of the preceding year, which is recast at 100. Then all gold price action 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 105 simply means it has rallied 5% from the prior year’s close, while 95 shows it’s down 5%.
This chart averages the individually-indexed full-year gold performances in those bull-market years from 2001 to 2012 and 2016 to 2018. 2019 isn’t included yet since it remains a work in progress. This bull-market-seasonality methodology reveals that late summers are when gold’s long parade of big seasonal rallies gets underway. And that starts with the major autumn rally which is born in gold’s summer doldrums.
During these modern bull-market years, gold has enjoyed a strong and pronounced seasonal uptrend. From that prior-year-final-close 100 baseline, it has powered 14.8% higher on average by year-ends! These are major gains by any standard, well worth investing for. While this chart is rendered in calendar-year terms since these increments are easiest for us to grasp, gold’s seasonal year actually starts in the summers.
Remember this whole concept of seasonality relies on blending many years together, smoothing away outliers to reveal core underlying tendencies. Seasonally gold tends to bottom in mid-June, but then still largely drifts sideways in its summer doldrums until early July. Gold sure bucked its weakest season this year, blasting sharply higher in June to that huge decisive bull-market breakout! But seasonals remain relevant.
Tremendous buying was necessary to negate gold’s summer doldrums in the last couple months, which largely came from gold-futures speculators. But that nearly exhausted their capital firepower available to buy, leaving a high selloff risk. They could rapidly unwind their excessively-bullish bets if the right catalyst convinces them to exit. The resulting quickly-cascading gold-futures selling would kill gold’s autumn rally.
But gold’s bull-breakout momentum carrying it to its best levels in 6.2 years by mid-July could stave off the bearish mean reversion in spec gold futures. Seeing gold hold over $1400 again has unleashed new-high psychology, which powerfully motivates investors to buy. Investment capital inflows could grow and feed on themselves, amplifying gold’s upside during its autumn-rally span. We still have to consider these seasonals.
Interestingly at gold’s typical mid-June summer-doldrums lows that birth its major autumn rallies, it has still been 5.8% higher year-to-date on average. On that same trading day this year, gold had already been rallying but was still only up 4.6% YTD! So gold remained relatively low this summer compared to seasonal precedent when its autumn rallies normally get underway. There was lots of room for seasonal buying.
Gold’s autumn rallies generally start grinding higher in Julies, which have seen modest average gains of 0.5% in these modern bull-market years per this dataset indexed from prior-year closes. They accelerate considerably in Augusts, which is when that Asian harvest buying kicks into full swing. Gold averaged big 1.9% gains in Augusts, which is its 4th-best month seasonally! So traders need to be long gold by late Julies.
The upside momentum in gold’s strong autumn rallies only builds from there. From 2001 to 2012 and 2016 to 2018, Septembers enjoyed hefty additional average gains of 2.5%! That makes for gold’s 3rd best month of the year, only behind Januaries’ 3.1% and Novembers’ 2.7%. Gold’s autumn rallies generally running from mid-Junes to late Septembers have enjoyed sizable 5.7% average gains in these bull years!
That’s certainly a nice run higher in just 3.4 months. For comparison the US benchmark S&P 500 stock index has averaged 8% annual returns historically. So gold surging almost 3/4ths that much in just over 1/4th the time is impressive. And these autumn rallies are only the first third of gold’s strong season, which includes the much-larger winter rallies averaging big 9.3% gains and smaller spring rallies running 3.3%.
Together gold’s troika of autumn, winter, and spring rallies carve its strong seasonal uptrend rendered in this chart. These sequential seasonal rallies begin right after gold’s weakest time of the year, normally those summer doldrums which were short-circuited this year. Speculators and investors alike can ride gold’s strong bull-market seasonality in physical bullion or the leading GLD SPDR Gold Shares gold ETF.
But the gold miners’ stocks well outperform gold’s underlying seasonal gains, amplifying gold’s trio of big seasonal rallies. The gold stocks enjoy powerful sentimental and fundamental boosts when gold rallies materially. Higher gold prices shock traders out of their usual apathy for this small contrarian sector, restoring capital inflows. The resulting gold-stock gains start shifting sentiment back to bullish, fueling more buying.
And that is fundamentally-justified, as gold-mining profits really amplify underlying gold gains. The higher gold prices flow directly through to bottom lines, as production costs are largely fixed when mines are being planned. Gold miners’ profits leverage to gold is important to understand, illuminating why gold stocks are the best way to ride gold’s seasonal uptrend. The latest real-world data drives home this point.
The leading gold-stock investment vehicle is the GDX VanEck Vectors Gold Miners ETF. It includes the world’s biggest and best major gold miners. Every quarter I analyze the latest financial and operational results from GDX’s elite gold stocks. While this current Q2’19 earnings season is well underway, it won’t be finished until mid-August. So the latest full results available are still Q1’19’s, which proved quite robust.
The GDX gold miners reported average all-in sustaining costs of $893 per ounce, which is what it costs them to produce and replenish each ounce of gold. AISCs don’t change much regardless of prevailing gold prices, as mining still requires the same levels of infrastructure, equipment, and employees quarter after quarter. From Q2’18 to Q1’19, the GDX gold miners’ AISCs averaged $856, $877, $889, and $893.
That makes for $879 AISCs over the past year. Gold-mining profits are the difference between prevailing gold prices and AISCs. Q1’19’s $1303 average gold price and average AISCs yielded industry profits of $410 per ounce. So far in Q3’19, gold has averaged $1415 which is a hefty 8.5% higher! Assuming gold holds these levels and past-year AISCs persist like usual, gold miners are earning about $536 this quarter.
That is big 30.7% earnings growth on a mere 8.5% gold rally, making for 3.6x upside leverage! This core fundamental relationship between mining profits and gold prices is why major gold stocks tend to amplify gold’s gains by 2x to 3x. That leverage can grow much larger after gold stocks are really undervalued and out of favor. In roughly the first half of 2016, GDX skyrocketed 151.2% on a 29.9% gold upleg for 5.1x upside!
So gold stocks’ own strong bull-market seasonality is fully justified fundamentally. This next chart applies this same seasonal methodology to the flagship HUI NYSE Arca Gold BUGS Index. We can’t use GDX for this study since its price history is insufficient, it was only born in May 2006. But since GDX and the HUI hold most major gold miners in common, they closely mirror each other. Gold stocks see big autumn rallies.
During these same modern gold-bull-market years of 2001 to 2012 and 2016 to 2018, the gold stocks as measured by the HUI enjoyed average gains of 9.3% between late Julies to late Septembers. Augusts and Septembers are actually this sector’s second-strongest 2-month span, averaging big respective gains of 3.7% and 3.5%. Speculators and investors need to be fully deployed before Augusts, just like in gold.
The gold stocks’ 9.3% average autumn rally only leverages gold’s 5.7% one by 1.6x, behind the 2x to 3x expected. But that evens out over the winter and spring rallies, where gold stocks climb another 14.9% and 12.2%. That works out to 1.6x and 3.7x upside leverage to gold. In full-calendar-year terms, the gold stocks’ bull-market seasonal gains averaging 25.9% amplified gold’s 14.8% by 1.8x. That was still short of 2x to 3x.
Prior to this summer’s dazzling gold breakout, gold stocks had underperformed the metal they mine for years. With gold unable to hit new bull highs, investors largely forgot about it and its miners’ stocks. That has dragged down gold stocks’ average upside relative to gold. But it has picked up dramatically with gold’s decisive bull-market breakout starting to wake up traders. Recent gold-stock gains well outpaced gold’s.
At best in mid-July, GDX had rocketed 30.8% higher summer-to-date! That was 2.9x gold’s own 10.7% gain over that span. Gold stocks’ powerful counter-seasonal summer surge extended GDX’s upleg-to-date gains to 60.8% over 10.2 months by mid-July. That also proved 2.9x upside leverage to gold’s own 20.7% upleg over that same time frame. That’s at the high side of that historical 2x-to-3x outperformance range.
Since gold stocks mirror and amplify underlying moves in gold, their autumn-rally setup this year is very similar. Rather than drifting like usual in June and July, gold-stock prices soared higher on gold’s decisive bull-market breakout. That’s left them relatively high heading into their normal autumn-rally span. While that increases the risks of a counter-seasonal selloff slaughtering this year’s autumn rally, it all depends on gold.
Gold stocks will follow and leverage gold in the next couple months, whether the metal retreats or keeps rallying. Again gold faces a major selloff if gold-futures selling starts snowballing, rapidly unwinding the speculators’ excessively-bullish bets. But if investors entranced by the alluring new-high psychology keep buying, gold will continue powering higher. Gold stocks’ near-term fortunes depend on gold investment demand.
This final chart slices up gold-stock seasonals into calendar months instead of years. Each is indexed to 100 at the previous month’s final close, and then all like calendar months’ indexes are averaged together across these same modern bull-market years of 2001 to 2012 and 2016 to 2018. Again gold’s autumn rally makes Augusts and Septembers gold stocks’ second-best 2-month span after Januaries and Februaries.
There’s no doubt gold-stock seasonals are very favorable in these next couple months. Gold miners only enjoy strong back-to-back months a couple times a year, and this autumn-rally span is one of them. Late summers offer the best seasonal buying opportunities of the year to deploy capital in gold stocks. That’s when they transition from seasonally-weak summers to seasonally-strong autumns, winters, then springs.
That being said, seasonality reveals mere tendencies. The primary drivers of gold and its miners’ stocks are sentiment, technicals, and fundamentals. Seasonality reflects how these average out across calendar years over long spans, but they can easily override seasonals in any given year. This summer so far is a key case in point. The usual summer doldrums failed to materialize as gold surged on the Fed pivoting dovish.
This year’s autumn-rally setup is well on the bearish side with gold-futures speculators effectively all-in long upside bets and all-out short downside bets. Their buying firepower is nearing exhaustion, leaving vast room to sell and hammer gold and thus gold stocks lower. That remains a serious risk if the right catalyst arises to ignite cascading selling. But the power of new-high psychology to attract investors is strong.
Investment capital inflows can drive gold higher for many months or even years, regardless of what gold-futures speculators are doing. The higher gold rallies, the more investors want to own it. The more they buy, the higher gold climbs. Buying begets buying, and nothing fuels this virtuous circle like new secular highs. So while we need to remain wary entering the autumn rally relatively high, it could certainly still happen.
Exactly a year ago gold’s setup heading into its autumn-rally span was incredibly bullish. As I explained in last year’s essay updating this research thread, extreme gold-futures selling had pushed spec shorts to all-time-record highs. Spec longs were really low too, leaving lots of room to buy and push gold much higher. Yet what happened? Speculators kept on aggressively shorting anyway, battering gold even lower!
Gold was trading at $1302 in mid-June when its summer seasonal low tends to be hit. It fell hard from there, hitting $1224 at the end of July. Then it plunged even lower still to $1174 by mid-August, and only rebounded modestly to $1199 by late September when the autumn rally tends to end. Gold had terrible autumn-rally performance in 2018 despite the super-bullish setup. Strong momentum tends to build on itself.
Last year bearish psychology grew even more bearish in August and September, leading to even more selling beyond normal limits. This year we could see self-reinforcing bullish sentiment as gold’s best prices in years fuel greed. That new-high psychology motivating investors to return could gradually push gold higher as they buy. The resulting high resilient gold prices could retard the big overhang of gold-futures selling.
Regardless of what happens in August and September, gold and its miners’ stocks are entering their strong season which runs until late next spring. So material selloffs can be used to accumulate positions in gold and silver miners with superior fundamentals. But make sure to protect your capital with trailing stop losses, as speculators’ excessively-bullish gold-futures bets still have to normalize via selling sooner or later.
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The bottom line is gold and gold stocks are entering their strong season, starting with their autumn rally. In modern bull-market years, Augusts and Septembers have averaged out to the second-best couple-month span. This is normally fueled by Asian seasonal gold demand coming back online, driving this metal considerably higher. Gold stocks’ profits leverage to gold enables them to nicely amplify its gains.
This year’s autumn-rally setup is very unusual, as gold skipped its summer-doldrums slump after breaking out to major new bull-market highs. That was driven by massive gold-futures buying, leaving speculators’ positioning quite bearish. But rare new-high psychology is a powerful motivating force for investors to buy. Sustained capital inflows from them could easily overpower or retard gold-futures selling for months.
Published by Adam Hamilton of Zeal LLC Specialising in stock-market speculation and investment from a contrarian perspective. This material has been prepared for general information purposes and must not be construed as investment advice.