Before their recent surge on gold regaining $1600, the gold stocks spent much of the past half-year or so largely drifting sideways to lower. That high consolidation really weighed on sentiment, with greed giving way to apathy. This sector normally tends to suffer a seasonal slump into mid-March, paving the way for gold stocks’ spring rally. That’s their second-strongest seasonal surge of the year running into early June.
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. The seasonal gold year starts in late July as Asian farmers begin reaping their harvests. They plow some of their surplus income into gold. That’s soon followed by the famous Indian wedding season in autumn, with its heavy gold buying for brides’ dowries during marriage-auspicious festivals.
After that comes the Western holiday season, where gold jewelry demand surges for Christmas gifts for wives, girlfriends, daughters, and mothers. Following year-end, Western investment demand balloons after bonuses and tax calculations as investors figure out how much surplus income the prior year generated for investment. Then after that Chinese New Year gold buying flares up heading into February.
These understandable cultural factors drive surges of outsized gold demand between late summer and late winter. But interestingly there is one more gold-demand spike in spring. Over the years I’ve seen a variety of theses explaining this mid-March-to-early-June gold rally, but nothing definitive like for the rest of the year’s seasonality. As silly as it sounds, I suspect spring itself is the reason for this demand surge.
Sentiment exceedingly influences investing, which requires optimism for the future. Investors won’t risk deploying their scarce capital unless they believe it will grow. And the glorious expanding sunshine and warming temperatures of spring naturally breed optimism. The vast majority of the world’s investors are far enough into the northern hemisphere that spring has a major psychological impact, buoying their spirits.
While spring’s seasonal impact on gold itself is more muted, the gold stocks tend to blast higher anyway as capital floods in. That optimism fuels gold stocks’ most upside leverage to gold seasonally throughout the calendar year. If their recent gold-$1600 surge didn’t pull forward too much buying, gold stocks’ spring rally should get underway near mid-March. That usually portends outsized gains in this contrarian sector.
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 last 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 after. 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 57.8% by late February 2020, 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, then resumed in 2016 to 2020. 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 those 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 2019. 2020 isn’t included yet since it remains a work in progress. This bull-market-seasonality methodology reveals that gold’s spring rally is its last push higher before the summer doldrums arrive. While this is gold’s smallest seasonal rally of the year, the gold stocks greatly leverage it.
During these modern bull-market years from 2001 to 2012 and 2016 to 2019, gold’s spring rally tended to start in mid-March on average. From that major seasonal low following the winter rally, gold often starts grinding higher before its gains accelerate through April and May. This spring rally has generally run its course by early June. Across the 16 bull years in this study, gold averaged modest spring rallies of 3.3%.
This spring rally unfolds rapidly, with an average duration of just 2.7 months. That makes it the smallest and shortest of gold’s three major seasonal rallies, falling way behind the champion 9.1% winter rally that precedes it and the strong 6.2% autumn rally that follows the summer doldrums. Nevertheless, it is still well worth trading. 3.3% gains really do make a difference, and naturally about half of years exceed this mean.
On average gold’s spring-rally bottoming occurred on March’s 10th trading day, which will be the 13th this year. If today’s seasonals stay true to form, gold will slump in the first couple weeks of March. But that seasonal pullback between the winter and spring rallies is pretty modest, averaging just 1.4% over a few weeks at most. The resulting mid-March lull in gold prices spawns an excellent gold-stock buying opportunity.
Gold’s average seasonal performances in March, April, and May during these modern bull-market years ran -0.4%, +1.5%, and +0.7%. While even April is only gold’s 6th-best month of the year, it still has an outsized impact on gold-stock prices. This has to be sentiment-driven. Optimism runs high in the spring anyway, and plenty of bullish psychology lingers following gold stocks’ strong winter rally in preceding months.
But this year’s spring gold rally definitely faces some challenges, as 2020’s gold buying so far has been precarious. It’s important to remember that seasonality defines mere tendencies over long spans of time, like prevailing tailwinds or headwinds. These can amplify or retard gold’s price action driven by its two dominant primary drivers, speculators’ collective gold-futures trading and investment-demand trends.
Unfortunately neither has been firing on all cylinders in recent months. That’s why gold has only slowly ground higher since its last upleg originally peaked in late September, despite 2020’s shocking geopolitical news. Gold should’ve soared with the US and Iran attacking each other militarily, and a terrifying potential global pandemic wreaking havoc in China. But the capital inflows to catapult it higher didn’t materialize.
Even after late February’s surge back over $1600, gold was just 6.8% higher than its initial upleg-topping levels 5.7 months earlier. Given the ominous news flow, gold should’ve blasted way higher. Its lethargic reaction is the result of gold-futures speculators not being able to materially buy, as their capital firepower was largely exhausted. And investors distracted by euphoric stock markets haven’t been interested in buying.
The spring rally’s seasonal tailwinds alone won’t be able to overcome these challenges. Gold needs to see significant-to-sizable capital inflows from speculators or investors to power higher in the next few months. Gold-futures speculators have essentially been all-in since late December, when their total longs and shorts were running 100% and 0% up into their own gold-bull trading ranges! Their buying was tapped out.
That 100% longs and 0% shorts held by these hyper-leveraged traders is the most-bearish-possible near-term setup for gold. They have little room to buy, but vast room to sell when the right catalyst hits. And the least extreme specs’ excessively-bullish gold-futures bets had become since was still 89% longs and 5% shorts in early February. These collective bets still have a lot of mean-reversion normalizing left to do!
While gold-futures speculators mostly haven’t been able to buy, investors have proven indifferent since mid-October or so. That’s when the Fed launched its extreme QE4 campaign monetizing huge amounts of Treasuries. Those colossal liquidity injections catapulted the stock markets higher, generating extreme complacency and euphoria. That has killed demand for prudently diversifying stock-heavy portfolios with gold.
It isn’t likely to return until recent extreme record-high stock markets plunge into a deep and lingering correction, or gold keeps surging fast enough to attract in momentum investors like last summer. But that seems like a long shot today with gold-futures specs’ buying power mostly expended. Without sizable capital inflows gold’s spring rally this year threatens to be muted, unless something changes to bring them back. Related: Is A New Housing Bubble Forming?
And as goes gold, so go gold stocks. Gold stocks also exhibit strong seasonality, which is of course the direct result of gold’s own seasonality. Since gold-mining costs are largely fixed when mines are being planned, fluctuations in gold’s price flow directly into amplified moves in gold-mining profits. Higher gold prices drive much-higher earnings for the gold miners, which attract in more investors to bid up stock prices.
The ironclad historical relationship between the price of gold, gold-mining profitability, and therefore gold-stock price levels is exceedingly important to understand. If you need to get up to speed, I wrote an essay looking at gold-stock price levels relative to gold in late January. Fundamentally gold stocks are leveraged plays on gold, and usually really outperform in the spring on gold’s seasonals and general optimism.
This next chart applies this same bull-market-seasonality methodology used on gold directly to the gold stocks. It looks at the average annual indexed performance in the flagship HUI NYSE Arca Gold BUGS Index in these same bull-market years of 2001 to 2012 and 2016 to 2019. Using the HUI is necessary because the popular GDX VanEck Vectors Gold Miners ETF was only born in May 2006, missing bull years.
That was halfway into the last secular gold-stock bull, which ran from November 2000 to September 2011. Over that long 10.8-year span, the HUI skyrocketed a life-changing 1664.4% higher on gold’s parallel 638.2% bull! Gold-stock prices naturally mirror and amplify gold action since it dominates gold-mining earnings. That’s true across entire secular bulls, within individual uplegs, and even in calendar-year seasons.
Gold stocks’ seasonal spring rally is much stronger than gold’s, buttressing that spring-optimism-drives-stock-buying thesis. Between mid-March to early June, the gold stocks have averaged hefty 11.5% rallies in these 16 modern bull-market years. That makes for exceptional 3.5x upside leverage to gold’s 3.3% seasonal spring rally! Interestingly this proves gold stocks’ best seasonal leverage to gold’s gains by far.
While the HUI averaged larger 15.2% surges during gold’s winter rally, that only made for 1.7x upside leverage to gold’s big 9.1% gain. And the HUI’s 9.0% average gain during gold’s autumn rally also only amplified gold’s 6.2% surge by 1.5x. Though the gold-stock spring rally’s 11.5% average gains rank second out of the seasonal-rally trio, it offers the most bang for the buck in gold-stock upside compared to gold!
Like gold, the gold miners’ stocks suffer a seasonal slump from late February to mid-March. That has averaged 2.7% in these modern bull-market years. So don’t get discouraged if we see a typical early-March slump in this sector. That’s usually just a mild pullback before gold stocks’ strong spring rally gets underway. Any seasonal weakness is a good opportunity to add new gold-stock trades relatively low.
The gold stocks’ post-winter-rally pre-spring-rally lull tends to bottom on March’s 11th trading day, which will be the 16th this year. From there the HUI surges 11.5% higher on average over the next 2.7 months into early June. That gold-stock spring-rally span naturally closely mirrors gold’s own. How the gold stocks fare over the next several months really depends on what the yellow metal ends up doing ahead.
If gold keeps grinding higher, its miners’ stocks should follow and leverage its gains. Gold needs to see rekindled capital inflows to pull that off. If gold drifts sideways, odds are the gold stocks will too. And if gold suffers a counter-seasonal spring selloff on gold-futures speculators dumping longs and adding shorts to normalize their excessively-bullish positions, the gold stocks will track their metal lower like usual.
But gold stocks’ spring outperformance relative to gold in any of these scenarios will certainly be justified by their fundamentals. Their Q4’19 results are being reported and this latest earnings season will wrap up by mid-March. In the preceding Q3’19, the major gold miners of GDX averaged all-in sustaining costs of $910 per ounce. With that quarter’s average gold price near $1474, that implied gold-miner profits of $564.
Those were up a staggering 36.2% sequentially quarter-on-quarter and 68.9% year-over-year! Q4’19’s results are likely to continue showing spectacular gold-mining profits growth, as average gold prices rose slightly to $1483. Assuming the GDX major gold miners’ Q4’19 AISCs are in line with their preceding four-quarter average of $897, that implies sector earnings of $586. That would be up a massive 72.9% YoY!
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And so far in Q1’20, gold has averaged $1576 which makes for another big 6.3% QoQ gain. As investors figure out the stock markets’ best earnings growth is coming in this obscure contrarian gold-mining sector, that could easily fuel major gold-stock outperformance relative to gold again. This year’s outsized spring gold-stock rally could very well happen for fundamental reasons even if gold’s own spring gains remain muted.
This last chart breaks down gold-stock seasonality into even-more-granular monthly form. Each calendar month between 2001 to 2012 and 2016 to 2019 is individually indexed to 100 as of the previous month’s final close, then all like calendar months’ indexes are averaged together. Slicing up seasonal tendencies this way shows May has actually averaged gold stocks’ strongest month of the year in modern bull-market years!
During the 16 Aprils in these gold-bull-market years, the gold stocks as measured by the HUI saw average gains of 1.0%. But the lion’s share of the spring-rally gains came in May, where average gains more than quadrupled to 4.4%! For decades if not longer, May has been one of the best and most-important months to be heavily long gold miners’ stocks. Only August now manages to rival it thanks to 2019’s surge.
The key to gold stocks’ spring rally is to get your capital deployed by mid-March, when gold stocks swoon to their spring-rally bottoming. In intra-month terms the initial gains are often fast in late March as gold stocks rebound out of their seasonal lull. But then the spring rally tends to slow down in mid-April, which invariably discourages impatient and short-sighted traders. The real gains come in May, when gold stocks surge.
Of course the standard seasonality caveat applies that these are mere tendencies, not primary drivers of gold or gold stocks. Seasonal tailwinds can be easily drowned out by bearish sentiment, technicals, and fundamentals. Seasonality doesn’t always work, especially when it doesn’t align with the primary drivers of sentiment, technicals, and fundamentals in that order. That casts this year’s spring rally into some doubt.
Ultimately gold stocks will follow gold, since their earnings amplify changes in its price. If gold-futures speculators start selling en masse to normalize their excessively-bullish positions, that will certainly force gold lower. If investors enamored with recent Fed-levitated stock markets don’t resume consistently buying gold, it’s not going to rally. If gold is sufficiently weak in coming months, gold stocks will follow it lower.
But if gold can hang in there and consolidate high, or better yet rally on resurgent investment demand, the gold stocks should enjoy excellent spring-rally gains. The major gold miners’ earnings are soaring in a market where profits growth is getting harder to find. As American stock investors figure this out, this small contrarian sector will see major capital inflows catapulting gold-stock prices much higher in years ahead.
The bottom line is gold stocks often experience a strong spring rally seasonally. This is driven by gold’s own seasonality, where outsized investment demand arises at certain times during the calendar year. Gold usually enjoys a solid spring rally likely fueled by the universal optimism this season brings. And since gold drives gold miners’ profitability, their stock prices naturally follow it higher while amplifying its gains.
Unfortunately this year’s potential spring rally is more clouded than usual. Speculators’ positioning in gold futures remains excessively-bullish, their buying firepower largely expended. And investors have been ignoring gold to chase recent record-high stock markets. But if gold can consolidate high or push even higher, the gold stocks will likely surge to outsized gains this spring as their profits growth dazzles investors.
By Adam Hamilton
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