Gold Stocks’ Winter Rally 4
Adam Hamilton November 1, 2019 3158 Words
The gold miners’ stocks have surged in 2019, blasting higher after gold’s first bull-market breakout seen in several years. That powerful summer rally left them really overbought, necessitating a correction to rebalance exuberant sentiment. That grinding consolidation lower has set them up nicely for their winter rally, this sector’s seasonally-strongest time of the year. These seasonal tailwinds will amplify their next upleg.
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. And the biggest seasonal surge of all is just getting underway heading into winter. As the Indian-wedding-season gold-jewelry buying that normally drives this metal’s big autumn rally winds down, the Western holiday season ramps up. The holiday spirit puts everyone in the mood to spend money.
Men splurge on vast amounts of gold jewelry for Christmas gifts for their wives, girlfriends, daughters, and mothers. The holidays are also a big engagement season, with Christmas Eve and New Year’s Eve being two of the biggest proposal nights of the year. Between a third to a half of the entire annual sales of jewelry retailers come in November and December! And jewelry historically dominates overall gold demand.
According to the World Gold Council’s latest data, between 2014 to 2018 jewelry accounted for fully 58%, 57%, 47%, 53%, and 51% of total annual global gold demand. That averages out to 53%, which is far bigger than investment demand. During those same last 5 years, that weighed in at just 20%, 22%, 37%, 30%, and 26% to average 27% of the world total. Jewelry is nearly twice as large as investment demand!
That frenzied Western jewelry buying heading into winter shifts to pure investment demand after year-end. That’s when Western investors figure out how much surplus income they earned during the prior year after bonuses and taxes. Some of this is plowed into gold in January, driving it higher. Finally the big winter gold rally climaxes in late February on major Chinese New Year gold buying flaring up in Asia.
So during its bull-market years, gold has always tended to enjoy major winter rallies driven by these sequential episodes of outsized demand. Naturally the gold stocks follow gold higher, amplifying its gains due to their great profits leverage to the gold price. Today gold stocks are now once again heading into their strongest seasonal rally of the year, driven by this annually-recurring robust winter gold demand.
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 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 47.8% in early September, 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 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 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 from correction-depressed gold stocks.
During these modern bull-market years, gold has enjoyed a pronounced and strong seasonal uptrend. This whole concept of seasonality relies on blending many years together, smoothing away outliers to reveal underlying core tendencies. On average by year-ends, gold has powered 14.8% higher from the prior-year-final-close 100 baseline! And the majority of these major gains accrue during the winter rally.
On average gold’s winter rally starts powering higher in late October, right after the seasonal correction following gold’s autumn rally. This major winter-rally bottoming has technically averaged out to arrive on that month’s 16th trading day, which was October 22nd this year. But gold’s powerful bull-breakout rally left it with an extreme gold-futures-selling overhang, which sure ramps up the odds its bottoming will be delayed.
Seasonality defines mere tendencies over long spans, not primary drivers. And seasonals often exhibit mean-reversion patterns after major price moves. That may moderate some of gold’s early-winter-rally potential this year. Gold’s autumn rally naturally comes before its winter rally, running from mid-June to late September in these modern bull-market years. These autumn rallies have averaged modest 5.7% gains.
But late this past June soon after that seasonal rally started, gold achieved that glorious decisive bull-market breakout. That radically improved psychology, unleashing a deluge of new buying from both gold-futures speculators and normal gold investors. So over that usual autumn-rally span, gold surged 13.6% higher this year! That’s 2.4x the seasonal average, major outsized gains, which may have pulled forward buying.
After its autumn rally, gold suffers a seasonal correction running from late September to late October. It is the most severe of all gold’s seasonal corrections, dragging this metal down from its seasonal uptrend’s overhead-resistance line back to its lower support. That pre-winter-rally seasonal correction has run 1.9% on average. This year gold fell a worse-than-normal 2.8% in that span, part of a larger 5.2% pullback.
That still left gold entering its seasonally-strongest span at higher levels than normal, 1.080x its 200-day moving average this year! Over the past 5 years, at that late-October seasonal bottoming gold was only trading at a tight average of 0.987x its 200dma. So gold being much higher than usual heading into its strongest season may retard its coming winter-rally gains. But they could still prove large on pure sentiment.
Rather than buying low like they are supposed to, investors instead love buying high. They love chasing winners, throwing more capital at them the higher they run. Gold’s powerful summer surge this year has left investors far more excited about and bullish on gold than they were in all recent late Octobers. So gold’s self-reinforcing new-high psychology could really unleash a much-larger-than-normal winter rally.
Whether gold’s coming seasonal gains prove smaller or bigger than usual, its strong season is still well worth riding. It starts with November, which has seen big average gold gains of 2.7% from 2001 to 2012 and 2016 to 2018. That makes for gold’s second-strongest month of the calendar year! After that surge gold tends to consolidate high in December, which has averaged comparatively-unimpressive 1.0% gains.
But then comes January, which enjoys major gold demand after investors figure out how much surplus income they generated the prior year. January’s average 3.1% gains are the largest seen out of all the calendar months! That momentum coasts into February, which is no slouch either averaging 1.9% gains. Gold’s 4.1-month-long winter rally is the only seasonal one commanding a cluster of big-gold-rally months.
So late October to late February is when gold enjoys peak seasonal tailwinds. This can really amplify gold’s gains if it is already heading higher for sentimental, technical, or fundamental reasons. After gold’s powerful decisive-bull-breakout surge this past summer, investors are more excited about gold than they’ve been in years. So the alluring new-high psychology could unleash sentiment-fueled momentum buying.
The bigger gold’s winter rally, the better the gold miners’ stocks will perform during this same coming seasonally-strong timeframe. The gold stocks enjoy powerful sentimental and fundamental boosts when gold rallies consistently. Higher gold prices turn trader sentiment bullish on its miners, motivating them to deploy capital which forces gold-stock prices higher. That bullish psychology is fundamentally justified this year.
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 really important to understand, illuminating why gold stocks are the best way to ride gold’s major seasonal rallies. The gold miners’ earnings should explode higher on gold’s breakout surge!
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 operational and financial results from GDX’s elite gold stocks. While this current Q3’19 earnings season is well underway, it won’t be finished until mid-November. So the latest full results available are still Q2’19’s, which proved strong.
That quarter the GDX gold miners reported average all-in sustaining costs of $895 per ounce. That was much lower than gold’s average price of $1309, yielding industry profits of $414 per ounce. But gold’s breakout-surge-fueled upleg catapulted its prices radically higher in the recently-finished Q3’19. That left the average gold price a stupendous 12.6% higher quarter-on-quarter near $1474! That’s a massive jump.
These much-higher prevailing gold prices greatly amplify gold-mining earnings. The major gold miners’ AISCs don’t change much quarter-to-quarter regardless of prevailing gold prices. They averaged a tight $889 over the last 4 quarters. Assuming that holds in Q3, GDX’s major gold miners’ profits have likely skyrocketed 41.3% QoQ! Much-higher gold prices make huge gold-stock gains fundamentally-righteous.
A big gold-stock winter rally is certainly justified this year after gold’s bull-breakout surge. This next chart applies this same seasonal methodology to the traditional HUI NYSE Arca Gold BUGS Index. We can’t use GDX here 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 winter 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 14.9% between late October to late February. That also makes the gold stocks’ winter rally their largest seasonal one of the year, besting both the spring rally’s 12.2% gain and autumn rally’s 9.3% upside. Gold stocks enjoy their best cluster of strong monthly rallies now.
The monthly performances underlying these calendar-year seasonals are easier to understand if gold-stock seasonality is instead sliced into months. This next chart does just that, offering a more-granular perspective on seasonality. Each calendar month in these same modern bull-market years is individually indexed to 100 as of the previous month’s final close, then all like months’ indexes are averaged together.
From 2001 to 2012 and 2016 to 2018, the major gold stocks averaged strong 4.1% gains in Novembers. That ranks it as the third-best calendar month of the year for gold miners. Their drop off in December is much milder than gold’s too, as that month still enjoys good 2.9% average gains. Then January picks up quite dramatically with a 3.8% average surge, while February’s 4.2% is the second best of the calendar year!
Gold stocks’ winter rally is unique in not seeing any significant weakness within its span, unlike both the spring and autumn rallies which suffer sizable mid-run pullbacks. There’s been no better time seasonally to be heavily deployed in gold stocks in these modern bull-market years than this late-October-to-late-February winter-rally span. Gold stocks’ collective performance in coming months largely depends on gold’s.
The more gold rallies, the more bullish speculators and investors will grow on its miners’ stocks. And the more capital they will deploy, bidding gold-stock prices higher. If gold’s powerful autumn rally pulled forward too much buying, lower winter-rally gold gains will certainly weigh on gold stocks’ upside. But if new-high psychology flourishes in gold driving it considerably higher, the gold stocks will certainly soar again.
Their recent massive autumn-rally surge highlights how fast they can rocket with gold rallying materially. Between mid-June to late September, the major gold stocks per the HUI blasted 28.4% higher. That is 3.1x better than gold stocks’ average autumn rally, a really-strong run. Despite that surge they still have real potential to see those outsized gains continuing during their coming winter rally, for multiple reasons.
Fundamentally last quarter and the current Q4’19 are almost certain to see the gold miners enjoying their best earnings in years, both in absolute and growth terms. That’s going to validate traders’ decisions to allocate capital to this high-flying sector. Despite gold’s healthy bull-market correction, so far in Q4 its high $1494 average price still rivals Q3’s $1474. Much-higher gold-mining profits will fuel big investment demand.
In addition the gold stocks remain really undervalued relative to gold, the dominant driver of their profits. A quick proxy for this is found in the GDX/GLD Ratio, the daily close in GDX divided by the daily close in the leading GLD SPDR Gold Shares gold ETF. This GGR hit 0.211x in early September as the latest gold-stock upleg peaked, which was a 2.5-year high. At worst by mid-October the GGR slumped back to 0.188x.
Since this gold-stock bull was born in mid-January 2016, its average GGR has run 0.187x. But when gold is rallying consistently on balance and gold-stock traders wax bullish, gold stocks tend to shoot way higher relative to gold. In the summer of 2016 when gold stocks were last in favor, the GGR averaged 0.244x. To regain that GDX would have to rally about 25% from late-October levels, assuming gold is just flat.
And the GGR was much higher in the past when gold-stock psychology was much better. Between GDX’s birth in May 2006 and August 2008 before gold stocks were ravaged in the first stock panic in a century, the GGR averaged 0.583x. From 2009 to 2012, the normal post-panic period before extreme Fed QE distortions started gutting gold, the GGR’s mean was 0.381x. Recent years’ low levels are an anomaly.
The gold miners’ stocks still have vast lost ground to regain relative to gold. That will gradually come as long as this gold bull continues powering higher on balance in the years ahead. The GGR needs to mean revert dramatically higher, arguing for better-than-normal gold-stock upside whenever gold rallies. That includes in its seasonal winter rally this year. New-high psychology could spawn outsized gold-stock buying.
Regardless of how it plays out over these next 4 months, gold and its miners’ stocks are now entering their seasonally-strongest span of the year. So once gold’s own indicators including speculators’ gold-futures positioning and gold’s overboughtness levels give the green light, traders should aggressively add fundamentally-superior gold and silver miners. Their stock prices are likely to rally strongly by late February.
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The bottom line is gold stocks are just entering their seasonally-strongest period of the year. Their big winter rally is fueled by gold’s own, which is driven first by outsized demand from holiday jewelry buying and later new-year investment buying. So both the metal and its miners’ stocks have strong tendencies to rally between late October to late February in bull-market years. It’s the best calendar span to own gold stocks!
This year’s dawning winter rally has great upside potential despite the big recent surges in gold and its miners’ stocks. Gold’s decisive bull-market breakout left traders way more excited about this sector than they’ve been in years. The resulting bullish new-high psychology should feed on itself leading to growing capital inflows. Gold stocks still have a long way up to go to normalize relative to higher prevailing gold prices.
Adam Hamilton, CPA November 1, 2019 Subscribe at www.zealllc.com/subscribe.htm