Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17
Q4 Pivot View for Stocks and Gold - 14th Oct 17
Gold Mining Stocks Q3’17 Preview - 14th Oct 17
U.S. Mint Gold Coin Sales and VIX Point To Increased Market Volatility and Higher Gold - 14th Oct 17
Yuan and Gold - 14th Oct 17
Tips for Avoiding a Debt Meltdown - 14th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Gold Stocks Autumn Rally

Commodities / Gold and Silver Stocks 2016 Aug 05, 2016 - 07:46 PM GMT

By: Zeal_LLC

Commodities

The gold miners’ stocks have already enjoyed a phenomenal year, blasting higher with gold’s new bull market.  This sector’s market-dominating performance has been amazing.  Yet incredibly, the gold stocks are only now entering their strongest time of the year seasonally.  Historically during bull-market years the gold stocks have enjoyed massive autumn rallies on average, starting right about now which is very bullish.

Gold-stock performance is highly seasonal, which certainly sounds odd.  The gold miners produce and sell their metal at relatively-constant rates year-round, so the temporal journey through calendar months should be irrelevant.  Based on these miners’ revenues, there’s no reason investors should favor them more at certain times of the year than others.  Yet history proves that’s exactly what happens in this sector.


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 isn’t driven by supply fluctuations like grown commodities experience, as its mined supply remains pretty steady all year.  Instead gold’s major seasonality is demand-driven, with global investment demand varying dramatically depending on the time within 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 now in late summer, 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 secures brides’ financial independence within their husbands’ families.

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 investors figure out how much surplus income they earned after getting bonuses and paying taxes.  Some of this is invested into gold just like the Asian farmers do.  Then big Chinese New Year gold buying flares up heading into February.

So during its bull-market years, gold has always tended to enjoy massive 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 right at their most-bullish seasonal juncture, the transition between the usually-drifting summer doldrums and big autumn rallies.

Since it’s gold’s own demand-driven seasonality that fuels the gold stocks’ seasonality, that’s the best place to start to understand what’s likely coming.  Price action is very different between bull years and bear years, and gold is absolutely in a new bull market.  Between the 6.1-year secular low it suffered in mid-December and early July, gold powered 29.9% higher easily exceeding that +20% new-bull threshold.

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 slid 18.8% at worst from its bull-market peak.  Gold didn’t enter formal bear-market territory at -20% until April 2013, thanks to the near-miraculous stock-market levitation driven by extreme distortions from the Fed’s bond monetizations.

So the modern bull-year seasonality relevant to this new bull year in 2016 ran from 2001 to 2012, before the Fed-induced bear-market years between 2013 to 2015.  This first chart distills down gold’s bull-year seasonal tendencies, by averaging gold prices indexed within each calendar year.  This methodology is essential because it renders price percentage moves perfectly comparable despite differing prevailing gold prices.

Gold’s close on the final day of each preceding year is recast at a level of 100, with all the following year’s daily gold closes indexed off that.  An indexed level of 110 simply means gold was up 10% year-to-date at that point.  Each calendar year’s individually-indexed gold prices are then averaged together to arrive at this gold-bull seasonality.  Gold has always had a strong tendency to enjoy major autumn rallies.

During its last bull-market years from 2001 to 2012, gold’s major autumn rally started on average in late July.  While gold seasonals technically bottomed in mid-June, that was just part of gold drifting listlessly sideways in the summer doldrums between late May and late July.  Gold’s major autumn rally averaging hefty 7.5% gains between mid-June and early October didn’t actually break out to the upside until early August.

And that’s exactly where we are today!  Gold is on the verge of once again seeing outsized demand from those key seasonal income-cycle and cultural drivers that ignite in this late-summer period and then run well into autumn.  Note above how August and September together saw gold’s strongest seasonal gains on average during its last secular bull.  These next couple months are among gold’s top-performing calendar ones.

Gold averaged gains of 2.5% in Augusts and 3.3% in Septembers between 2001 to 2012, making those its 4th- and 2nd-best calendar months respectively.  While Novembers take the title with 4.0% average gains, no other couple-month span outperforms August and September!  Gold is just entering its strongest stretch of the year in seasonal terms, which is a very bullish near-term omen for it and gold-stock prices.

While that’s definitely exciting, this year does face some unique risk factors that could dampen gold’s usual seasonal strength.  A merely average 7.5% rally from gold’s $1286 levels in mid-June would take it to $1382 by early October.  But obviously gold already almost got there!  2016 saw gold blast higher during the summer doldrums in a rare counter-seasonal breakout.  This proved a record summer rally for this metal.

Between the end of May and early July, gold rocketed 12.3% higher!  That is radically better than bull-years’ seasonal average summer-to-date performance of -1.1% by that point.  This incredible surge was driven by a combination of massive buying by both investors and gold-futures speculators.  The former is great and not a problem at all, as investors are strong hands looking to own gold outright for the longer term.

But unfortunately futures speculators’ frenzied buying was the dominant force fueling gold’s radically-unprecedented summer rally.  Speculators grew exceedingly bullish, ramping their upside bets on gold to towering record levels.  But these hyper-leveraged gold-futures contracts are exceedingly risky, since relatively-small adverse moves in gold prices can result in total losses of the capital speculators risked.

Gold’s record summer rally this year may have borrowed from its strong autumn gains, effectively pulling some of that autumn buying forward into summer.  That hinges on whether investors resume buying gold aggressively or not.  And the record gold-futures longs accumulated by speculators leave gold with a near-record futures selling overhang heading into autumn.  This remains a serious near-term risk for gold.

If some news or market event spooks the uber-bullish speculators, they will be forced to exit their wildly-excessive long positions en masse.  This heavy gold-futures selling will drive down gold fast, forcing a snowballing number of speculators to liquidate or face catastrophic losses due to futures’ extreme leverage.  So until speculators’ collective gold-futures positions normalize, a cascading gold selloff is possible any time.

I suspect gold’s strong autumn seasonals will ultimately prevail, as Asian farmers and Indian parents are not going to postpone their usual large gold buying due to extreme gold-futures positions in American markets.  Nevertheless given the wildly-anomalous summer setup leading into this year’s autumn gold rally, odds are it is going to prove far more volatile than normal.  Caution is in order this year, not complacency.

Gold’s strong autumn seasonals are why gold stocks enjoy strong autumn seasonals of their own.  Gold stocks amplify gold’s price action because gold-mining profitability leverages it.  This next chart uses the same bull-market seasonal methodology applied to the flagship HUI gold-stock index.  The gold stocks are now entering their best couple-month span of the year seasonally, a very bullish portent for this sector. 

As of this week, the gold stocks as measured by the HUI have already skyrocketed 181.7% higher since their 13.5-year secular low in mid-January!  That very week I pointed out the fundamental absurdity of those gold-stock prices given prevailing gold levels, and aggressively bought and recommended many new gold stocks in our newsletters.  Once gold-stock bulls get underway, they grow to immense proportions.

Between November 2000 and September 2011, this leading HUI gold-stock index soared an astounding 1664.4% higher!  That epic secular bull covered the vast majority of gold’s bull-market years between 2001 to 2012, so we can use those for gold-stock seasonals as well.  And on average during that span of mighty bull years, the gold stocks bottomed seasonally in late July.  And then massive autumn rallies erupted.

On average between late July and late September in those last modern bull years, the HUI rocketed 15.0% higher!  A similar rally today from this index’s late-July low would boost the HUI to 286, and like gold we are already there in early August.  Just like gold, gold stocks enjoyed a super-anomalous record summer rally this year.  So they too may have seen much autumn buying pulled forward into summer.

If gold gets hit by cascading gold-futures selling as speculators are forced to rapidly unwind their still-near-record longs, gold stocks are going to fall in sympathy and amplify gold’s losses.  Considering the HUI’s staggering gains, not far from a triple in just a half-year, a healthy bull-market correction wouldn’t be surprising at all.  The setup leading into this year’s autumn rally is radically different than in normal years.

But while that portends much-greater coming volatility than usual just like in gold, it shouldn’t negate gold stocks’ entire autumn rally.  If gold climbs on balance in the coming months as it ought to with all that outsized Asian gold demand coming online again, the gold stocks will follow it higher.  Gold stocks have some aces up their sleeves as well, which could lead to investment demand really accelerating.

No other sector in all the markets is even remotely close to challenging gold stocks’ commanding performance supremacy this year.  Professional investors including hedge-fund managers are really taking notice.  They are having a tough time performing this year in these frustratingly-fake central-bank-levitated markets.  They need to find some winners soon to salvage their years, and the momentum is in gold stocks.

Gold and gold-stock excitement is mounting after their record summers, and gold’s strong autumn seasonality is well-known.  So there’s a good chance much more investment capital than usual will flood into both gold and its miners’ stocks this autumn.  And these inflows will accelerate dramatically when the lofty stock markets inevitably roll over, as gold is the ultimate portfolio diversifier since it moves counter to stocks.

Thus gold’s near-record futures selling overhang and its downside threat to gold-stock prices may very well be mitigated or even negated by exceptional investment demand this autumn.  It’s been years since investors got excited about gold and gold stocks, and that’s just starting to build as evidenced by all the bullish comments on the precious metals in the mainstream financial media.  This autumn could prove remarkable.

Just like in their primary driver gold, gold stocks’ best couple-month span of the year seasonally comes in August and September.  This next chart breaks down gold-stock bull-year seasonality per the HUI into more-granular monthly form.  Each calendar month between 2001 to 2012 is individually indexed to 100 as of the previous month’s final close, and then all like calendar months’ indexes are averaged together.

Gold stocks enjoyed big average gains in Augusts and Septembers in the bull-market years between 2001 and 2012 of 6.7% and 4.8%.  These coming couple months happen to be gold stocks’ 2nd- and 4th-best months of the year!  Those are the same relative rankings as gold’s monthly bull-year seasonality, but reversed.  No other time of the year has a higher probability of witnessing major gains in the gold stocks.

With such massive seasonal tailwinds starting to blow, it’s hard not to be heavily long gold stocks this time of the year regardless of how far and fast they got here.  With gold stocks’ epic performances this year winning growing popularity even among mainstream investors and speculators, there’s no better time for a new rush of capital to flood into them than late summer and early autumn.  That’s really bullish.

But it’s important to remember that seasonals are mere tendencies, not sure things.  Just like in weather, long-term averages can mask considerable extremes.  This year has already seen gold stocks buck their seasonality in record ways.  April is a relatively-weak month seasonally, with the HUI averaging modest 0.5% losses in bull years.  Yet this past April the gold stocks greatly defied seasonality with a huge 31.0% rally!

April’s weakness is followed by May, which weighs in as gold stocks’ strongest month of the year seasonally.  Its average 6.9% HUI gain between 2001 to 2012 edged out August’s 6.7%.  This May the HUI plunged 13.8% as gold stocks mean reverted to give back some of April’s incredible gains!  So it’s important to realize that gold stocks certainly haven’t behaved in line with seasonal norms in recent months.

This July saw the HUI surge another 11.2% higher, vastly greater than the bull-year average of a 1.9% loss.  While that’s nothing like the extreme gold-stock rally seen in April, it still pressures this year’s August to diverge down from normal years’ average performance.  Seasonality is important to consider, but it doesn’t actually drive anything.  It just quantifies what’s caused by sentiment, technicals, and fundamentals.

While gold stocks face greater downside risk than normal in the coming weeks thanks to that extreme near-record futures selling overhang looming over gold, their sentiment, technicals, and fundamentals are still arguing for an exceptional autumn rally.  Mainstream investors and speculators are getting more excited, but they aren’t yet euphoric and remain woefully under-deployed in this small contrarian sector.

Technically the gold stocks look super-bullish, with incredible strength even in the summer when there shouldn’t be much if any.  And fundamentally the gold stocks remain very low relative to gold, their primary driver.  This is easiest expressed through the HUI/Gold Ratio, which I last wrote about a month ago.  Between 2009 to 2012, the last normal years before the Fed-spawned gold bear, the HGR averaged 0.346x.

Even this week as the gold stocks climbed to a new bull record of 283.7 on the HUI, the HGR was still only running 0.206x.  Thus merely to regain post-stock-panic normal-year average levels relative to today’s prevailing gold prices in the $1350s, the HUI still has to rally another 68% higher from here!  That implies a HUI trading near 470, so there are great gains still to be won in gold stocks even at these gold levels.

As always investors and speculators can play the likely coming autumn rally with the leading GDX gold-stock ETF, which closely mirrors the HUI’s performance.  But a carefully-handpicked portfolio of the elite gold miners with the best fundamentals will see gains trouncing those of the benchmarks.  Uncovering these winners takes incredible amounts of time, work, and expertise, but the resulting gains are well worth it.

At Zeal we’ve literally done tens of thousands of hours of research on individual gold stocks, so we will always prefer portfolios of this sector’s very best miners and explorers.  We build these portfolios in real-time as market trends allow and buying opportunities arise in our acclaimed weekly and monthly newsletters.  Since 2001 we’ve recommended and realized 833 stock trades in real-time for our subscribers.

Our average annualized realized gains across all these trades, including all losers, are running way up at +17.6%!  And this year’s dazzling new gold-stock bull has already catapulted many new trades still on our books to unrealized gains of hundreds of percent!  So it pays big to put us to work for you.  Our newsletters draw on our vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  For just $10 an issue, you can learn to think, trade, and thrive like a contrarian.  Subscribe today and start multiplying your wealth!

The bottom line is gold-stock seasonals argue this sector is right on the verge of a major autumn rally.  August and September are the best couple-month span of the year for gold stocks seasonally in bull-market years.  This is driven by a parallel autumn gold rally fueled by outsized Asian demand coming back online.  Gold stocks naturally amplify gold’s gains since their profits leverage gold’s price moves.

While this year’s autumn-rally setup isn’t as clean as usual, gold stocks still have great potential to surge in the coming months.  Futures speculators drove a record summer gold rally, leaving gold with a near-record selling overhang that could cascade anytime.  But mainstream excitement is growing for the red-hot gold stocks, so much bigger capital inflows are likely coming.  And there’s no better time of the year to buy.

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 - 2016 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife