Gold Stocks’ Autumn Rally 6

The gold miners’ stocks were whacked hard earlier this summer on a Fed-rate-hikes scare. That serious anomaly really damaged sentiment, spawning exceptionally weak seasonal performance in this contrarian sector. But the bruised gold stocks and the metal they mine have trudged through, making it back to the start of their traditional strong season. That begins with robust autumn rallies that usually start marching now.

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 usually 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 typically 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 middle-aged 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 serious proportions, hitting -17.3% in mid-December 2016. But that remained shy of a new bear’s -20%.

Gold rebounded sharply from those severe-correction lows, nearly fully recovering by early September 2017. But it 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 remained alive and well!Its total gains grew to 96.2% over 4.6 years by early August 2020, still modest.

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 2021. 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 latest bull today and bear-market action is quite dissimilar.

Prevailing gold prices varied radically through these modern bull years, running between $257 when gold’s last secular bull was born to August 2020’s latest record high of $2,062. All those long years with that vast range of gold levels 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 is down 5%.

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