Gold Stocks’ Autumn Rally 6

Gold getting pounded on that leveraged gold-futures selling really impaired psychology, shifting investors’ gold outlook more to the bearish side. The best high-resolution daily proxy for gold investment demand is the combined physical-gold-bullion holdings of the dominant American GLD SPDR Gold Shares and IAU iShares Gold Trust gold ETFs. They were largely flat in June straddling the FOMC, edging up 0.4% or 6.8t.

But investors started worrying more in early July after gold didn’t quickly and fully bounce back from that anomalous rate-hike-fear plunge. So by the middle of this week, GLD+IAU holdings have slumped 1.4% or 21.4t summer-to-date. Investors love chasing momentum, so they need sustained meaningful gold advances to entice them back in. The normal Indian autumn demand along with catch-up buying ought to help.

Gold powered dramatically higher in the last couple summers bucking the doldrums because investment demand was so strong. Across June, July, and August 2019, GLD+IAU holdings soared 17.4% or 178.7t! And during the summer of 2020, these leading and dominant gold ETFs enjoyed another mighty holdings build of 192.0t or 12.3%! Big investment buying needs to return to fuel an outsized autumn rally this year.

And it really ought to given the soaring price inflation increasingly ravaging the US economy. Gold is the ultimate inflation hedge, as its mined supply only grows on the order of 1% annually. So as central banks print money, relatively much more has to chase relatively much less gold bidding up its price. The Fed is inflating like there is no tomorrow, unleashing the epic deluge of new money rapidly forcing prices much higher.

Since that March 2020 stock panic, the Fed has ballooned its balance sheet by a radically unprecedented 91.1% or $3,929b! That’s no typo, this profligate FOMC has recklessly chosen to nearly double the US dollar supply in just 16.3 months. As more investors start to understand this and its dire implications, they’ll really want to up their still-super-low gold portfolio allocations. That could start accelerating in August.

So despite this year’s autumn rally kicking off with gold’s anomalous low on that distant-future-rate-hikes scare, big upside potential remains. A merely-average 6.4% autumn rally would mean revert this metal back up near $1,874. But stronger Indian gold demand, speculators normalizing lopsided gold-futures bets, and investors increasingly returning as inflation worsens could easily fuel a much larger autumn rally.

This next chart applies this same modern-gold-bull-year seasonality methodology to gold stocks. Since GDX was born later in May 2006, its price history is insufficient for longer-term studies. Thus the classic HUI gold-stock index is used instead. GDX and the HUI closely track each other, they are functionally interchangeable containing most of the same large gold stocks. Gold’s gains fuel their own autumn rally.

The major gold stocks have averaged a nice 11.2% autumn rally in 2001 to 2012 and 2016 to 2020. The timing of that naturally closely parallels gold, launching in mid-June before running into late September. Gold stocks’ autumn rally ends the summer-doldrums drift and kicks off this sector’s strong season, which runs all the way to the following June. This contrarian sector’s overall seasonal uptrend is incredibly strong.

On average across these 17 gold-bull-market years, gold stocks have powered 27.2% higher! That is an extraordinary gain through such a long secular span. While gold stocks aren’t very popular outside of the usual contrarian circles, they certainly should be. With average annual gains at that scale, speculators and investors can double their capital in major gold stocks in less than 3 years! That’s hard to beat anywhere.

Yet out of gold stocks’ three major seasonal rallies that mirror gold’s, the autumn one is the most anemic. It is the smallest on average with those 11.2% HUI gains, compared to 13.8% in the subsequent winter rally and 13.2% in the later spring rally. Those run parallel to gold’s +6.4%, +8.9%, and +3.8% in its own autumn, winter, and spring rallies. Thus gold stocks’ autumn-rally upside leverage to gold has only run about 1.8x.

That lags GDX’s normal gold outperformance of 2x to 3x, but is still better than the winter rally’s worse upside leverage near 1.6x. Gold stocks amplify gold’s gains best in their spring rally, which clocks in way up at 3.5x! But their autumn rally is still well worth trading even with relatively poor upside leverage to gold on average. That is skewed low by weak autumn-rally years where gold and gold stocks fall sharply.

But in strong autumn-rally years where elevated gold investment demand pushes the yellow metal higher, gold stocks really amplify its gains. Summer 2019 was a great case in point. Between late May to early September that year, roughly the autumn-rally span, GDX soared 51.6% on a 21.4% gold run! That made for much-better 2.4x upside leverage. When gold rallies strongly during summer, gold stocks still really outperform.

So if gold investment demand strengthens as it ought to this August and September, the gold stocks should see much-bigger autumn-rally gains than usual. August has proven gold stocks’ second-best month of the year seasonally, enjoying excellent average 4.1% gains! September is no slouch either averaging +2.0%. These months combined are one of major gold stocks’ strongest two-month seasonal spans.

That is more apparent in this final chart that slices gold-stock seasonals into calendar months. Each is indexed to 100 at the previous month’s final close, then all like months’ indexes are averaged together. These same modern-gold-bull years of 2001 to 2012 and 2016 to 2020 are included. The next couple of months are usually an important time to be fully deployed in gold stocks in order to ride their autumn rally.

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