Gold Stocks’ Spring Rally 6

Following a necessary correction, the gold miners’ stocks have spent much of recent months bottoming. This healthy basing process is rebalancing sentiment, preparing the way for this sector’s next bull-market upleg. That is looking to coincide with gold stocks’ spring rally, one of their strongest times of the year seasonally. That stiff tailwind blowing behind bullish technicals and fundamentals should make for big gains.

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. And this year’s spring rally has real potential to grow considerably larger than usual. Gold stocks’ recent correction short-circuited their winter rally, leaving major catch-up buying for this spring.

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.

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