Gold Stocks’ Spring Rally 6

So gold’s 2021 spring rally will likely both start earlier and grow bigger than normal, as seasonality mean reverts and overshoots after the recent counter-seasonal correction. Gold needs to see some outsized spring-rally gains to catch up with where it ought to be per seasonal norms. By early June, gold tends to be up 7.4% YTD in seasonal-average terms. Rebounding back to there would boost gold up near $2,038!

If anything remotely close to that happens, this is a super-bullish omen for gold stocks in the coming months. Their own spring seasonal rally is directly driven by gold’s. The GDX VanEck Vectors Gold Miners ETF is the leading gold-stock benchmark and trading vehicle. It tends to amplify material gold-price moves by 2x to 3x. So if gold surges about 11% higher to catch up, GDX could see huge 22%-to-33% spring-rally gains!

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 major spring rally.

(Click on image to enlarge)

The gold stocks’ spring rally is much stronger than gold’s, averaging hefty 13.2% gains during these same modern-gold-bull years of 2001 to 2012 and 2016 to 2020. Like gold, last year proved very strong for the gold stocks as viewed through the GDX lens. Driven by gold’s massive post-panic upleg, this dominant gold-stock ETF soared 134.1% higher in about that same span! But this sector’s overall performance was weak.

In 2020 GDX merely rallied 23.0%, lagging way behind gold’s 25.1% gain. That’s why these gold-stock seasonals didn’t change as much last year as gold’s did, as evident in the difference between these dark-blue and light-blue lines. Gold stocks’ underperformance last year resulted from the timing of gold uplegs and corrections, leaving the HUI pretty oversold at year-end. On average it has seen 27.2% annual gains.

Like gold, the gold stocks are set up for a much-larger-than-normal mean-reversion-and-overshoot spring rally. Normally this sector surges 13.2% higher between mid-March to early June, really amplifying gold’s own anemic 3.8% spring rally. After decades of study, I still suspect this sector’s strong outperformance results from spring optimism. Speculators and investors are more willing to deploy capital when they feel good.

Broken out into calendar months, in March, April, May, and June the HUI has averaged performances of -0.2%, +3.5%, +4.3%, and +2.4%. April and May together are an exceptionally-strong span for the gold stocks, their fourth- and first-best months of the year seasonally in these modern-gold-bull years! This is actually new, as GDX skyrocketing 40.0% higher in April 2020 out of the stock panic greatly skewed these seasonals.

April’s radically-improved seasonals are very clear on this next chart, which slices gold-stock seasonals into calendar months instead of years. This uses the same methodology discussed above but applied to months rather than years. Each calendar month is individually indexed to 100 as of the previous month’s final close, then all like-months’ indexes are averaged together. This offers a more granular perspective.

So seasonally gold stocks have some big months approaching, which are what make their spring rally so strong. Again averaging 13.2%, this year’s has the potential to grow much larger because of gold’s likely mean reversion and overshoot. On average by early June’s spring-rally topping, the HUI has powered up 17.5% year-to-date. To regain that seasonal benchmark would certainly require an outsized surge from here.

As of this week, GDX is down 6.4% YTD due to gold’s lingering bottoming and base-building process. To mean revert back up to +17.5% by early June, GDX would have to soar up to $42.32. That isn’t a stretch absolutely, this leading gold-stock ETF closed at $44.48 in early August as the last parallel uplegs in gold and gold stocks were topping. And getting back on the average seasonal track would require a major rally.

GDX would have to power 25.6% higher from this week’s levels to hit its normal early-summer gains in seasonal terms. With the large gold stocks’ typical 2x-to-3x leverage to major gold moves, those kinds of GDX gains would only need a 9%-to-13% gold spring rally. That is right in line with what is likely if gold itself mean reverts seasonally after its recent correction. The coming months look really bullish for this sector.

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