Gold Stocks’ Spring Rally 4

The gold miners’ stocks have been climbing higher on balance, enjoying a solid upleg that is gathering steam. That’s fueling improving sentiment, driving more interest in this small contrarian sector. This gold-stock upleg is likely to grow in coming months, partially because of very-favorable spring seasonals. The gold stocks’ second-strongest seasonal rally of the year typically unfolds between mid-March to early June.

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 experience, as its mined supply remains fairly steady year-round. Instead, gold’s major seasonality is demand-driven, with global investment demand varying dramatically 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-late-May 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.

Since it is gold’s own demand-driven seasonality that fuels the 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 young bull market. After being crushed to a 6.1-year secular low in mid-December 2015 on the Fed’s first rate hike of this cycle, gold blasted 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 mammoth proportions, hitting -17.3% in mid-December 2016. But that remained shy of a new bear’s -20%.

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 at -20% 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, and resumed in 2016 to 2019. 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.

1 2 3 4
View single page >> |

Disclaimer: We publish acclaimed weekly and monthly newsletters offering ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.