Gold Stocks Autumn Rally / Commodities / Gold and Silver Stocks 2020

The gold miners’ stockshave rocketed higher this summer, smashing out of their usual summer-doldrumssideways grind.  That atypical strengthhas been driven by gold steadily marching to major new secular highs, fueled bystrong investment demand.  This hascarried gold stocks and the metal they mine back to their traditional strongseason, which begins with robust autumn rallies usually accelerating in latesummers.

Seasonality is the tendency for prices toexhibit 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 buyingand selling.

Gold stocks exhibit strong seasonalitybecause their price action mirrors that of their dominant primary driver,gold.  Gold’s seasonality generally isn’tdriven 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 investmentdemand varying considerably depending on the time in the calendar year.

This gold seasonality is fueled bywell-known income-cycle and culturaldrivers of outsized gold demand from around the world.  Starting in late summers, Asian farmers beginto reap their harvests.  As they figureout how much surplus income was generated from all their hard work during thegrowing season, they wisely plow some of their savings into gold.  Asian harvest is followed by India’s famouswedding season.

Indians believe getting married duringtheir autumn festivals is auspicious, increasing the likelihood of long,successful, happy, and even lucky marriages. And Indian parents outfit their brides with beautiful and intricate22-karat gold jewelry, which they buy in vast quantities.  That’s not only for adornment on their weddingdays, but these dowries secure brides’ financial independence within theirhusbands’ families.

So during its bull-market years, gold has usuallytended 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 attheir most-bullish seasonal juncture, the transition between the typically-driftingsummer doldrums and big autumn rallies.

Since it is gold’s own demand-drivenseasonality that fuels gold stocks’ seasonality, that’s logically the best placeto start to understand what’s likely coming. Price action is very different between bull and bear years, and gold remainsin a middle-aged bull market.  Afterfalling to a 6.1-year secular low in mid-December 2015 as the Fed kicked offits last rate-hike cycle,gold powered 29.9% higher over the next 6.7 months.

Crossing the +20% threshold in March 2016confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthyselling was greatly exacerbated after Trump’s surprise election win.  Investors fled gold tochase the taxphoria stock-market surge.  Gold’scorrection 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 anomaloussevere-correction lows, nearly fully recovering by early September 2017.  But gold failed to break out to newbull-market highs, then and several times after.  That left gold’s bull increasingly doubted, untilJune 2019.  Then gold surged to a major decisive breakout confirmingits bull remained alive and well!  Its total gains grew to 87.3% over 4.6 years by late July 2020,still modest.

Gold’s last mighty bull market ran fromApril 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 fromits bull-market peak.  Gold didn’t enterformal bear-market territory until April 2013, thanks to the crazy stock-market levitation drivenby extreme distortions from the Fed’s QE3 bond monetizations.

So the bull-marketyears for gold in modern history ran from 2001 to 2012, skipped the interveningbear-market years of 2013 to 2015, then resumed in 2016 to 2020.  Thus these are the years most relevant tounderstanding gold’s typical seasonal performance throughout the calendaryear.  We’re interested in bull-market seasonality, because goldremains in its latest bull today and bear-market action is quite dissimilar.

Prevailing gold pricesvaried radically throughout these modern bull-market years, running between $257when gold’s last secular bull was born to this week’s newest record high of $1969.  All those long years with that great range ofgold levels have to first be rendered in like-percentageterms in order to make them perfectly comparable.  Only then can they be averaged together todistill out gold’s bull-market seasonality.

That’s accomplished by individually indexing each calendaryear’s gold price action to its final close of the preceding year, which isrecast at 100.  Then all gold priceaction of the following year is calculated off that common indexed baseline, normalizingall years regardless of price levels.  Sogold trading at an indexed level of 105 simply means it has rallied 5% from theprior year’s close, while 95 shows it’s down 5%.

This chart averages theindividually-indexed full-year gold performances in those bull-market years from2001 to 2012 and 2016 to 2019.  2020isn’t included yet since it remains a work in progress.  This bull-market-seasonality methodologyreveals that late summers are whengold’s long parade of big seasonal rallies really gets underway.  That starts with the major autumn rally whichis born in gold’s summer doldrums.

During these modernbull-market years, gold has enjoyed a strong and pronounced seasonaluptrend.  From thatprior-year-final-close 100 baseline, it has powered 15.0% higher on averageby year-ends!  These are major gains byany standard, especially averaged across 16 different years.  While this chart is rendered in familiarcalendar-year terms easiest for us to parse, gold’s seasonal years actually startin summers.

Gold tends to see its major summer-doldrums low inmid-June, the best seasonal buying opportunity of the year in preciousmetals.  But then it usually spends the next6 weeks into late July drifting sideways to modestly higher.  On average gold slowly inches up 1.4% overthat span, plodding middling gains often too inconsequential to register oninvestors’ radars.  The first 2/3rds of gold’ssummers are typically fairly dull.

But strong Augustaction shatters that summer-doldrums malaise as gold’s major autumn rally picksup steam.  Starting in late July, Asian-harvestgold buying really accelerates.  Whilegold’s average gain in July between 2001 to 2012 and 2016 to 2019 was just +0.5%,in August that nearly quintuples to +2.3%!  Surprisingly given gold’s weak summer reputation,August has proven its third best month seasonally.

Then September weighsin at fourth at 2.1% average gains in these modern bull-market years.  And that is despite gold’s autumn rally toppingin late September at 6.2% average gains. Of gold’s three major seasonal rallies, this +6.2% autumn one ranks inthe middle between the powerful +9.1% winter rally and the comparatively-anemic+3.3% spring rally.  Nearly 6/10ths ofautumn-rally gains accrue by the end of August.

While getting deployedin precious-metals positions in mid-June ahead of gold’s troika of seasonalrallies is ideal, late July is normally the last chance to buy inrelatively low.  In typicalsummer-doldrums years where gold sentiment is apathetic, it takes a resolutecontrarian bent to fight seasonal weakness and shift capital into the preciousmetals before the autumn rally.  Gold’s hugecounter-seasonal strength this year is unusual.

With their kids out ofschool, a sizable fraction of global traders take vacation time to enjoysummers.  So gold investment demandusually withers in June and July.  Butthat certainly hasn’t happened during this odd pandemic-scarred summer!  The best daily proxy for global goldinvestment demand is the holdings of the dominant American GLD SPDR Gold Sharesgold ETF, which I last explored in a mid-June essay.

Contrary to normal summer-doldrumsbehavior, in June GLD shares experienced such heavy differential buying thatthis ETF’s physical-gold-bullion holdings ballooned a large 5.0%!  Rising GLD holdings show investment capital migratinginto gold.  GLD’s holdings climbed tomajor secular highs on 10 of June’s 22 trading days, helping push gold to majorsecular highs of its own on 5 of those. Investors really wanted gold.

Their outsized counter-seasonaldemand hasn’t abated in July either. Month-to-date as of Wednesday, GLD’s holdings have surged an even-bigger5.4% on GLD-share buying persistently outpacing gold’s own!  Did this big summer investment rush pullforward some of gold’s autumn rally, or will demand still grow like usual inAugust and September pushing gold higher?  Gold’s extreme overboughtness complicates this.

With COVID-19 andgovernments’ heavy-handed responses to it disrupting pretty much everything allover the world, summer 2020 is wildly unprecedented.  Investors are flocking to gold via its ETFsled by GLD because of this crazy situation. They saw the stock markets collapse into a brutal panic on the draconianeconomic lockdowns, then saw central banks conjure up trillions of dollars to reverse that ugly selling.

In just over a monthinto late March, the flagship benchmark S&P 500 stock index plummeted 33.9%in a rare full-blown stock panic! That’s a 20%+ cratering in 2 weeks or less.  Stock panics force investors to remember thatmarket cycles still exist, stock markets rise and fall.  Those traumatic events dramatically alter psychologyfor years after, elevating perceived risks for more serious downside.  That’s great for gold.

After the prior stock panic in October 2008, gold soared 166.5% higher over the next 2.8 years.  That was fueled by a massive 71.5% or 535.5 metric-tonGLD-holdings build!  After suffering stockpanics, investors flock back to gold for a long time to prudently diversifytheir stock-heavy portfolios.  So evenwithout this scary pandemic, gold investment demand will likely remain elevatedfor years in the wake of March’s panic.

Fed officials wereterrified the extreme fear from COVID-19, governments’ lockdowns, and theplunging stock markets would spiral into a devastating depression.  The US economy is overwhelmingly driven byconsumer spending, so when Americans pull in their horns en masse economiccontraction cascades into a vicious circle. To attempt to stave this off, the Fed ramped its money printing farbeyond stratospheric.

From mid-March tomid-June, the Fed’s balance sheet skyrocketed up 66.3% or $2,857b!  In only 3.0 months, it evoked enough newdollars to force their overall supply 2/3rds higher.  That is radically unprecedented, as close tohyper-inflation as this 107-year-old central bank has ever dared tread.  High inflation, relatively more money chasingrelatively less goods and services, drives outsized gold investment.

The Fed’s $2.9tmonetary deluge bought a massive 44.5% rebound rally in the S&P 500 by earlyJune.  But the elite American companies inthis index aren’t earning anywhere near enough profits to justify such loftyFed-goosed levels.  At the end of June,the S&P 500 stocks averaged trailing-twelve-month price-to-earnings ratiosof 27.8x.  Weighted by market capitalizations,that ran 33.1x!  Anything over 28x is astock bubble.

And that was evenbefore any disastrous Q2 earnings were reported, in the peak-lockdown quarterwhere economic activity collapsed.  Lowerprofits will force prevailing valuations even higher into dangerous bubbleterritory.  So investors are very justifiedin fearing more serious stock-market selling. As long as they do, gold investment demand will remain elevated.  Stock markets need to reflect this COVID-19world.

This unusual strong globalinvestment demand should combine with typical strong Indian investment demandin this year’s autumn rally.  Indianeconomic growth had stagnated even before this pandemic, and India’s COVID-19cases have rocketed to the third-highest in the world despite low per-capita testing.  The Indian rupee has fallen to record lowsagainst the US dollar this year too, heightening inflation fears.

Thus rupee gold prices havesoared to dazzling record highs!  Indiansare usually shrewd price-conscious gold buyers. But with COVID-19 spreading fast and more draconian lockdowns likely, movingcapital into gold to protect from currency debasement should be a powerful motivatorto step up investment demand.  Way behindon their typical gold buying this year, stressed-out Indians should be anxiousto stack more gold.

So 2020’s autumn goldrally has real potential to keep growing much larger than normal drivenby unusually-strong gold investment demand. That is very bullish for gold stocks. The major miners of the leading GDX VanEck Vectors Gold Miners ETF tendto amplify material gold upside by 2x to 3x. And these higher-prevailing gold prices are dramatically boosting theirearnings, fundamentally justifying big stock-price gains.

Gold miners won’t finishreporting their Q2 results until mid-August, but they will look awesome excludingCOVID-19-lockdown disruptions.  Over thepast four quarters ending in Q1, the top 25 GDX gold miners reportedaverage all-in-sustaining costs of $904 per ounce.  AISCs don’t change much since mining costsare largely fixed regardless of gold levels. In Q2 gold averaged a high $1714, implying big sector profitability.

The major gold minersof GDX could’ve earned $810 per ounce last quarter had lockdowns not brieflyshuttered some operations.  That would’vemade for astounding 84.5% year-over-year profits growth!  Of course higher gold prices mean much-higherearnings in future quarters too.  Soaringgold-mining profits are attractive anytime, but irresistible in bubble stockmarkets plagued by falling general corporate earnings.

This next chart appliesthis same modern-gold-bull-year seasonality methodology to gold stocks.  Since GDX was just born in May 2006, itsprice history is insufficient for longer-term studies.  Thus the classic HUI gold-stock index is usedinstead.  GDX and the HUI closely track each other,they are functionally interchangeable containing most of the same major goldstocks.  Gold gains drive their autumn rally.

The major gold stockshave averaged a 10.4% autumn rally in 2001 to 2012 and 2016 to 2019.  Like gold that starts grinding higher inmid-June, stalls to drift back down into late July, then greatly accelerates inAugust before topping in late September. Gold stocks’ autumn rally kicks off their strong season, which runsuntil early the following June.  This contrariansector’s overall seasonal uptrend is incredibly strong.

On average across these16 gold-bull-market years, gold stocks have powered 27.4% higher!  That is an extraordinary gain across such along secular span.  While gold stocksaren’t very popular outside of the usual contrarian circles, they certainly shouldbe.  With average annual gains at that scale,speculators and investors can double their capital in major gold stocks in lessthan 3 years!  That’s hard to beatanywhere.

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 10.4%HUI gains, compared to 15.2% in the subsequent winter rally and 11.5% in thelater spring rally.  Those run parallelto gold’s +6.2%, +9.1%, and +3.3% in its own autumn, winter, and springrallies.  Thus gold stocks’ autumn-rally upsideleverage to gold has only run about 1.7x.

That’s worse than GDX’saverage gold outperformance of 2x to 3x, but in line with the winter rally’ssimilar upside leverage of 1.7x.  Gold stocksamplify gold’s gains the best in their spring rally, which clocks in way up at3.5x.  But their autumn rally is still wellworth trading even with relatively-low upside leverage to gold on average.  That is skewed low by weak autumn-rally yearswhere gold and gold stocks fall sharply.

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

So if gold investmentdemand remains strong as it ought to this August and September, the gold stocksshould see much-bigger autumn-rally gains than usual.  August has proven gold stocks’ second-bestmonth of the year seasonally, enjoying excellent average 4.4% gains.  September is no slouch either averaging+2.6%.  These months combined are majorgold stocks’ third-strongest 2-month seasonal span.

That is more apparentin this final chart that slices gold-stock seasonals into calendar months.  Each is indexed to 100 at the previous month’sfinal close, then all like months’ indexes are averaged together.  These same modern-gold-bull years of 2001 to2012 and 2016 to 2019 are included.  Thenext couple months are usually an important time to be fully deployed ingold stocks in order to ride their autumn rally.

Gold-stock seasonalsare certainly very favorable in these next couple months.  Late summers heading into August before gold’sand gold stocks’ autumn rallies usually take off offer an excellent seasonalbuying opportunity.  While not quite asgood as the earlier summer-doldrums lows, late summers are just before goldstocks transition into their seasonally-strong autumns, winters, and springs.  Those enjoy major gains.

That being said, seasonality reveals meretendencies.  The primary drivers of goldand its miners’ stocks are sentiment, technicals, and fundamentals.  Seasonality reflects how these average out acrosscalendar years over long spans, but they can easily override seasonals in any given year.  But this year’s autumn-rallysetup still looks quite bullish because it is so wildly unprecedented.  We’ve never seen anything like it.

As long as gold investment demand remainsstrong pushing this metal higher, the gold stocks will follow it up amplifyingits gains.  Heading into autumn 2020 it’shard to imagine investors forsaking gold. We just had a rare stock panic, which galvanizes gold investment demand foryears.  The frantic Fed did all buthyperinflate to dig stock markets out, blasting the dollar supply 2/3rds higherforcing stocks into bubble territory.

And overlaying that big heap of goldbullishness, we are plagued with a raging pandemic still worsening.  Its economic impact from both fear andgovernment actions has been devastating already, and remains far fromover.  Wall Street’s V-shaped economic recoveryis a euphoric fantasy, with a long drawn-out U-shaped one being far morelikely.  Gold investment demand shouldn’tflag given these extraordinary risks.

But technically gold has blasted vertically to extremely-overboughtlevels in recent weeks, complicating its autumn-rally outlook.  After gold soared too far too fast historically,pullbacks or corrections soon followed. Excessive euphoric gains pull forward too much near-future buying, exhaustinggold’s near-term upside potential.  Yetwith markets so radically unprecedented now, gold may be able to resist thatusual reckoning.

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows.  We layered into many new positions before recentoverboughtness, with unrealized gains already growing as big as +234%!  Our trading books are full of fundamentally-thrivinggold and silver miners that are still running.

To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles that drivegold.  Our newsletters are a great way,easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off sale!  If overboughtgold doesn’t correct, our many winning trades should well outperform GDX in goldstocks’ autumn rally.

The bottom line is gold and gold stocks areentering their strong season, starting with their autumn rally mostly in Augustand September.  That is normally fueledby Asian seasonal gold demand ramping back up. But all this year’s pandemic craziness has also unleashed strong sustainedinvestment buying from around the world. These big capital inflows should make for supercharged gold and gold-stockautumn rallies.

Investors have been flocking to gold andits miners this summer because they are rightfully very worried.  No one knows how terrible COVID-19’s economicimpact will ultimately prove.  And theFed’s radically-extreme monetary inflation has spawned bubble-valued stockmarkets.  Prudently diversifyingportfolios with gold may have never been more important.  That trend could fuel one heck of an autumn rallythis year.

Adam Hamilton, CPA

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