Gold Stocks Autumn Rally / Commodities / Gold and Silver Stocks 2021

The gold miners’ stockswere whacked hard earlier this summer on a Fed-rate-hikes scare.  That serious anomaly really damaged sentiment,spawning exceptionally-weak seasonal performance in this contrariansector.  But the bruised gold stocks andthe metal they mine have trudged through, making it back to the start of theirtraditional strong season.  That beginswith robust autumn rallies that usually start marching now.

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 severe-correctionlows, nearly fully recovering by early September 2017.  But it failed to break out to new bull-markethighs, then and several times after. That left gold’s bull increasingly doubted, until June 2019.  Then gold surged to a major decisive breakout confirmingits bull remained alive and well!  Its total gains grew to 96.2% over 4.6 years by early August 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 2021.  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 through these modern bull years, running between $257 whengold’s last secular bull was born to August 2020’s latest record high of $2,062.  All those long years with that vast range of goldlevels 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 is down 5%.

This chart averages theindividually-indexed full-year gold performances in those bull-market years from2001 to 2012 and 2016 to 2020.  2021isn’t included yet since it remains a work in progress.  This bull-market-seasonality methodology revealsthat late summers are when gold’slong parade of big seasonal rallies really gets underway.  That starts with the major autumn rally whichis born in gold’s summerdoldrums.

2020 proved anamazing year for gold, with this leading alternative investment blasting25.1% higher!  At gold’s August-2020 all-time-recordpeak before the subsequent healthy correction, this metal had soared a huge 35.9%year-to-date.  And from March 2020’sstock-panic-driven low to that last upleg topping, gold clocked in with a giant40.0% gain in just 4.6 months!  Any wayyou slice it, gold enjoyed a phenomenal year.

Such outsizedperformance really skews the indexed seasonal average, even though 2020 was the17th year added to this modern-gold-bull span. So I included a new data series in these charts, the light-blue lines showingpre-2020 seasonality before last year entered the mix.  Gold’s huge gains during that crazy pandemic yearreally shifted its seasonal average considerably higher, which certainly doesn’thappen often.

Overall across these last17 gold-bull calendar years, gold averaged major 15.6% gains.  With this kind of growth rate compounded, it takesless than five years for gold prices to double. That has held true during gold’s current bull too, as gold powered from$1,051 in December 2015 to $2,062 in August 2020.  That’s up 1.96x in 4.6 years!  Gold’s strong seasonals are the impetus behindgold stocks’ powerful seasonal rallies.

Gold’s autumn rallytechnically starts with its summer-doldrums bottoming in mid-June.  But summers for gold have often been sideways-grindyaffairs.  2019 and 2020 both provedexceptions, seeing strong gold surges on momentum-fueled investment demand.  This current summer 2021 had plenty of potentialto see that summer strength flare again, but an absurd Fed-rate-hike scare inmid-June initially scuttled that.

The Fed’s Federal OpenMarket Committee met for another monetary-policy meeting then, and changednothing.  The FOMC kept itshyper-easy zero-interest-rate policy and $120b of monthly quantitative-easingmoney printing in place indefinitely.  There were no hints at all of rate hikes ortapering QE bond buying.  But top Fedofficials’ individual projections of future rates came in slightly more hawkishthan expected.

Just a third of thoseguys thought the Fed might need two quarter-point rate hikes way out intoyear-end 2023.  Not only is that an eternityaway in the markets, the Fed chair himself warned to take that so-called dotplot “with a big grain of salt.”  Even thoughit has proven notoriously inaccurate at forecasting future federal-funds-ratelevels, prospects for distant-future rate hikes scared speculators into dumpinggold futures.

That hammered gold 5.2%lower in just three trading days after that nothingburger FOMC decision!  Gold soon bounced and recovered into mid-July,but remained well below pre-hawkish-dots-scare levels.  So though this year’s gold autumn rally gotoff to a slow start, it actually has bigger upside potential launching off suchanomalous lows.  Gold’s tendency to meanrevert higher after sharp selloffs should fuel bigger gains.

During these moderngold-bull years, gold’s autumn rally averaged strong 6.4% gains between mid-Juneto late September.  But those certainlyweren’t linear over that span, tending to cluster around August.  In June, July, and August proper, gold’saverage gains from 2001 to 2012 and 2016 to 2020 weighed in at +0.5%, +1.1%,and +2.1%.  Gold’s autumn rally tends toaccelerate as summers mature, especially in August.

That’s certainly goodnews this year after gold’s Fed-gold-futurespurge in mid-June.  Late summers are whenmassive Indian seasonal gold demand starts mounting, from both post-harvest andpre-wedding buying.  And that could beconsiderably bigger than usual in this imminent August 2021.  Not only are gold prices relatively-low whichattracts shrewd price-conscious Indians, but there is catch-up buying to do.

Indian gold dealers reporteddemand all but vanished in May, due to soaring COVID-19 cases then and newlockdowns in response.  Indians evenignored a big mid-month Hindu festival that usually drives outsized golddemand.  So Indian gold experts expect tosee large catch-up buying unfold during gold’s autumn rally.  Indian gold-jewelry demand is the second-largestin the world after China, utterly massive.

That alone should pushgold prices higher between now and that late-September autumn-rally peak.  As gold continues recovering and mean revertinghigher, that will attract capital inflows from the two groups of Americantraders who dominate gold’s short-term fortunes.  They are the gold-futures speculators whodrove gold’s hawkish-Fed-dots plummeting, and gold investors who have largelybeen ignoring gold ever since.

The specs puked out theequivalent of an enormous 89.7 metric tons of gold in the week of that FOMCdecision, and another 22.6t the following week! That left their total longs and shorts running 0% and 79% up into theirpast-year trading ranges.  The most-bullish-possiblenear-term setup for gold is 0% longs and 100% shorts, indicating sellingexhaustion.  These guys have room formassive buying to normalize their positions.

At that point specs neededto buy the gold-futures equivalent of 404.0t of gold to push their bets back tolevels where major gold selloffs grow increasingly likely!  For comparison, gold’s young upleginterrupted by those hawkish Fed dots powered 13.5% higher between early Marchto early June on just 125.3t of spec gold-futures buying.  As of the latest weekly positioning report,they still have room to buy another 300.0t!

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

But investors startedworrying more in early July, after gold didn’t quickly and fully bounce backfrom that anomalous rate-hike-fear plunge. So by the middle of this week, GLD+IAU holdings have slumped 1.4% or 21.4tsummer-to-date.  Investors lovechasing momentum, so they need sustained meaningful gold advances to enticethem back in.  The normal Indian autumn demandalong with catch-up buying ought to help.

Gold powereddramatically higher in the last couple summers bucking the doldrums because investmentdemand 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 leadingand dominant gold ETFs enjoyed another mighty holdings build of 192.0t or12.3%!  Big investment buying needs toreturn to fuel an outsized autumn rally this year.

And it really ought togiven the soaring price inflation increasingly ravaging the US economy.  Gold is the ultimate inflation hedge, as itsmined supply only grows on the order of 1% annually.  So as central banks print money, relativelymuch more has to chase relatively much less gold bidding up its price.  The Fed is inflating like there is notomorrow, unleashing the epic deluge of new money rapidly forcing pricesmuch higher.

Since that March 2020 stockpanic, the Fed has ballooned its balance sheet by a radically-unprecedented 91.1%or $3,929b!  That’s no typo, this profligateFOMC has recklessly chosen to nearly double the US dollar supply in just16.3 months.  As more investors start tounderstand this and its dire implications, they’ll really want to up their still-super-lowgold portfolio allocations.  That could startaccelerating in August.

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

This next chart appliesthis same modern-gold-bull-year seasonality methodology to gold stocks.  Since GDX was born later 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 large goldstocks.  Gold’s gains fuel their ownautumn rally.

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

On average across these17 gold-bull-market years, gold stocks have powered 27.2% higher!  That is an extraordinary gain through 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 11.2%HUI gains, compared to 13.8% in the subsequent winter rally and 13.2% in thelater spring rally.  Those run parallelto gold’s +6.4%, +8.9%, and +3.8% in its own autumn, winter, and springrallies.  Thus gold stocks’ autumn-rally upsideleverage to gold has only run about 1.8x.

That lags GDX’s normalgold outperformance of 2x to 3x, but is still better than the winter rally’s worseupside leverage near 1.6x.  Gold stocksamplify gold’s gains best in their spring rally, which clocks in way up at 3.5x!  But their autumn rally is still well worth tradingeven with relatively-poor 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.  Summer2019 was a great case in point.  Between lateMay to early September that year, roughly the autumn-rally span, GDX soared 51.6%on a 21.4% gold run!  That made for much-better2.4x upside leverage.  When gold rallies stronglyduring summer, gold stocks still really outperform.

So if gold investmentdemand strengthens 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 4.1% gains!  September is no slouch either averaging +2.0%.  These months combined are one of major goldstocks’ strongest two-month seasonal spans.

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 2020 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 accelerate offer an excellentseasonal buying opportunity.  Whilenot quite as good as the earlier summer-doldrums lows, late summers are justbefore gold stocks 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 really bullish, partially because of that Fed-gold-futurespurge and mean reversion higher.

On average at their autumn-rally topping inlate September, the major gold stocks of both the HUI and GDX have powered up 27.2%year-to-date in these modern-gold-bull years! But thanks to mid-June’s hawkish-Fed-dots scare, as of this week GDX is still down 5.1% YTD.  That is largely the result of that post-FOMCplunge, as in mid-May GDX was tracking up 10.2% this year compared to a +12.0%seasonal average.

To mean revert back up to those average 27%YTD gains by the end of today’s autumn rally, GDX would have to soar to $45.82.  That’s another 34%higher than this week’s levels, big potential upside well worthtrading.  With the major gold stocks’typical 2x-to-3x leverage to gold, it would only needto power 11% to 17% higher to fuel a full gold-stock seasonal meanreversion.  These relatively-modest gainsare totally doable.

In gold-stock terms, that would extend GDX’stotal upleg since its last correction bottomed in early March to 48.3%.  The first four uplegs of this gold-stock bullaveraged massive gains of 99.2% over 7.6 months each!  So seeing this battered sector mean revertback up to seasonal norms in the next couple months of this autumn-rally spanisn’t a stretch.  All it would take isgold normalizing after that Fed-rate-hike-scare purge.

And this leading alternative investment’sbullish backdrop certainly favors that. Late-summer Indian gold demand is likely to be bigger than usual oncatch-up buying.  Speculators’gold-futures positioning is still very bullish for gold after their violentselling purge on that Fed-rate-hike scare. And investors haven’t fled gold on that anomalous weakness, so they’ll likely chase coming upside momentumamplifying gold’s gains.

While we took our lumps on gold-stockstoppings on that post-FOMC gold-futures puking, we redeployed in fundamentally-superior mid-tier and junior goldminers to keep our newsletter trading books full.  With gold stocks battered down to really-oversold levels relative to GDX’s 200-day moving average and really-undervalued levels comparedto gold, their upside potential in the rest of this autumn rally looks amazing.

At Zeal we walk the contrarianwalk, buying low when few others are willing before later selling high when fewothers can.  We overcome popular greedand fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental,and fundamental research.  That hasalready led to realized gains in this current young upleg as high as +51.5% onour recent newsletter stock trades!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’sgoing on in this sector.  Stayingsubscribed to our popular and affordable weekly and monthly newsletters is a greatway.  They draw on my vast experience, knowledge,wisdom, and ongoing research to explain what’s going on in the markets, why, andhow to trade them with specific stocks.  Subscribe today while this gold-stockupleg remains young!  Our recently-reformattednewsletters have expanded individual-stock analysis.

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 this year’s setup is much more bullish than usual.  Gold-futures speculators need to do bigbuying to normalize their positioning after their violent exodus in the wake ofmid-June’s distant-future-rate-hikes scare.

And while that anomalous event left gold investmentdemand anemic this summer, it will likely ramp up fast as gold mean revertshigher.  Investors love chasing gains toride momentum, which amplifies gold’s upside. Gold portfolio allocations should soar too on the raging inflation unleashedby the Fed nearly doubling the money supply since March 2020’s stock panic.  This is a great setup for a big gold-stockautumn rally.

Adam Hamilton, CPA

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