Gold Summer Doldrums 3 – Adam Hamilton (07/03/2020)

Gold, silver, and their miners’ stocks suffer their weakest seasonals of the year in early summers.  With traders’ attention normally diverted to vacations and summer fun, interest in and demand for precious metals usually wane.  Without outsized investment demand, gold tends to drift sideways dragging silver and miners’ stocks with it.  Feared as the summer doldrums, sometimes unusual catalysts short-circuit them.

This doldrums term is very apt for gold’s summer predicament.  It describes a zone in the world’s oceans surrounding the equator.  There hot air is constantly rising, creating long-lived low-pressure areas.  They are often calm, with little or no prevailing winds.  History is full of accounts of sailing ships getting trapped in this zone for days or weeks, unable to make headway.  The doldrums were murder on ships’ morale.

Crews had no idea when the winds would pick up again, while they continued burning through their limited stores of food and drink.  Without moving air, the stifling heat and humidity were suffocating on these ships long before air conditioning.  Misery and boredom were extreme, leading to fights breaking out and occasional mutinies.  Being trapped in the doldrums was viewed with dread, it was a very trying experience.

Gold investors can somewhat relate.  Like clockwork heading into most summers, gold starts drifting listlessly sideways.  It often can’t make significant progress no matter what trends looked like heading into June, July, and August.  As the days and weeks slowly pass, sentiment deteriorates markedly.  Patience is gradually exhausted, supplanted with deep frustration.  Plenty of traders capitulate, abandoning ship.

June and Julies in particular are often desolate sentiment wastelands for the precious metals, devoid of recurring seasonal demand surges.  Unlike most of the rest of the year, the summer months simply lack any major income-cycle or cultural drivers of outsized gold investment demand.  Summer 2019 proved an exception on a major gold-bull breakout, and summer 2020 is looking like another on extreme Fed money printing.

Quantifying gold’s summer seasonal tendencies during bull markets requires all relevant years’ price action to be recast in perfectly-comparable percentage terms.  That is accomplished by individually indexing each calendar year’s gold price to its last close before market summers, which is May’s final trading day.  That is set at 100, then all gold-price action each summer is recalculated off that common indexed baseline.

So gold trading at an indexed level of 105 simply means it has rallied 5% from May’s final close, while 95 shows it is down 5%.  This methodology renders all bull-market-year gold summers in like terms.  That’s necessary since gold’s price range has been so vast, from $257 in April 2001 to $1894 in August 2011.  That span encompassed gold’s last secular bull, which enjoyed a colossal 638.2% gain over those 10.4 years!

While that mighty gold bull ran from 2001 to 2011, 2012 was technically a bull year too since a 20%+ drop back into formal bear territory wasn’t yet seen.  That finally came in Q2’13, where gold plummeted 22.8% in its worst quarterly performance in 93 years.  The Fed’s unprecedented open-ended QE3 campaign was ramping to full speed, levitating stock markets which slaughtered demand for alternative investments led by gold.

The resulting gold-bear years ran from 2013 to 2015, which need to be excluded since gold behaves very differently in bull and bear markets.  That ultimately pounded gold to a 6.1-year secular low in December 2015, which helped birth today’s gold bull.  It has gradually powered higher on balance ever since, never suffering any bull-slaying 20%+ selloffs.  So 2016 to 2020 have proven gold-bull years to add into this analysis.

When all gold’s summer price action from these modern gold-bull years is individually indexed and thrown into a single chart, this spilled-spaghetti mess is the result.  2001 to 2012 and 2016 to 2018 are rendered in yellow.  Last summer’s action is shown in light blue for easier comparison with this summer.  Seeing all this perfectly-comparable indexed summer price action at once reveals gold’s center-mass-drift tendency.

These summer seasonals are further refined by averaging together all 16 of these gold-bull years into the red line.  Finally gold’s summer-to-date action this year is superimposed over everything else in dark blue, showing how gold is performing compared to its seasonal mean.  So far in summer 2020 gold has been meandering roughly in line with seasonal expectations, although a couple big catalysts could change that.

While there are outlier years, gold generally drifts listlessly in the summer doldrums much like a sailing ship trapped near the equator.  The center-mass-drift trend is crystal-clear in this chart.  The vast majority of the time in June, July, and August, gold simply meanders between +/-5% from May’s final close.  This year that equates to a probable summer range between $1645 to $1818.  Gold tends to remain within trend.

Interestingly “gold summer doldrums” is increasingly a misnomer as more gold-bull years slowly reshape the seasonal average.  Gold’s summer seasonal low statistically has been gradually pushed all the way back to mid-June.  On June’s 11th trading day, which translated to June 15th this summer, gold has tended to carve its summer seasonal low.  The worst of gold’s weak seasonals pass quickly in early summers!

At that mid-June nadir, gold has only been down an average of 0.7% from May’s close.  From there this metal actually tends to start climbing again into July and especially August.  In average indexed terms, gold has tended to eke out 0.1% gains in Junes.  They’re the real doldrums.  Gold’s momentum starts building to 0.7% gains in Julies, then really accelerates into summer-ends with hefty 2.3% gains in Augusts!

Between that average seasonal low in mid-June and the end of August, gold has averaged impressive 3.8% summer rallies in these modern bull-market years.  The summer doldrums have been compressed into a shorter time frame by a couple outlier years in today’s secular gold bull.  They are its maiden 2016 summer and last summer.  Those gold outperformances prove that catalysts can fuel counter-seasonal demand.

Summer 2016 was this gold bull’s first, where gold enjoyed strong upside price momentum and bullish psychology heading into the summer doldrums.  Investors love chasing winners, and kept on piling into gold as it carved major new secular highs.  By early July, gold had soared 12.3% summer-to-date!  But that left gold super-overbought so those gains faded, yet this metal still surged 7.7% in that whole summer.

Gold bucked the summer doldrums in 2016 because gold investment demand was exceptionally strong.  Several weeks ago I wrote an essay explaining why the best daily proxy for global gold investment is the physical-gold-bullion holdings of the leading and dominant American GLD SPDR Gold Shares gold ETF.  When stock investors are flooding into gold via GLD shares chasing momentum, their buying forces gold higher.

Gold blasted up 12.3% from the end of May into early July 2016 because American stock investors were buying GLD shares much faster than gold itself was being bought.  Their differential demand forced GLD’s holdings 13.1% higher in roughly that same early-summer span.  Out of 24 summer trading days into early July, 18 saw GLD-holdings builds averaging a sizable 0.7% each!  Investment capital was pouring in.

Gold ETFs like GLD and the American IAU iShares Gold Trust, the second-largest gold ETF in the world after GLD, are designed to track the gold price.  This is only achievable if they shunt all excess ETF-share demand and supply into the underlying world gold market.  When gold-ETF shares are being bought faster than gold, ETF-share prices threaten to decouple from gold to the upside and fail their tracking mission.

So gold-ETF managers must offset excess demand by issuing enough new gold-ETF shares.  Then they use the proceeds from these sales to buy more physical gold bullion to hold in trust for their shareholders.  So when gold-ETF holdings are rising, it shows stock-market capital is flowing into gold.  While that is unusual during market summers, it does happen if gold enjoys a sufficient catalyst to attract investors’ interest.

Summer 2019 proved another great example of this.  After that initial investment-fueled bull-market peak in early-July 2016, gold failed to climb to more new bull-market highs for several years.  But late last June, gold finally managed its next decisive bull-market breakout after dovish Fed interest-rate projections hammered the US dollar.  The resulting new gold-bull highs really excited investors, who piled in to chase the upside.

So last summer as the light-blue line shows, gold rocketed 16.7% higher in one of its best performances out of all gold-bull summers!  Investors flooded into gold because it was rallying fast, enticing in even more investment capital in an awesome virtuous circle of buying.  Again summer 2019’s counter-seasonal gold investment demand was evident in GLD’s holdings.  They soared a massive 18.2% higher last summer!

And gold’s upside potential this summer is far greater than normal due to this same momentum-chasing investment phenomenon.  Gold investment soared after mid-March’s stunning stock panic on the dire economic impact of governments’ draconian lockdowns to slow the spread of COVID-19.  That drove gold to major new bull-market highs challenging $1750 by late May.  So investors piled in to ride gold’s big gains.

The major gold ETFs continued to enjoy strong differential share demand in June, with GLD and IAU seeing major holdings builds of 5.0% and 3.2% last month!  That came during one of gold’s weakest months seasonally, and is likely to grow as gold strengthens in July and August.  Gold being driven to new highs by investment demand is self-feeding, the higher gold rallies the more investors want to buy to participate.

And it’s not just the rapidly-improving seasonals in July and August that bode well for gold.  This summer has a couple of unusual catalysts which ought to spawn outsized investment demand.  The first and most-important is the Fed’s radically-unprecedented extreme monetary inflation unleashed to goose stock markets out of their deep panic lows.  The Fed feared the resulting negative wealth effect would spawn a depression.

So between mid-March to early June, the Fed’s balance sheet skyrocketed 66.2% higher in just 2.8 months!  That blasted the US-dollar supply an astounding $2,853.3b higher.  With 2/3rds more dollars just conjured out of thin air to bid up prevailing price levels on shrinking pools of goods and services, there’s never been a more-important time to own gold.  Prudent investors are buying with that inflation tsunami hitting.

Gold investment demand also surges when stock markets are weakening or expected to weaken.  Gold is the ultimate portfolio diversifier since it is negatively correlated with material stock selloffs.  So as what looks like a monster bear rally in US stocks driven by the Fed’s near-hyperinflation inevitably rolls over, gold investment demand should strengthen considerably.  Gold has a very-bullish setup in this summer of 2020!

For many years I’ve thrown in silver and the gold miners’ stocks in my gold-summer-doldrums analyses.  Gold’s fortunes drive the entire precious-metals complex.  Silver and precious-metals miners’ stocks are effectively leveraged plays on gold.  Their summer behavior mirrors and amplifies whatever is happening in gold.  So if gold enjoys outsized gains this summer, silver and their miners’ stocks ought to do even better.

This silver-summer-seasonals methodology is the same as gold’s, showing how it has fared during gold’s modern bull-market years.  With a far-smaller global market, silver is much-more volatile than gold.  So its center-mass summer drift is wider, running +/-10% from May’s final close.  That implies a summer range between $16.04 to $19.60 this year.  But silver’s summer seasonals have proven weaker overall than gold’s.

Silver’s summer-doldrums seasonal low tends to arrive a couple weeks after gold’s in late June.  That is averaging June’s 20th trading day, which translated to June 26th this year.  And that saw silver being down 3.5% summer-to-date, much worse than gold’s 0.7% average droop at its own summer seasonal low.  Silver’s overall seasonal performance in market summers is considerably worse than gold’s too.

On average in 2001 to 2012 and 2016 to 2019, silver merely edged up 1.3% between the end of May to the end of August.  That is dwarfed by gold’s far-superior 3.1%!  Silver’s big relative underperformance in summers is likely sentiment-related.  Investors usually don’t flock to silver unless gold itself is running in an exciting and noticeable way.  And gold’s average gradual summer rallies don’t usually rise to that standard.

When gold enjoyed outsized summer surges like in those summers of 2016 and 2019, silver responded with great 16.8% and 25.8% summer rallies!  But when gold just grinds modestly higher like summer 2017’s 4.2% gain, that doesn’t garner enough investor attention for silver to amplify its upside.  That year the white metal lagged with a little 1.4% summer gain.  Silver needs big gold uplegs to entice major capital inflows.

Thankfully the gold stocks aren’t so picky, tending to leverage gold’s summer gains whether they prove big and outsized or small and uninspiring.  For gold-stock summer seasonals, I’m using the older HUI gold-stock index which closely mirrors the GDX VanEck Vectors Gold Miners ETF more popular today.  Since GDX was only launched in May 2006, it has insufficient price history to match these modern gold-bull years.

This same summer-seasonality methodology applied to the HUI shows gold stocks track and amplify gold’s fortunes far better than silver.  The more-volatile gold stocks also have a wider center-mass-drift summer trading range of +/-10% from May’s final close.  In HUI terms that runs from 246.0 to 300.7 this year.  Applied to GDX, that equates to a likely summer-2020 trading range running from $30.89 to $37.75.

Interestingly gold stocks’ average summer-doldrums low is on June’s 10th trading day, which shook out to June 12th this year.  That is right in line with gold’s own summer seasonal low.  The gold stocks per the HUI tend to slump 1.3% by then from May’s close, which amplifies gold’s early-summer weakness by 1.9x.  The major gold stocks of the HUI and GDX generally tend to leverage material gold moves by 2x to 3x.

On average from 2001 to 2012 and 2016 to 2019, the gold stocks have rallied 2.0% in Junes, slumped 0.3% in Julies, and then finished summers strong with big 4.0% surges in Augusts.  This compares to +0.1%, +0.7%, and +2.3% for gold in these same market-summer months.  Overall from the end of May to the end of August, the HUI has averaged 5.8% summer gains.  That’s again 1.9x gold’s 3.1% mean rally.

Like silver to a lesser extent, the gold stocks fare best during market summers when gold is surging fast enough to generate excitement.  That entices traders enjoying summers’ many pleasures back to markets to buy in and chase those gains.  During gold’s outperforming summers of 2016 and 2019 driven by that strong investment demand, the HUI rallied 10.1% and a massive 45.3% on gold’s 7.7% and 16.7% gains!

That made for 1.3x and 2.7x upside leverage to gold in those summers of 2016 and 2019.  The latter is excellent, showing how important it is to own gold miners when gold is enjoying counter-seasonal strong summer investment demand.  The former is only light because gold and thus gold stocks peaked in mid-summer 2016 before slumping into its end.  By early August 2016, the HUI had soared 41.4% summer-to-date!

That made for far-more-impressive 3.4x amplification of gold’s summer surge by its miners’ stocks.  The gold stocks have generally performed fairly well during modern gold-bull summers.  They’ve enjoyed a solid average summer rally seasonally, but surge dramatically when gold is being bid higher by strong investment demand.  So the gold summer doldrums usually don’t live up to their fearsome reputation.

These weak gold seasonals don’t encompass entire market summers, but have been compressed into early Junes on average.  From those mid-month seasonal lows, gold and the gold stocks tend to start marching higher into summer-ends leading into their big autumn rallies.  Silver isn’t as responsive, but still follows this seasonal pattern to a lesser extent.  Summer seasonal weakness in precious metals is usually modest.

And summer 2020 has good potential for outsized gold gains again.  Following March 2020’s brutal stock panic and subsequent crazy-extreme Fed money printing, gold investment demand proved very strong leading into summer.  And it has remained strong through its first third, or June.  So it’s probably a decent time to add to positions in fundamentally-superior gold and silver miners’ stocks if you aren’t sufficiently deployed.

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The bottom line is the gold summer doldrums in modern bull years have usually proven much milder than feared.  The seasonal weakness tends to be compressed into early June, with gold and its miners’ stocks carving summer lows in mid-June on average.  From there gold and gold stocks usually rally on balance in July and August, with gains really accelerating into summer-end.  That’s heading into gold’s big autumn rally.

And summer 2020 has excellent potential to see outsized gold gains on big counter-seasonal investment demand.  Gold’s strong upside momentum to major new secular highs in the wake of March’s stock panic has generated major investment-capital inflows.  And investors are likely to keep buying on balance with the Fed’s near-hyperinflation and resulting precarious stock-market extremes.  That’s really bullish for gold.

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