By Adam Hamilton
The gold miners’ stocks have mostly ground higher over the past half-year, forging a new upleg. Their fortunes have been dominated by traders gaming the Fed’s extreme tightening cycle, which has really bullied around gold. Despite these crazy sentimental and technical distortions, gold stocks’ background seasonals shouldn’t be overlooked. This sector’s strongest seasonal rally relative to gold is well underway.
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 behaviors 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 display strong seasonality because their price action amplifies that of their dominant primary driver, gold. Gold’s seasonality generally isn’t driven 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 investment demand varying considerably 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. Like clockwork these power major spring, autumn, and winter seasonal rallies in gold and thus its miners’ stocks. Interestingly market forces behind the former are the least-understood out of all gold’s seasonal surges. Maybe that’s why this imminent spring rally has also proven gold’s weakest.
Yet surprisingly gold stocks still enjoy their best seasonal outperformance relative to their metal during these same coming months! So gold stocks’ spring rally has proven their strongest seasonal one during gold’s modern bull-market years. This contradictory mismatch between gold’s worst seasonal rally and its miners’ best one offers an important clue on the spring rally’s motivating impetus, sentiment is likely the key.
Traders’ psychology exceedingly influences their capital-allocation decisions. They won’t buy gold or gold stocks or anything unless they are optimistic prices will climb on balance. After dark cold winters in the northern hemisphere where the vast majority of the world’s traders live, spring naturally breeds optimism. Its glorious swelling sunshine and warming temperatures universally buoy the spirits of nearly everyone.
The lengthening daylight hours and improving weather from March to May bring joyful anticipation of the summer vacation season. That’s such a wonderful contrast to January and February, which often seem like nose-to-the-grindstone months of relentless busyness. With things looking up and traders generally feeling happier during springs, their optimism makes them more bullish on much including gold and gold stocks.
This glass-half-full sentiment leaves traders more willing to deploy capital to chase expected gains. And their optimistic buying feeds on itself, fueling virtuous circles of strength. The more traders buy gold and its miners’ stocks, the more they rally. Those resulting gains attract in still-more traders, accelerating the upside. Spring is exceptionally favorable for nurturing this positive psychological feedback loop in markets.
Since it is gold’s own demand-driven seasonality that fuels gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming. This old research thread focuses on modern bull-market seasonality, as bull and bear price action is quite different. Gold enjoyed a mighty 638.2% bull run from April 2001 to August 2011, fueling gold stocks skyrocketing 1,664.4% per their leading index then!
Following that secular juggernaut, gold consolidated high then started correcting into 2012. But the yellow metal didn’t enter formal bear territory down 20%+ until April 2013. That beast mauled gold on and off over several years, so 2013 to 2015 are excluded from these seasonal averages. Gold finally regained bull status powering 20%+ higher in March 2016, then its modest gains grew to 96.2% by August 2020.
Another high consolidation emerged after that, where gold avoided relapsing into a new bear despite a serious correction. Later the yellow metal started powering higher again, coming within 0.5% of a new nominal record in early March 2022 after Russia invaded Ukraine. So 2016 to 2021 definitely proved bull years too, with 2022 really looking like one early on. Then Fed officials panicked, unleashing market chaos.
Inflation was raging out of control thanks to their extreme money printing. In just 25.5 months following the March 2020 pandemic-lockdown stock panic, the Fed ballooned its balance sheet an absurd 115.6%! That effectively more than doubled the US monetary base in just a couple years, injecting $4,807b of new dollars to start chasing and bidding up the prices on goods and services. That fueled an inflation super-spike.
With big inflation running rampant, Fed officials frantically executed the most-extreme tightening cycle in this central bank’s history. They hiked their federal-funds rate an astounding 450 basis points in just 10.6 months, while also selling monetized bonds through quantitative tightening. That ignited a huge parabolic spike in the US dollar, unleashing massive gold-futures selling slamming gold 20.9% lower into early September.
That was technically a new bear market, albeit barely and driven by an extraordinary anomaly that was unsustainable. Indeed gold soon rebounded sharply, exiting 2022 with a trivial 0.3% full-year loss. Gold kept on powering higher, reentering bull territory up 20.2% in early February 2023! So I’m also classifying 2022 as a bull year for seasonality research. Gold’s modern bull years include 2001 to 2012 and 2016 to 2022.
Prevailing gold prices varied radically across these secular spans, running just $257 when gold’s mighty 2000s bull was born to August 2020’s latest record high of $2,062. That vast range of gold levels spread over all those long years has to first be rendered in like-percentage terms in order to make them perfectly comparable with each other. Then they can be averaged together to distill out gold’s bull-market seasonality.
That’s accomplished by individually indexing each calendar year’s gold price action to its final close of the preceding year, which is recast at 100. Then all gold price action of the following year is calculated off that common indexed baseline, normalizing all years. So gold trading at 110 simply means it has rallied 10% off the prior year’s close. Gold’s previous seasonality before 2022 was added is shown in light blue.
Gold’s off-the-charts volatility last year spawned by that extreme Fed tightening really yanked around its seasonal performance. Averages improved early on as gold powered higher before those extreme rate hikes launched the US dollar stratospheric. Gold’s resulting plummeting dragged its seasonals sharply lower in 2022’s second half. But heading into year-end, that gap almost closed again as gold rebounded.
Gold’s spring seasonal rally runs from mid-March to early June, where it powers 3.6% higher on average. That is considerably worse than the +4.1% prior to 2022. Gold’s spring rally was truncated prematurely in mid-April last year. That’s when Fed officials’ uber-hawkish jawboning convinced traders that violent rate hikes were coming. In early May the Fed hiked 50bp, followed by four 75bp monsters in a row starting in mid-June!
That first one was the Fed’s biggest rate hike since November 1994, something not witnessed in almost 28 years! Those extreme Fed distortions left gold’s 3.6% spring rally even smaller than its 5.1% autumn and 8.6% winter ones. But it really isn’t weak, as this spring rally is the fastest compressed into just 2.6 months. Gold’s autumn and winter rallies take much longer to unfold, clocking in at 3.4 and 4.1 months.
So gold actually surges at a 16.4% annualized pace during its spring rally, compared to 18.4% and 25.0% in its autumn and winter ones. Those aren’t trivial gains achieved by an enormous asset on average over fully 19 years! And this year’s spring rally ought to remain a huge outperformer, pushing gold’s spring-rally seasonals back higher. At best between late February to late March, gold has already blasted up 10.1%!
After waxing short-term overbought in late January, gold’s young bull suffered a sharp pullback in most of February. A confluence of several unusual events contributed, including a European Central Bank dovish surprise, a record seasonal adjustment in monthly US jobs, and speculators’ gold-futures trading reports going dark. With that selling way overdone, gold had already rebounded 2.4% before mid-March’s fireworks.
The Fed’s savage rate hikes were forcing huge unrealized losses in some banks’ supposedly-safe portfolios of short-term US Treasuries. That scared depositors into fearing technical insolvency, fueling full-blown runs on otherwise-healthy banks! That really lit a fire under gold in mid-March, fueling massive gold-futures buying. Traders were remembering gold’s legendary safe-haven status in troubled times.
With the Fed’s extreme tightening cycle threatening confidence in the US banking system, futures-implied odds for more rate hikes crashed. That slammed the US dollar lower accelerating speculators’ leveraged gold-futures buying. As traders love chasing upside momentum, big gold surges often soon become self-feeding. This dynamic combined with gold’s strong seasonal tailwinds should amplify this year’s spring rally.
And despite that economy-crushing frenzy of monster Fed rate hikes, inflation continues to rage out of control. In the year since Fed officials started hiking like madmen, monthly headline CPI inflation has still averaged huge 7.8% year-over-year gains! That is even more shocking considering the CPI is heavily lowballed, intentionally underreporting price increases since they are so problematic politically for the US government.
Yet in the year before the Fed’s most-extreme hiking cycle ever launched, the headline CPI looked better averaging 5.7% YoY gains. Rate hikes can’t kill inflation driven by excessive monetary expansion. In early March before the bank runs, the Fed’s balance sheet remained 100.6% higher than pre-pandemic-lockdown-stock-panic levels! Then in mid-March it soared back up to +107.7% as banks rushed for Fed funding!
With the US money supply still more than doubled, this inflation super-spike has a long ways to run yet before prices normalize to this vast deluge of new dollars. That is incredibly bullish for gold. During the last two inflation super-spikes in the 1970s, monthly-average gold prices from trough to peak CPI months nearly tripled during the first before more than quadrupling in the second! Today’s gold bull is only starting.
So odds favor this year’s spring rally continuing to prove outsized relative to multi-decade gold-bull-year seasonal averages. That certainly bodes well for gold stocks in the next couple months. Their leading GDX VanEck Gold Miners ETF tends to amplify material gold moves by 2x to 3x. But only birthed in May 2006, GDX is too young for this long-term seasonal analysis. For that we need the classic HUI gold-stock index.
It is functionally interchangeable with GDX, containing the same major gold miners. To test this, I remade this seasonal research thread’s underlying spreadsheet by plugging in GDX instead of the HUI starting in 2007. The resulting charts proved all but identical, so for consistency’s sake I’m continuing to advance these studies with the HUI. The gold stocks are naturally thriving this spring, leveraging gold’s upside like usual.
Applying this same modern-gold-bull-year seasonality methodology to gold stocks, they’ve averaged big spring-rally gains of 12.1%. That’s much better than the autumn rally’s +8.1%, yet still behind the winter rally’s +13.3%. But for several reasons, gold stocks’ spring rally still remains their seasonally-strongest one. It actually was absolutely until 2022 was added, as gold stocks plunged with gold starting in mid-April.
Before Fed officials panicked with their brutal rate hikes, gold stocks’ spring rally averaged seasonal-best 13.5% gains over 18 years. That was ahead of both the +9.5% and +12.9% gains from the autumn and winter rallies. As the most-extreme hiking cycle ever and resulting extreme market anomalies can’t happen very often, gold stocks’ spring-rally supremacy will likely reassert itself in the averages in coming years.
But even as these seasonals now stand including 2022’s gross distortions, gold stocks’ spring rally is still their strongest. Their seasonal upside leverage to gold runs a massive 3.4x during this long secular timespan, dwarfing the 1.7x and 1.5x seen during the autumn and winter rallies! And mirroring gold, the gold stocks’ spring rally is also the fastest at 2.6 months. Autumn and winter are way longer averaging 3.4 and 4.0.
So annualized, the major gold stocks of HUI and GDX skyrocket up at a phenomenal 55.2% pace during this spring-rally period! Those fast gains trounce the 29.0% and 40.1% annualized rates on average during the autumn and winter seasonal rallies. So in terms of raw outperformance relative to gold, there’s no other time of the calendar year more favorable for the miners. That’s confirmed by fully 19 years of data.
Gold-stock fortunes are heavily dependent on trader psychology, which grew really bearish during gold’s serious pullback in February. So gold stocks have lagged gold’s spring-rally surge, with GDX up 21.0% at best from early to mid-March. But before 2023’s spring rally runs its course by early June, GDX’s upside leverage to gold should near the high end of its usual 2x-to-3x range. That portends big gains in April and May.
When gold is really running, gold miners’ big inherent profits leverage to it help drive far-larger outsized gains. The last example was in spring 2020, which proved exceptional due to that pandemic-lockdown stock panic. From mid-March to late May, GDX skyrocketed an astonishing 95.8% higher on a parallel massive 18.7% gold surge! Again traders love chasing upside momentum, fueling big self-feeding buying.
With the lion’s share of gold’s and gold stocks’ spring rallies coming in April and May, these have proven the strongest two-calendar-month span of the year for this sector. This next chart carves up gold-stock seasonals into more-granular calendar months using the same indexing methodology. Despite the Fed’s walloping last April and May, gold-stock seasonals remain explosively bullish during the next couple months.
On average during these same modern gold-bull years of 2001 to 2012 and 2016 to 2022, gold stocks surged 2.9% higher in April and 4.1% in May! The former is narrowly the HUI’s fifth-strongest month in this long secular span, while the latter takes the crown as the best. As you can tell by the pre-2022 light-blue lines, these months were even better before Fed officials unleashed hell on the markets to fight inflation.
Before last year’s resulting extreme anomalies, April was gold stocks’ third-best month at +3.6% while May was even better clocking in at +4.9%! So while November and December together now seem to rival this April-May span in terms of back-to-back gains, this spring-rally timeframe remains the strongest. Last year’s crazy Fed-distorted market action temporarily retarded April and May, then goosed November and December.
Gold stocks’ average upside leverage to gold during May has run a colossal 4.4x, trouncing every other month! These next couple months are the most-favorable time of the year to be heavily deployed in the gold miners. Whether it is spring’s general optimism leaving traders more likely to loosen their purse strings to deploy capital or just momentum-chasing buying, gold stocks really thrive from mid-March to early June.
With the lion’s share of this seasonally-strongest span still coming, it’s a great time to up your portfolio allocations to fundamentally-superior mid-tier and junior gold miners. They are in the sweet spot for big upside potential as gold powers higher. These smaller miners offer a unique mix of sizable diversified production, great output-growth potential, and smaller market capitalizations ideal for outsized gains.
The bottom line is gold stocks usually experience a strong spring rally seasonally. This is driven by gold’s own seasonality, where outsized investment demand arises at certain times during the calendar year. Gold usually enjoys a solid spring rally likely fueled by the universal optimism this season brings. And since gold drives gold miners’ profitability, their stock prices naturally follow it higher amplifying its gains.
That infectious spring exuberance has proven very potent for gold stocks. Over the last couple decades of gold-bull years, the miners have outperformed their metal dramatically from mid-March to early June. No other seasonal surge rockets so fast! And given this year’s backdrop of raging inflation festering while the Fed backs off extreme hiking to stop bludgeoning banks, gold’s and gold stocks’ upside potential is exceptional.
Adam Hamilton, CPA