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Gold-Stock Spring Rally

Adam Hamilton
Mar 23, 2013

The loathed and left-for-dead gold miners look to have begun their usual spring rally. This sector has actually exhibited strong seasonality for its entire secular bull. For well over a decade, most years have enjoyed a major gold-stock rally between mid-March and early June. These favorable seasonals are a welcome tailwind for a sector that is radically undervalued fundamentally and overdue to explode higher.

Pronounced seasonality is certainly not something you'd expect from gold miners. Outside of mine expansions and new projects, their production rates are remarkably consistent over a calendar year. This is very different from agriculture, where harvests only happen once or twice a year. But despite steady gold sales over time, the stocks of this metal's miners are inarguably slaved to definite seasonal trends.

Why? Gold. The miners' stocks generally follow this primary driver of their profits in lockstep. They rally when gold is strong and slump when it is weak. And gold itself has demonstrated major seasonality during its own secular bull of the past decade. As the calendar marches forward, major income-cycle and cultural drivers from around the globe lead to a consistent series of outsized spikes in gold investment demand.

I explained each of these catalytic events in depth in my last essay on gold seasonals, which I highly encourage you to read to get up to speed. Without that foundational knowledge, the gold-stock seasonals won't make much sense. Gold stocks' seasonality exists because they mirror the gold price, the driver of their profits. And the factors driving gold's own seasonality have long been well-understood.

The biggest risk of seasonal analysis is reading too much into it. Seasonals are a secondary driver at best, subservient to sentiment, technicals, and fundamentals. I think of them like tailwinds or headwinds. Your car's gasoline-powered engine is its primary driver. While it can easily propel the vehicle into headwinds, the journey is a lot more pleasant and more efficient if you are blessed with strong tailwinds.

These spring gold-stock tailwinds couldn't come at a more opportune time. Thanks to gold's unjustified and irrational capitulation in February, bearishness in futures traders skyrocketed. By some measures it hit its highest extremes since 2008's hyper-scary stock panic, by others since before gold's current secular bull was even born. Extreme bearishness is a potent contrarian indicator, signaling major gold lows before new uplegs.

And just as gold is ready to start powering higher in its next mighty upleg after a long high consolidation, gold stocks happen to be trading near their lowest valuations by far of their entire secular bull. They are dirt-cheap, recently trading as if gold and silver prices were merely at $933 and $14 despite actually being 69% and 105% higher! These are the reasons gold stocks will surge, seasonals are merely icing on the cake.

If gold was overbought today after a strong upleg, if euphoria had driven gold stocks to high valuations after a massive rally, then these miners' strong spring seasonals would be utterly irrelevant. Gold stocks would be due to correct, a sentiment mean reversion trumping seasonality. But the exact opposite is true. Gold and gold stocks are very oversold and universally despised, the perfect breeding ground for major uplegs.

So with this hated sector radically undervalued and overdue to soar, the usual spring seasonal tailwinds are very welcome. This first chart is updated from my last full essay on gold-stock seasonality. It looks at the seasonal tendencies of this sector's flagship index, the NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index. Given that mouthful, it is understandably better known by its market symbol HUI.

Seasonality is best expressed in percentage terms, because over the course of a secular bull an index's prevailing levels change dramatically. The HUI averaged 465 in 2012, a far cry from 2001's 60. A 5-point move today is nothing, but early in this secular bull it was gigantic. So in order to make the disparate years of this gold-stock bull comparable, I individually indexed each one to show percentage moves then averaged them.

Every calendar year is separately indexed to its first trading day, which is assigned a value of 100. Every subsequent daily close of that year is then indexed off that baseline. If the HUI goes up 10%, regardless of its underlying levels, its seasonal index reads 110. Then all these annual seasonal indexes are averaged, resulting in the chart below. Logical or not, the gold stocks have exhibited strong seasonality.

Since stock prices behave very differently in secular bulls and secular bears, I limit my seasonality studies to the secular-bull years. For gold stocks they run between 2001 and 2013, a period within which the HUI skyrocketed an astounding 1664% higher at best! A dozen years offers plenty of data to average, smoothing outsized up and down years. Throughout this long span, gold stocks' spring rally is very clear.

It's highlighted with the light-blue circle above. Around mid-March on average, gold stocks bottom after an early-month slump. That drags the HUI down to the support line of its seasonal uptrend, and triggers one of three great seasonal buying opportunities of the calendar year. In 2013 this seasonal low came a little early after gold stocks were beaten to a pulp during February's totally irrational gold capitulation.

The HUI bottomed this year on March 5th, at mind-boggling 43-month lows. Gold stocks hadn't been so low since August 2009, when gold and silver were merely $933 and $14. They hadn't been cheaper relative to gold since the stock panic's nadir, and traded at their lowest valuations by far of their entire secular bull. Investors had totally abandoned this sector, all eyes enamored with the levitating stock markets.

But on average over the last dozen years, the HUI has surged 13.9% between mid-March and early June. This is the first of the HUI's three big seasonal rallies of the calendar year. On average this seasonal rally accelerates in late March, consolidates in April, and then soars in May. It ultimately catapults gold stocks from their seasonal support to their seasonal resistance. And it can grow a heck of a lot larger at times.

The most recent analogous spring in sentiment terms was 2009. Gold stocks were left for dead then too, a despised sector trading at much-lower valuations than the preceding years. The HUI bottomed on March 10th, trading at just 0.836x its 200-day moving average. If you understand Relativity Trading, this is wildly oversold. And 2013's March low was far worse, the HUI being pummeled down to just 0.774x.

But out of the deepest despair the biggest uplegs are launched. The HUI soon started surging, and by June 2nd it had blasted 53% higher! While it was very overbought after such a stupendous run, at 1.397x its 200dma, the ride was super-profitable for the brave contrarian traders who had bought gold stocks cheap near their March low. Spring gold-stock rallies born in despair can be massive in scale.

Of course spring 2009 saw the birth of the general stock markets' mighty cyclical bull, which I called right at the bottom. So the naysayers could argue that the HUI's spring rally that year was merely an extension of the S&P 500's (SPX). And there isn't an ice cube's chance in hell that today's overbought and tired SPX near 65-month highs will see similar gains. So throw out the spring 2009 gold-stock rally entirely.

Between March and June 2010, there was no enormous SPX rally like the post-panic recovery. Yet the HUI still surged nearly 26% over a span where the SPX lost 4%. That is actually the kind of stock-market move we are facing this spring at best. Yet the oversold gold stocks still rallied strongly contrary to the bleeding stock markets because gold itself was powering 15% higher in its own usual spring rally.

Gold stocks' spring rally came early in 2011, sentiment trumping seasonals to pull the HUI's usual March low forward into late January. But despite being forced to start early, the HUI still climbed nearly 22% over the subsequent few months. This sector's spring rally is a force to be reckoned with even if it starts early or late. It generally really pays to be long gold stocks in this spring timeframe, their upside bias is strong.

Now remember seasonals are merely a secondary driver, so they don't always work. And last spring was one of those rare exceptions. From its mid-March low to early June, the HUI actually lost 2% or so. Many gold-stock traders remember last spring's anomaly, so they figure gold-stock seasonals are dead. But I wouldn't be so quick to abandon the 11 secular-bull years of precedent before that. 2012 was unique.

Gold, the gold stocks' primary driver, had a rough spring in 2012. Back in the summer of 2011 it had soared in a massive counter-seasonal rally. You probably remember the impetus for that surge in gold investment demand was fears that Washington would be forced into a technical default on Treasuries if an agreement on raising the federal debt ceiling couldn't be reached. This left gold very overbought.

Sentiment in the yellow metal was hyper-bullish, nearing euphoria as I warned during that topping. This meant an imminent correction was inevitable to rebalance sentiment. Like all outsized spikes to major new highs, gold's summer-2011 surge had pulled a ton of buying forward. Investors who would have bought it later in a normal environment got so excited that they plowed their capital in near the highs.

This buying pulled from the future created a vacuum that lasted well into 2012, through the usual spring rally season. Between late February and late June, gold prices drifted almost 13% lower. It's nearly impossible for gold stocks to rally when gold is correcting, sentiment is too bearish while their fundamental outlook temporarily deteriorates. But realize spring 2012 was an anomaly, 2013's setup is nothing like that.

Instead of climbing to interim highs like in February 2012, in February 2013 gold plunged to dismal lows in a capitulation selloff. This left gold futures traders extremely bearish, a powerful contrarian buying indicator. They were actually fairly bullish leading into last spring. And the HUI itself wasn't anywhere near as oversold last March as it was early this month. The setup this year definitely supports bullish seasonals.

Interestingly, the final third or so of this seasonal spring gold-stock rally is actually this sector's second strongest month of the year. This final chart, also from my earlier gold-stock seasonality studies, zooms in to consider individual calendar months throughout this secular bull. The methodology here is similar, with each calendar month's opening indexed to 100 and then averaged with other years' same months.

The mid-March seasonal buying opportunity in gold stocks is readily apparent here, as its first half is one of the worst months for the HUI. This index tends to surge in late March, stall out and drift in April, and then soar dramatically in May. The average HUI gain in May between 2001 and 2012 was an impressive 6.7%. This obviously includes all outliers, both positive and negative. Spring is great for gold stocks.

April's seasonal slump makes it somewhat tempting to delay gold-stock purchases until late that month. But that tilts the odds of catching the full spring rally well out of traders' favor. In absolute terms, the mid-March HUI low is nearly always way lower than the HUI's late-April levels. This is readily apparent in the first annual-seasonals chart. So mid-March is the optimal time to buy low despite April's average weakness.

And emerging from oversold levels accompanied by a strong gold rally out of oversold lows of its own, the gold stocks' April performance is actually quite strong. In April 2010 and 2011 for example, the HUI enjoyed large monthly gains above 8% and around 4% respectively. In addition, if the spring rally doesn't synchronize with the seasonal precedent in terms of timing, you don't want to risk not being deployed in April.

Weathering any mild April slump, which is unlikely this year because the gold stocks have been so radically oversold, is well worth it. May's seasonal surge into early June is so awesome on balance that you don't want to miss any of it. And this secular gold-stock bull has seen plenty of years where the HUI has started climbing weeks earlier than the seasonal averages. Mid-March truly is the best time to get deployed.

Provocatively gold's own spring rally, which is well-documented historically, is the least-understood out of all this metal's major seasonal rallies in terms of what drives it. It doesn't have a clear income-cycle or cultural driver, like Asian harvest in the late summer or Indian wedding season in autumn. I suspect it is simply a spring phenomenon, an investor response to the joyous lengthening of daylight hours.

The stock markets have always had an upside bias in spring. After emerging from a dark cold winter, people just feel a lot happier and more optimistic as daylight grows and temperatures rise. There is also a growing anticipation of the upcoming summer vacations, and the end of the market busy season in May. Most investors make most of their buying decisions based on sentiment, they buy when they feel good.

And man, it is hard not to feel good in the spring! I am a battle-hardened contrarian speculator, a veteran of many campaigns. I know better than to ever let myself feel good or bad about anything market-related, as greed and fear slaughter traders. But nevertheless, I find myself much happier when the sun is blasting through the large high windows of my south-facing office, bathing me and my desk in glorious warm light.

Thankfully I live in a place with 300+ sunny days per year, it's awesome. I find myself slightly less productive on cloudy days, and somewhat more cynical than usual. And I'm not alone. I've talked with countless traders who just love the sunshine, and spring is when it really starts shining brilliantly again throughout much of this country. Hope springs eternal, and happy investors eagerly look to buy.

So there is really no better time of the year for dismal gold and gold-stock sentiment to thaw. The glass just becomes half-full in the spring as days get longer and temperatures warm. And this year there are plenty of bullish factors to drive that necessary sentiment shift to ignite a major gold-stock upleg. In addition to gold being ready to surge and gold stocks being extremely cheap as mentioned before, there's more.

Probably the main reason gold, silver, and their miners have gotten zero love in recent months is due to the levitating stock markets. Gold and the SPX have had a strong negative correlation, gold only doing well when general stocks weaken. Investors feel they have no need for alternative investments like gold when conventional ones are doing so well. But the hyper-complacent stock markets are due to roll over.

The SPX is very overbought near 65-month highs, after enjoying a massive 131% cyclical bull over the past 48 months. But the average cyclical bull within a secular bear merely sees a double over less than 35 months, so today's bull is much bigger and older than normal. The SPX is also above secular-bear resistance, a dangerous place technically. As general stocks roll over, gold will quickly return to favor.

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The bottom line is gold-stock seasonals have just turned favorable again. This sector usually enjoys a major spring rally, propelled higher by a parallel spring rally in gold. It runs from mid-March to early June on average, with the resulting gains making this period one of the best of the year to own gold stocks. And due to gold stocks being deeply out of favor and wildly oversold, this year's potential is exceptional.

Gold itself is just starting to march higher out of capitulation lows, a trend that will accelerate as the toppy general stock markets inevitably roll over. This is happening as gold stocks were just pummeled to their lowest valuations of their entire secular bull, and their lowest levels relative to gold since 2008's crazy stock panic. Add in some strong seasonal tailwinds, and it's the perfect recipe for a major upleg.


Mar 23, 2013
Adam Hamilton, CPA

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