Gold, silver, and theirminers’ stocks suffer their weakest seasonals of the year in early summers. With traders’ attention normally diverted to vacationsand summer fun, interest in and demand for precious metals usually wane. Without outsized investment demand, goldtends to drift sideways dragging silver and miners’ stocks with it. Long feared as the summer doldrums, they’ve actuallymoderated in recent years.
This doldrums term is very apt for gold’s traditionalsummer predicament. It describes a zone surroundingthe equator in the world’s oceans. Therehot air is constantly rising, spawning long-lived low-pressure areas. They are often calm, with little prevailingwinds. History is full of accounts ofsailing 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 whenthe winds would pick up again, while they continued burning through their limitedstores of food and drink. Without movingair, the stifling heat and humidity were suffocating on these ships long beforeair conditioning. Misery and boredomwere extreme, leading to fights breaking out and occasional mutinies. Being trapped in the doldrums was viewed withdread, it was a very trying experience.
Gold investors cansomewhat relate. Like clockwork trudgingthrough early summers, gold starts driftinglistlessly sideways. It often can’tmake significant progress no matter what trends looked like heading into June,July, and August. As the days and weeksslowly pass, sentiment deteriorates markedly. Patience is gradually exhausted, supplanted with deep frustration. Plenty of traders capitulate, abandoningship.
June and early July inparticular have often proven desolate sentiment wastelands for precious metals,devoid of recurring seasonal demand surges. Unlike most of the rest of the year, the summer months simply lack anymajor income-cycle or cultural drivers of outsized gold investment demand. Yet several recent summers have proven bigexceptions to these decades-old seasonals, and 2022’s could still be another.
Quantifying gold’ssummer seasonal tendencies during bull markets requires all relevant years’ priceaction to be recast in perfectly-comparable percentage terms. That is accomplished by individually indexing each calendar year’s gold price to its lastclose before market summers, which is May’s final trading day. That is set at 100, then all gold-priceaction each summer is recalculated off that common indexed baseline.
So gold trading at anindexed level of 110 simply means it has rallied 10% from May’s final close,while 95 shows it is down 5%. Thismethodology renders all bull-market-year gold summers in like terms. That’s necessarysince gold’s price range has been so vast, from $257 in April 2001 to $2,062 inAugust 2020. That span encompassed twosecular gold bulls, the first soaring 638.2% over 10.4 years into August 2011!
While that previous mightybull 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 came in Q2’13, where gold plummeted22.8% in its worst quarterly performance in 93 years! The Fed’s unprecedented open-ended QE3 campaignwas ramping to full-speed, levitatingstock markets which slaughtered demand for alternative investments led bygold.
The resulting gold-bearyears ran from 2013 to 2015, which need to be excluded since gold behaves verydifferently in bull and bear markets. Thatultimately pounded gold to a 6.1-year secular low in December 2015, whichhelped birth today’s gold bull. It hasgradually powered higher on balance ever since, never suffering anybull-slaying 20%+ selloffs. So 2016 to 2022have proven gold-bull years to add into this analysis.
When all gold’s summerprice action from these modern gold-bull years is individually indexed andthrown into a single chart, this spilled-spaghetti mess is the result. 2001 to 2012 and 2016 to 2020 are rendered inyellow. Last summer’s action is shown inlight-blue for easier comparison with this summer. Seeing all this perfectly-comparable indexedsummer price action at once reveals gold’s center-mass-drift tendency.
These summer seasonalsare further refined by averaging together all 18 of these gold-bull years intothe red line. Finally gold’ssummer-to-date action this year is superimposed over everything else in dark-blue,showing how gold is performing compared to its seasonal mean. A third of the way through this summer, gold hasgenerally meandered around its seasonal trend. But that could change fast in these crazy markets.
Some strongcounter-seasonal surges in recent years are contributing to gold’s “summer”doldrums being something of a misnomer. The “June” doldrums might now be more accurate! During all these modern bull-market years before2022, gold averaged a slight 0.1% loss through June. That flatlined performance resulted from goldrecovering from its summer-doldrums seasonal low typically seen earlier inmid-June.
On average at June’s 11thtrading day, the yellow metal has been down a modest 0.7% month-to-date. Interestingly that arrived June 15th thisyear, the day the Fed fired that huge 75-basis-point rate hike at the marketsto attempt to fight red-hot inflation. Whilegold surged 1.6% on that, its prior-day $1,807 close was down 1.6% MTD. That was roughly in-line with seasonal precedentdespite big gold-futuresselling.
June’s slight grindlower actually flags summer doldrums’ ends. Buyers begin nibbling in July, which has enjoyed much-better averageseasonal gains of 1.3%. The redseasonal-average line turning higher mid-summer is readily evident in this chart. Those gains swell again in August to a strong2.1% as gold’s major autumn rally accelerates! That excellent run extends from summer-doldrums lows to late September.
In these same moderngold-bull years of 2001 to 2012 and 2016 to 2021, gold’s autumn rally averagedstrong 5.8% gains over that span! That handily bests gold’s spring rally averaging +4.1%, but remains wellbehind the champion winter rally’s powerful 8.3% gains. Assuming gold’s recent $1,807 closing lowleading into mid-June’s Federal Open Market Committee meeting holds, a 5.8%rally would carry gold to $1,912.
But with June, July,and August averaging fast-improving gold performances of -0.1%, +1.3%, and +2.1%,again June usually proves the worst of the summer doldrums. And after just drifting lower this latest Junewith gold slumping 1.0%, its gains are poised to mount this month. Odds are this summer will see bigger gold gainsthan usual, with several super-bullish factors converging to catapult gold tosummer escape velocity.
The last time that happenedwas summer 2020, when gold rocketed higher out of that year’s pandemic-lockdownstock panic. Across June, July, and August, gold soared 13.7% in a very-strong summer rally! This current summer-2022 setup for gold is exceptional,way superior to that rally-spawning one a couple years ago. This dreadful inflation super-spike fueled by the Fed’s epicQE4 money printing is the main reason.
Between mid-October 2019and mid-April 2022, the Fed mushroomed its balance sheet by a ludicrous 127.0% or$5,016b in just 30.1 months! That effectively more than doubled the US-dollar supply in just a couple years, unleashingtoday’s raging inflation. The latestConsumer Price Index headline-inflation print just hit a new cycle high soaring8.6% year-over-year in May, the hottest CPI inflation since December 1981!
Unfortunately thatshocking inflation read wasn’t some one-off anomaly, with the CPI soaring 8.5%,8.3%, and 8.6% YoY in the latest three reported months. And all dozen past-year reports averaged lofty6.8%-YoY general-price surges! In the yearbefore the Fed recklessly redlined its monetary printing presses to launch QE4,the headline CPI averaged mere 1.8%-YoY gains. That deluge of new money is bidding up prices.
Today’s first inflationsuper-spike since the 1970s is exceedingly-bullish for gold. The more high and fast-rising prices scareinvestors, the more gold investment demand grows. The more hot inflation scares Fed officials intotightening even faster with big rate hikes and QT, the deeper that hammersstock markets into their young bear. That too boosts gold investment demand for prudently diversifyingstock-heavy portfolios.
These dynamics catapulted gold to stupendousgains during the last two inflation super-spikes both in the 1970s. In monthly-average-price terms from trough topeak YoY-CPI months, gold prices nearly tripled during the first before morethan quadrupling in the second! Goldought to at least double before today’s inflation super-spike gives up its ghost,which isn’t likely until the Fed unwinds the majority of that QE4 money.
This raginginflation boosting gold investment should amplify gold’s usual autumn rallymarching higher in July and August. Right after mid-June’s FOMC meeting with that surprise huge 75bp hike,the Fed chair himself warned “either a 50 or 75 basis point increase seems mostlikely at our next meeting” in late July. More big rate hikes coming should continue pressuring stock markets,making gold more attractive to investors.
Gold’s near-term upsidepotential in these next couple summer months is also much greater than normaldue to speculators’ gold-futurespositioning. These hyper-leveragedtraders aggressively dumped long contracts heading into that latest FOMC decision. Their major liquidation was fueled by a monstrousUS-dollar rally on the Fed’s extreme uber-hawkish pivot to abig-and-fast rate-hike cycle and unprecedented QT.
Specs’ probablegold-futures-selling firepower was exhausted as that anomalous parabolic dollarsurge left it extraordinarily-overboughtand topping. As that lofty US dollarinevitably mean reverts back lower, speculators will flood back into goldfutures driving strong upside gold momentum. That will help entice investors back, likely amplifyinggold’s gains in this year’s autumn-rally months including July and August.
The recent drumbeat ofscary inflationary news will certainly continue intensifying this summer. Political polling shows this raging inflationis American voters’ top issue by far heading into November’s midtermelections. The more speculators and investorsthink about inflation, the more examples they’ll perceive and the more they’llworry about it. That will really strengthengold investment demand in coming months.
For many years I’ve thrownin silver and the gold miners’ stocks in my gold-summer-doldrums analyses. Gold’s fortunes drive the entireprecious-metals complex. Silver and precious-metalsminers’ stocks are effectively leveraged plays on gold. Their summer behavior mirrors and amplifieswhatever is happening in gold. So if goldenjoys outsized gains later this summer, silver and their miners’ stocks shoulddo better.
Silver’ssummer-doldrums seasonals are similar to gold’s but exaggerated. Silver also tends to carve a major seasonallow in June, but a couple weeks later than gold’s towards month-end. On average during these same modern gold-bullyears, silver dropped 3.5% summer-to-date by then. This summer silver’s June nadir hit right on scheduleand target this week, with the white metal down 3.4% MTD this Wednesday!
Because silver usuallybottoms later in June, it doesn’t have much time to recover beforemonth-end. So silver has averaged 2.6%seasonal losses that month. But likegold its fortunes really improve in July, where average gains soar to 5.2%! Yet that big surge apparently pulls forward muchof silver’s summer momentum, leaving August with smaller 1.1% gains. That all nets out to 3.6% average full-summerrallies.
Unfortunately that isn’tmuch leverage relative to gold, which averaged similar 3.3% gains through June,July, and August. Silver acts like agold sentiment gauge, which generally remains softer through most of marketsummers. Even though gold’s seasonalsturn favorable in mid-June, its autumn rally needs to build for a month or twobefore traders notice enough to start chasing. Silver languishes until psychology turns.
But when gold isenjoying outsized summer gains like a couple years ago, the resulting bullishsentiment catapults silver sharply-higher. While gold blasted 13.7% higher through June, July, and August 2020, silverskyrocketed up 58.1% in that summer-doldrums span! Once gold really gets moving generating realherd greed, silver explodes higher. Thatis likely to happen again soon in this terrible inflation super-spike.
The gold miners’ stocksare also big beneficiaries of gold strength, which their earnings and stockprices amplify to big gains. Forgold-stock summer seasonals, I’m using the older HUI gold-stock index which closelymirrors the GDX VanEck GoldMiners ETF more popular today. GDX’sprice history is insufficient to match these modern gold-bull years, since itwas only born in May 2006 deeper into gold’s last secular bull.
The major gold stocks’summer-doldrums low mirrors gold’s, averaging out to June’s 10th trading day ata 1.6% MTD loss. But last month’s gold slumpramped bearishness, leaving GDX down a disheartening outsized 10.4% MTD thisweek! Gold-stock sentiment is also heavilydependent on gold’s fortunes. Withtraders really down on the yellow metal’s prospects, they’ve capitulated andfled battered gold stocks this summer.
Nevertheless the majorgold stocks have enjoyed a nice summer uptrend on average through these samemodern gold-bull-market years of 2001 to 2012 and 2016 to 2021. That older HUI gold-stock index saw average monthlygains of 1.3%, 1.0%, and 3.2% in June, July, and August! Amplifying gold, its miners’ stocks growmore popular later in summers as gold’s autumn rally accelerates. Traders love chasing momentum.
But overall gold-stockleverage to gold is still relatively-weak on average through market summers. The HUI averaged a respectable 5.6% gain betweenthe ends of May and August, which is pretty impressive for the long-dreadedsummer doldrums. But gold’s ownmodern-bull-year summers again enjoyed nice 3.3% gains on average. That only makes for 1.7x upside leverage togold, well under GDX’s normal 2x to 3x.
Gold stocks’ relative summerunderperformance is probably partially driven by lack of interest. Summer doldrums exist because traders’ focuson the markets wanes as they enjoy warm sunshine, long daylight hours, and vacationswith their families. If they aren’tpaying close-enough attention to see gold’s autumn rallies marching higher, thegold miners’ stocks will stay off their radars. But big gold surges overcome that.
A recent example wassummer 2019, where gold bucked weak seasonals to blast dramatically higher in June,July, and August. That summer the yellowmetal powered 16.7% higher in that short span driven by strong investment demand! Those big gains proved exceptional-enough tocatch traders’ eyes, so they poured back into gold stocks despite the doldrums. GDX soared 38.3% that summer, for 2.3xupside leverage!
Gold stocks still have bigpotential to outperform again this summer, but only if gold surges fast-enoughin July and August to make financial-market news. Capital will pour back into this battered sectorif gold is sufficiently exciting to generate popular greed. That’s possible with gold needing to powerway higher on this new inflation super-spike. Gold stocks need big gold gains in July and August to buck the summerdoldrums.
This sector could win somelate-summer bullish visibility and capital inflows in August as the new Q2’22earnings season unfolds. The gold miners’earnings that quarter are likely to grow considerably proving fat,making gold stocks look even more undervalued. In the previous Q1, the top-25 GDX gold miners averaged all-in sustaining costs of $1,133 per ounce. That made for implied sector unit earnings of$746.
Gold averaged $1,879 inQ1, and is holding near those levels averaging an excellent $1,873 in thislatest Q2. But the major gold minersgenerally forecast improving outputs as 2022 marches on, spreading thebig fixed costs of mining across more ounces lowering AISCs. The GDX top 25’s full-year-2022 AISC guidancesat the end of Q1 averaged 7.0% lower than its AISCs! So they could retreat near $1,054 in Q2.
If that comes to pass, themajor gold miners’ implied profitability could soar 9.8% sequentially from Q1! Big earnings growth couldreally stand out in this Fed-bludgeoned general-stock bear sufferingweakening corporate profits. Strong gold-stockfundamentals with gold rallying on balance would increase the odds of outsized gainslater this summer. The gold miners’stocks can surge in the summer doldrums if gold does.
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Thebottom line is the gold summer doldrums in modern bull years have usually provenmuch milder than feared. The seasonalweakness tends to be compressed into early June, with gold and its miners’ stockscarving summer lows in mid-June on average. From there gold and gold stocks usually rallyon balance in July and August, with gains really accelerating into summer-endas gold’s big autumn rally gathers steam.
That hasmuch-bigger potential than normal this summer with inflation raging out of control. Gold soared during the last similar inflationsuper-spikes in the 1970s, and likely will again in this one. Speculators are positioned for biggold-futures buying as the overbought US dollar mean reverts lower. And this mounting stock bear driven by aggressiveFed tightening will really boost gold investment demand to diversifyportfolios.
Adam Hamilton, CPA
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