PM Summer Doldrums 3
Adam Hamilton June 10, 2011 2485 Words
Traders beware, the dreaded precious-metals summer doldrums are now upon us! Summers are barren sentiment wastelands for the entire PM complex. Gold, silver, and the PM stocks tend to grind listlessly sideways to lower, vexing traders who arenít psychologically prepared to weather this slow season.
A variety of factors drive this phenomenon during the financial-market summers, which run from Memorial Day to Labor Day. The primary one is the same summer psychology that affects all the financial markets, vacation season. Traders flee the markets in droves during these lazy summer months, enjoying the bountiful sunlight, long warm days, and precious family time while their kids are out of school.
Naturally this reduces the collective focus on the financial markets. Speculating and investing take a back seat to vacationing and relaxing, leading to much-reduced trading volume globally. Gold, which is the primary driver of silver and the PM stocks, is certainly not immune. Waning interest in the financial markets as a whole bleeds into this metal, robbing these summer months of compelling buying catalysts.
Since nothing moves gold prices like large spikes in investment demand, it mostly just drifts sideways in June, July, and August. The major income-cycle and cultural factors that drive big gold demand spikes between Labor Day and Memorial Day simply donít exist in the summer months. This makes summer the weakest time of the year by far for gold seasonals.
Goldís surprisingly-strong seasonality is purely demand-driven, as its newly-mined supply is nearly constant throughout the entire calendar year. Summer lacks the investment-demand spikes seen between September and May. Summer has no Asian harvest, no Indian wedding season, no Western holiday shopping, no end-of-year income-surplus investing, and no Chinese New Year.
The result is the PM summer doldrums, leaving the precious metals drifting along listlessly like a great tall ship trapped in the oceansí infamous doldrums. So to avoid frustration and discouragement, traders really shouldnít expect much from the PMs during these lazy summer months. On the bright side, this seasonís grinding ultimately leads to the best seasonal buying opportunity of the entire year.
Unfortunately this phenomenon is not as widely-understood as it ought to be. As prices march higher on charts during secular bulls, earlier yearsí price action becomes distorted. Moves that were important in summers past when gold was much lower barely even register visually on a current chart culminating in todayís higher prevailing prices. This makes it hard to view past summers in comparable terms, obscuring the doldrums.
The solution is to build a spreadsheet that renders every summer in perfectly-comparable percentage terms. Each yearís final pre-summer close, the last trading day of May, is indexed at 100. And then each summerís daily trading action after that is converted to this common percentage baseline. So whether gold entered a summer at $500 or $1500, a 5% move looks identical on these indexed charts.
Averaging every indexed summer since 2000, just before todayís secular gold bull was born, clearly reveals this metalís grinding summer-doldrums tendency. But averages can obscure extremes, and offer no insights into how tight or dispersed the underlying data is. The tighter the raw data fed into an average, the higher the probability that average is meaningful and important for predicting future price action.
So in addition to the red average line below, I included each summerís raw indexed data in yellow. While it looks like a bowl of spaghetti was thrown at this chart, these individual yearsí performances illustrate the averageís underlying building blocks. In addition, goldís current action in this yearís young summer is rendered in blue for comparison. The PM summer doldrums are well-established technical fact.
The vacation season and lack of investment-demand spikes for gold lead to the summer-doldrums drift seen on this chart. On average, gold tends to meander through the market summers flatlined, but with a definite downside bias. At best this average only climbs 0.7% above goldís May close, and at worst falls 1.5% below it. This listlessness is no big deal if you expect it, but can be quite frustrating if you donít.
The center-mass downtrend encompassing all the individual indexed summers in yellow is definitely down. The trend lines drawn above capture the vast majority of the past decadeís gold price action. While there were a few years where gold broke out above or below this downtrend, such moves were relatively-rare and always short-lived. This sideways-to-lower drift has a magnetism that canít be resisted for long.
Goldís upside-exception summers were 2005 and 2008. Back in 2005, goldís autumn rally started early as this metal caught a bid in late July and surged in early August. This was way back near the end of the old Stage One days of this gold bull, when this metalís every upleg and correction was directly driven by opposing US dollar moves. In just a couple of weeks that summer, the US Dollar Index fell 3.5% (a big move for the worldís reserve currency) leading to atypical summer interest in gold.
As the dollar held most of its losses until the end of August that year, so did gold keep most of its gains. It finished the summer of 2005 4.0% above where it had started, its best summer performance of this entire secular bull. Still, on average gold ended each summer just 0.3% above where it had started. Such gains over 3 entire months are terrible, gold was essentially unchanged.
And though 2008 enjoyed a big anomalous gold spike in July, it was very short-lived. A month later in August gold had plunged way under its center-mass downtrend, and it finished that summer a whopping 6.5% below where it had started. This was its worst summer of this entire bull by far. As you probably remember, the summer of 2008 saw the bond panic which snowballed into that autumnís stock panic. As US mortgage giants Fannie Mae and Freddie Mac teetered near bankruptcy, gold caught a temporary bid.
The other major downside breakout happened in June 2006, and it too was short-lived. Earlier that spring, gold had rocketed higher in its biggest upleg of its entire bull to that point. It was wildly-overbought in May, which soon led to it plunging in a necessary and healthy correction in June. By mid-June it had fallen 21.9% in less than 5 weeks! Though gold soon climbed back into its center-mass downtrend, it still finished that summer down 4.0%.
Goldís summer-doldrums center-mass downtrend has ultimately prevailed throughout all the years of this gold bull. While anomalous events can drive gold outside it temporarily, this metal soon gravitates back to its magnetic grind. All that traders can reasonably expect any summer is more of the same given this ironclad precedent. At best gold is likely to meander near the flatline during the summer months, but it definitely has a downside bias with selling pressure much more likely than buying pressure.
While the fortunes of gold are silverís biggest driver, this wild metal is far more volatile. So the raw data under silverís even-worse summer doldrums is much more dispersed. Nevertheless, when this mess of individually-indexed summers is averaged the result is still a meandering drift lower. Silver can buck goldís lead from time to time, but eventually it always falls back in line with the PM sectorís leader.
Far-more speculative and hence more likely to be battered about by the apathetic summer psychology, silverís summer-doldrums drift is more pronounced than goldís. At best its average nearly regains its May close, down 0.3%. And at worst it falls as low as 5.2% below Mayís close. And silver tends to end the summer about 3.0% lower than where it started. Summer is the weakest time of the year by far for silver seasonals.
Silver has seen more outlying summers than gold, on both the upside and downside. Most simply mirror and amplify what was going on in gold though. If gold was oversold after a correction heading into summer and thus likely to rally above trend, silver naturally followed. If gold was overbought after an upleg heading into summer and thus likely to correct below trend, silver tagged along. Silver usually follows gold.
Interestingly as the blue line shows, today silver is off to one of its worst early-summer starts of this entire bull. This metal has been hyper-volatile after soaring to absurd heights in a parabolic speculative mania, and then promptly collapsing in a brutal near-crash in early May. After any unsustainable parabolic ascent, its aftermath leads to exceptionally-volatile silver until the extreme oscillations gradually abate. This volatile-yet-moderating trend will probably persist well into this summer.
The range of silverís summer performances in its bull so far has been vast, from falling 19.7% in 2008 as that bond panic was gradually morphing into the first stock panic in a century to rallying 10.8% way back in 2004. But silverís average center-mass downtrend definitely meandered lower. So though silver is always a crapshoot and a strong summer is possible, the odds are certainly stacked against it with gold drifting listlessly sideways.
Not surprisingly with gold and silver trapped in the PM summer doldrums, the gold stocks and silver stocks are slaved to their metalsí lethargic drifts. The flagship HUI gold-stock index naturally shares in the precious-metals malaise, drifting sideways to lower for much of the summer. If you want to deploy more capital in gold stocks and silver stocks, early summer is the worst time of the year seasonally to do it!
While the HUI witnesses outlying summers too, the center-mass trend of all its indexed summers is definitely down. And so is their average, for most of summer anyway. It goes as high as 1.9% over Mayís close and as low as 5.0% under it. Unlike gold and silver the HUI finishes summer relatively strong, up 1.6% on average. But given the huge risks inherent in PM stocks, this is nothing to write home about.
Interestingly this average is heavily skewed by a single year, which is why it is important to consider the underlying individual-summer indexed data and not just the averages. During the summer of 2003 the HUI soared a breathtaking 36.9%, manhandling the summer doldrums! That year gold rallied 3.0% while silver climbed 10.2%. But the PM stocks still broke out big time, as many investors new to them rushed to join the early contrarians enjoying big gains.
That incredible summer, mainly August, was an anomaly that hasnít even come close to being replicated since. With the PM stocksí collective market capitalization far larger now, and far more mainstream investors including hedge funds owning PM stocks, it isnít likely weíll see another anomalous summer surge like 2003ís. As long as gold and silver drift sideways in their summer doldrums, there is almost no chance the PM stocks will command such an outsized bid.
Provocatively if that summer of 2003 is excluded from this average, the HUIís summer performance falls dramatically from up 1.6% on average to down 1.9%. And if you ignore 2003ís outlying indexed line above visually, the HUIís center-mass downtrend is definitely down just like silverís. So summer really isnít a high-probability-for-success time to deploy new capital in gold stocks and silver stocks.
At least early summer, that is. The red average line above, whether 2003 is included or not, shows the PM stocks carve a distinct seasonal low near the end of July. So late July and early August is the time to start deploying capital in the beaten-down PM stocks. I suspect this early low occurs because traders are anticipating the big autumn rallies in gold and silver. These are driven by major gold-investment-demand spikes out of Asia that really start ramping up in September.
Sentiment also comes into play near these summer lows. Following the often-exciting spring action in the precious metals, summer really demoralizes newer traders who arenít aware of the doldrums. They get more and more discouraged as the summer wears on and PMs grind lower, defying the bullish fundamentals. Eventually they capitulate and sell in disgust, driving PM stocks down to bargain prices.
The subsequent often-large autumn rallies are the reason the PM summer doldrums are a blessing, not a curse, for speculators and investors. As these charts show, on average gold, silver, and the HUI really start powering higher in September. Soon before that is when you want to have all your capital allocated to the precious-metals complex fully deployed. The PM summer doldrums are awesome because they drag the PMs lower right before their big autumn rallies launch. This grants a wonderful opportunity to buy low!
So I actually look forward to the PM summer doldrums each year. As a speculator and investor, they give me plenty of time to research PM stocks to find the highest-potential-for-success ones I want to buy and recommend to our subscribers. And they drag down gold, silver, and especially PM-stock prices to their best entry levels of the year seasonally. Some time to figure out what to buy, followed by subsequent relatively-low prices to do that buying, is really a great boon for traders.
With the better part of two months left before those late-summer buying ops arrive, this is the perfect time to do your homework. At Zeal we are constantly researching commodities stocks in great depth, to find our fundamental favorites in a variety of PM-stock sub-sectors. Periodically we publish comprehensive reports profiling a dozen of these elite companies. Fascinating and full of expert world-class research, these reports are available on our website for just $35 to $75. Buy yours today! Enjoy some great summer reading while preparing your personal PM-stock shopping list for the excellent late-summer buying op.
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The bottom line is the precious-metals summer doldrums have arrived. The market-wide vacation psychology combined with the lack of any major seasonal gold-investment-demand spikes leads to drifting PM prices. With the exception of occasional anomalies, this happens every year like clockwork. PMsí summer performances have been poor for their entire decade-long secular bull. 2011ís summer isnít likely to buck this trend.
This is very frustrating for those not expecting it, leading to a sentiment wasteland in late summer where many traders capitulate in disgust. But this summer-doldrums washout drives the best seasonal entry points of the year for gold, silver, and the PM stocks. Soon after, the powerful autumn gold rally arrives as seasonal investment demand surges in Asia. Buying low late in the summer doldrums usually leads to big gains in the autumn rally.
Adam Hamilton, CPA June 10, 2011 Subscribe at www.zealllc.com/subscribe.htm