Gold’s incredible strength this summer is very unusual, as early summers are the weakest times of the year seasonally for gold, silver, and their miners’ stocks. With traders’ attention diverted to vacations and summer fun, interest in and demand for precious metals normally wane. So this entire sector tends to suffer a seasonal lull, along with the general markets. This June’s bull-market breakout is a momentous anomaly.

This doldrums term is very apt for gold’s usual 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 nearly every summer, gold starts drifting listlessly sideways. It often can’t make significant progress no matter what the 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.

Thus after decades of trading gold, silver, and their miners’ stocks, I’ve come to call this time of year the summer doldrums. Junes and Julies in particular are usually desolate sentiment wastelands for precious metals, totally devoid of recurring seasonal demand surges. Unlike much of the rest of the year, these summer months simply lack any major income-cycle or cultural drivers of outsized gold investment demand.

The vast majority of the world’s investors and speculators live in the northern hemisphere, so markets take a back seat to the great joys of summer. Traders take advantage of the long sunny days and kids being out of school to go on extended vacations, hang out with friends, and enjoy life. And when they aren’t paying much attention to the markets, naturally they aren’t allocating much new capital to gold.

Given gold’s dull summer action historically, it is never wise to expect too much from it this time of year. Summer rallies can happen, but they aren’t common. So expectations need to be tempered, especially in Junes and Julies. That early-1990s Gin Blossoms song “Hey Jealousy” comes to mind, declaring “If you don’t expect too much from me, you might not be let down.” The markets are ultimately an expectations game.

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!

Obviously 2001 to 2011 were certainly bull years. 2012 was technically one too, despite gold suffering a major correction following that powerful bull run. At worst that year, gold fell 18.8% from its 2011 peak. That was not quite enough to enter formal bear territory at a 20%+ drop. But 2013 to 2015 were definitely brutal bear years, which need to be excluded since gold behaves very differently in bull and bear markets.

In early 2013 the Fed’s wildly-unprecedented open-ended QE3 campaign ramped to full speed, radically distorting the markets. Stock markets levitated on the Fed’s implied backstopping, slaughtering demand for alternative investments led by gold. So in Q2’13 alone, gold plummeted 22.8% which proved its worst quarter in an astounding 93 years! Gold’s bear continued until the Fed started hiking rates again in late 2015.

The day after that first rate hike in 9.5 years in mid-December 2015, gold plunged to a major 6.1-year secular low. Then it surged out of that irrational rate-hike scare, formally crossing the +20% new-bull threshold in early March 2016. Ever since, gold has remained in this current bull. At worst in December 2016 after gold was crushed on the post-election Trumphoria stock-market surge, it had only corrected 17.3%.

So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, then resumed in 2016 to 2019. Thus these are the years most relevant to understanding gold’s typical summer-doldrums performance, which is necessary for managing your own expectations this time of year. This spilled-spaghetti mess of a chart is fairly simple and easy to understand.

The yellow lines show gold’s individual-year summer price action indexed from each May’s final close for all years from 2001 to 2012 and 2016 to 2017. 2018’s is rendered in light blue. Together these establish gold’s summer trading range. All those past bull-market years’ individual indexes are averaged together in the red line, revealing gold’s central summer tendency. 2019’s indexed action is superimposed in dark blue.

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 equated to a probable summer range between $1240 to $1370. Gold tends to stay well within trend.

Obviously this year has proven a huge exception to that normal summer rule, with gold rocketing higher to a major bull-market breakout! Gold blasted to its best early-summer performance ever seen in all modern bull-market years. Comparing this current summer’s dark-blue line to past years’ price action certainly drives home how unique, exceptional, and special gold’s breakout surge to major new secular highs has been.

Still, understanding gold’s typical behavior this time of year is important for traders. Sentiment isn’t only determined by outcome, but by the interplay between outcome and expectations. If gold rallies 5% but you expected 10% gains, you will be disappointed and grow discouraged and bearish. But if gold rallies that same 5% and you expected no gains, you’ll be excited and get optimistic and bullish. Expectations are key.

History has proven it is wise not to expect too much from gold in these lazy market summers, particularly Junes and Julies. Occasionally gold still manages to stage a summer rally, like this year’s monster. But most of the time gold doesn’t veer materially from its usual summer-drift trading range, where it is often adrift like a classic tall ship. With range breakouts either way uncommon, there’s often little to get excited about.

In this chart I labeled some of the outlying years where gold burst out of its usual summer-drift trend, both to the upside and downside. But these exciting summers are atypical, and can’t be expected very often. Most of the time gold grinds sideways on balance not far from its May close. Traders not armed with this critical knowledge often wax bearish during gold’s summer doldrums and exit in frustration, a real mistake.

Gold’s summer-doldrums lull marks the best time of the year seasonally to deploy capital, to buy low at a time when few others are willing. Gold enjoys powerful seasonal rallies that start in Augusts and run until the following Mays! These are fueled by outsized investment demand driven by a series of major income-cycle and cultural factors from around the world. Summer is when investors should be bullish, not bearish.

The red average indexed line above encompassing 2001 to 2012 and 2016 to 2018 reveals gold’s true underlying summer trend in bull-market years. Technically gold’s major seasonal low arrives relatively early in summers, mid-June. On average through all these modern bull-market years, gold slumped 0.9% between May’s close and that summer nadir. But seasonally that’s still on the early side to deploy capital.

Check out the yellow indexed lines in this chart. They tend to cluster closer to flatlined in mid-June than through all of July. The only reason gold’s seasonal low appears in mid-June mathematically is a single extreme-outlier year, 2006. The spring seasonal rally was epic that year, gold rocketed 33.4% higher to a dazzling new bull high of $720 in just 2.0 months between mid-March to mid-May! That was incredible.

Extreme euphoria had catapulted gold an astounding 38.9% above its 200-day moving average, radically overbought by any standard. That was way too far too fast to be sustainable, so after that gold had to pay the piper in a sharp mean-reversion overshoot. So over the next month or so into mid-June, gold’s overheated price plummeted 21.9%! That crazy outlier is the only reason gold’s major summer low isn’t later.

There were 15 bull-market years from 2001 to 2012 and 2016 to 2018. That is a big-enough sample to smooth out the trend, but not large enough to prevent extreme deviations from skewing it a bit. Gold sees a series of marginally-higher lows in late June, early July, and even late July. In this dataset they came in 0.0%, 0.3%, and 0.8% higher than mid-June’s initial low. And that last late-July one arrives over 6 weeks later.

So generally there’s no hurry to deploy capital right at that initial mid-June seasonal low. Gold tends to drift nearly flatlined over the next several weeks into early July, trying traders’ patience. Buying within a few trading days of the US Independence Day holiday seems to have the best odds of catching gold near its summer-doldrums lows. Investment capital inflows usually begin ramping back up after that as traders return.

On average in these modern bull-market years, gold slipped 0.4% in Junes before rallying 0.7% in Julies. After July’s initial lazy summer week, gold tends to gradually start clawing its way back higher again. But this is so subtle that Julies often still feel summer-doldrumsy. By the final trading day in July, gold is still only 0.3% higher than its May close kicking off summers. That’s too small to restore damaged sentiment.

Since gold exited May 2019 at $1305, an average 0.3% rally by July’s end would put it at $1309. That’s hardly enough to generate excitement after two psychologically-grating months of drifting. But the best times to deploy any investment capital are when no one else wants to so prices are low. Gold’s summer doldrums come to swift ends in Augusts, which saw hefty average gains of 1.9% in these bull-market years!

And that’s just the start of gold’s major autumn seasonal rally, which has averaged strong 5.7% gains between mid-Junes to late Septembers. That is driven by Asian gold demand coming back online, first post-harvest-surplus buying and later Indian-wedding-season buying. June is the worst of gold’s summer doldrums, and the first half of July is when to buy back in. It’s important to be fully deployed before August.

These gold summer doldrums driven by investors pulling back from the markets to enjoy their vacation season don’t exist in a vacuum. Gold’s fortunes drive the entire precious-metals complex, including both silver and the stocks of the gold and silver miners. These are effectively leveraged plays on gold, so the summer doldrums in them mirror and exaggerate gold’s own. Check out this same chart type applied to silver.

Since silver is much more volatile than gold, naturally its summer-doldrums-drift trading range is wider. The great majority of the time, silver meanders between +/-10% from its final May close. That came in at $14.56 this year, implying a summer-2019 silver trading range between $13.10 to $16.02. While silver suffered that extreme June-2006 selling anomaly too, its major seasonal low arrives a couple weeks after gold’s.

Given gold’s spectacular bull-market-breakout surge last month, silver’s summer performance this year has been utterly dismal. Normally silver amplifies gold upside by at least 2x. But silver has been bombed out and languishing for so long that investors and speculators still want nothing to do with it. Silver often acts as a gold sentiment gauge, and gold hasn’t been over $1400 long enough yet to shift psychology to bullish.

On average in these same gold-bull-market years of 2001 to 2012 and 2016 to 2018, silver dropped 4.1% between May’s close and late June. That is much deeper than gold’s 0.9% seasonal slump, which isn’t surprising given silver’s leverage to gold. Silver’s summer performances are also much lumpier than gold’s. Junes see average silver losses of 3.2%, but those are more than erased in strong rebounds in Julies.

Silver’s big 3.6% average rally in Julies amplifies gold’s gains by an impressive 5.1x! But unfortunately silver hasn’t been able to maintain that seasonal momentum, with Augusts averaging a modest decline of 0.7%. Overall from the end of May to the end of August, silver’s summer-doldrums performance tends to drift lower. Silver averaged a 0.4% full-summer loss, way behind gold’s 2.2% gain through June, July, and August.

That means silver sentiment this time of year is often worse than gold’s, which is already plenty bearish. The summer doldrums are more challenging for silver than gold. Being in the newsletter business for a couple decades now, I’ve heard from countless discouraged investors over the summers. While I haven’t tracked this, it sure feels like silver investors have been disproportionally represented in that feedback.

Since gold is silver’s primary driver, this white metal is stuck in the same dull drifting boat as gold in the market summers. Silver usually leverages whatever is happening in gold, both good and bad. But again the brunt of silver’s summer weakness is borne in Junes. Fully expecting this seasonal weakness and rolling with the punches helps prevent getting disheartened, which in turn can lead to irrationally selling low.

The gold miners’ stocks are also hostage to gold’s summer doldrums. This last chart applies this same methodology to the flagship HUI gold-stock index, which mostly closely mirrors that leading GDX VanEck Vectors Gold Miners ETF. The major gold stocks tend to amplify gold’s gains and losses by 2x to 3x, so it is not surprising that the HUI’s summer-doldrums-drift trading range is also twice as wide as gold’s own.

The gold miners’ stocks share silver’s center-mass summer drift running +/-10% from May’s close. This year the HUI entered the summer doldrums at 157.1, implying a June, July, and August trading range of 141.4 to 172.8. While gold stocks’ GDX ETF is too young to do long-term seasonal analysis on, in GDX terms this summer range translates to $19.43 to $23.75 this year. That’s based off a May 31st close of $21.59.

Thanks to gold’s dazzling bull-market breakout, gold stocks have defied these weak summer seasonals this year to soar to their own major decisive breakout! This high-potential contrarian sector has enjoyed its best early-summer performance ever witnessed in gold’s modern bull-market years. While I hope this incredible outperformance persists, the summer doldrums could still reassert themselves if gold retreats.

Like gold, the gold stocks’ major summer seasonal low arrives in mid-June. On average in these gold-bull-market years of 2001 to 2012 and 2016 to 2018, by then the HUI had slid 2.1% from its May close. Then gold stocks tended to more than fully rebound by the end of June, making for an average 0.6% gain that month. But there is no follow-through in July, where the gold stocks averaged a modest 0.5% loss.

Overall between the end of May and the end of July, which encompasses the dark heart of the summer doldrums, the HUI proved dead flat on average. Again two solid months of grinding sideways on balance is hard for traders to stomach, especially if they’re not aware of the summer-doldrums drift. The key to surviving it with minimum psychological angst is to fully expect it. Managing expectations in markets is essential!

But also like gold, the big payoff for weathering the gold-stock summer starts in August. With gold’s major autumn rally getting underway, the gold stocks as measured by the HUI amplify it with good average gains of 3.1% in Augusts! And that’s only the start of gold stocks’ parallel autumn rally with gold’s, which has averaged 9.3% gains from late Julies to late Septembers. Gold-stock upside resumes in late summers.

Like much in life, withstanding the precious-metals summer doldrums is less challenging if you know they’re coming. While outlying years happen, they aren’t common. So the only safe bet to make is expecting gold, silver, and the stocks of their miners to languish in Junes and Julies. Then when these drifts again come to pass, you won’t be surprised and won’t get too bearish. That will protect you from selling low.

The precious-metals sector radically bucked its seasonal-slump trend this year, surging to a record start. Gold began blasting higher on May’s final trading day, and that sharp rally carried into early June. New trade-war tariff threats were ramping up market fears, driving the US stock markets to selloff lows following late April’s all-time record highs. So traders remembered diversifying with gold and flocked back to it.

In mid-June gold’s gains accelerated after the Fed reversed its future-rate outlook from hiking back to cutting. That propelled gold to its first new bull-market highs in 3.0 years, with it surging to a 5.8-year secular high on that late-June breakout day. That momentum fed on itself and carried gold back over $1400 for the first time since early September 2013. Those awesome $1400+ levels have mostly held since.

The gold miners’ stocks naturally leveraged gold’s gains, enjoying their own epic early-summer action. The precious-metals sector is doing wildly better than last summer, when gold rolled over in mid-June on a sharp US dollar rally. Hyper-leveraged gold-futures speculators watch the dollar’s fortunes for trading cues. Hopefully gold’s huge early-summer gains can hold, and it consolidates sideways in coming weeks.

Gold’s massive and exceptional June rally was mostly fueled by speculators buying enormous quantities of gold futures. That has largely exhausted their available capital firepower, and left their collective bets on gold exceedingly bullish. These positions must be partially unwound with selling, which forces gold into a high consolidation at best and a sharp selloff at worst. So gold isn’t out of the summer-doldrums woods yet.

The inevitable coming gold-futures selling could be largely offset by investment buying. Investors are radically underinvested in gold after the second-largest and first-longest stock bull in US history, giving them big room to buy to reestablish normal portfolio allocations. Since they love chasing winners, gold’s powerful new-high psychology is starting to attract them back. Their return could dwarf gold-futures selling.

Given gold’s long-established lackluster summer-doldrums performance record, it is probably not prudent to chase this rally with gold-futures speculators effectively all-in longs and all-out shorts. But the metal and its miners’ stocks can be accumulated aggressively on any significant weakness. All portfolios need a 10% allocation in gold and gold stocks! Far-more upside is coming after recent overboughtness is worked off.

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The bottom line is gold, silver, and their miners’ stocks usually drift listlessly during market summers. As investors shift their focus from markets to vacations, capital inflows wane. Junes and Julies in particular are simply devoid of the big recurring gold-investment-demand surges seen during much of the rest of the year, leaving them weak. Investors need to expect lackluster sideways action on balance this time of year.

This summer has proven an epic exception, with gold rocketing to its first major bull-market breakout in years! That has catapulted both the metal and its miners’ stocks to their best early-summer performances in gold’s modern bull-market years. But the summer doldrums could still reassert themselves as specs’ excessively-bullish gold-futures bets are bled off. So enjoy these big anomalous gains, but remain wary.

Adam Hamilton, CPA

July 8, 2019

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