The summer doldrums have dragged on this year. Here’s a fundamental and technical look at where we’ve been and where we should be going…
Gold’s summer doldrums are dragging on this year, with this asset slumping longer and lower than usual. Several converging factors are responsible. The stronger dollar has convinced gold-futures speculators to sell aggressively, and gold’s downside momentum has fed on itself. Investment demand has waned on the resulting weaker gold prices and euphoric near-record-high stock markets, but that should reverse soon.
Summers are usually gold’s weakest time of the year seasonally. So investors and speculators need to be mentally prepared for lackluster or bearish trading action this time of year. Market summers run Junes, Julies, and Augusts. And their first halves are simply devoid of the recurring outsized spikes in gold investment demand seen during much of the rest of the year. Thus gold prices tend to drift neglected.
Back in early June when gold was trading near $1300, I published my latest summer-doldrums research. I warned not to expect too much from gold before mid-summer, which is where we are now. Traders who get discouraged during market summers have only themselves to blame. Decades of precedent show gold demand is just weak this time of year, leading to sideways-to-lower gold prices. They are par for the course.
The recent gold action has been weaker than usual, but certainly not abnormally so. This first chart shows how gold is tracking this summer compared to others in modern bull-market years. Those are 2001 to 2012 and then 2016 to 2017. 2013 to 2015 were bear-market years, and gold behaves quite differently in bull and bear markets. All these individual bull years’ summer gold action is indexed to normalize them.
Gold’s final close before market summer each year, the last one in May, is recast at 100. Then all price action is recalculated off that common base. Thus regardless of where gold prices happened to be, they are perfectly comparable across all years. An indexed level of 105 means gold is up 5% summer-to-date. All these bull-market years are individually rendered in yellow, and then all averaged together in the red line.
That distills down gold’s average performance during market summers, which is sideways to lower until late July. Superimposed over that red seasonal mean is this year’s indexed gold action in blue. This is current to Wednesday’s close, the data cutoff for this essay. Gold’s summer-2018 performance is on the weak side relative to these modern bull-market years, helping explain why sentiment is so bearish these days.
On average from 2001 to 2012 and 2016 to 2017, gold slipped 0.2% lower in Junes before rebounding 0.9% higher in Julies. Mid-to-late July is when gold’s major autumn rally typically gets underway, which leads to Augusts enjoying hefty average gains of 2.2%. Next month is actually one of gold’s stronger of the yearseasonally, so weathering the summer doldrums is a June-July burden. They should be about over.
As this spilled-spaghetti mess of yellow individual-year lines shows, gold tends to meander in a summer trading range within 5% either way from May’s final close. Gold held to this usual seasonal script until this Tuesday, when it breached its indexed -5% lower-support line for the first time this summer. Gold dropped 1.0% that day on Fed Chairman Jerome Powell’s hawkish testimony before the Senate banking committee.
That left gold down 5.4% summer-to-date, slightly below its normal summer trading range. While sure negative for psychology, this isn’t material technically. As you can see above, other modern bull-market-year summers have seen gold hit summer lows under 95 indexed in Julies. The yellow indexed lines in 2002 and 2009 fell lower than 2018’s this month. So it’s interesting to see what happened in gold after those.
We humans make such miserable investors because we have a crippling immediacy bias. We naturally tend to assume current conditions will continue indefinitely, and thus extrapolate them out into infinity. So I get deluged with e-mails near summer-doldrums lows each year explaining and lamenting that gold is heading much lower. But that doesn’t happen since selling exhausts itself as peak pessimism is reached.
Back in July 2009 gold was faring even worse than today, down 7.0% summer-to-date early that month. It is the early-July sub-support yellow line above. Traders were overwhelmingly bearish then, certain that gold was going to spiral way lower much like today. I know because I’ve written a comprehensive weekly newsletter covering every trading day in depth for over 15 years. I reviewed the issues near those gold lows.
Yet instead of cratering, gold started powering sharply higher out of that early-July capitulation. It blasted 11.9% higher by mid-September in a strong autumn rally. And that sure wasn’t the only time it was wrong to be bearish on gold in mid-summers when everyone else is. The other late-July sub-support yellow line in this chart is 2002’s price action. Gold had again slumped 7.0% that summer as of late July, well under support.
Again investors and speculators were super-negative then, as recorded in our old newsletter archives. They universally expected that downside gold momentum to continue indefinitely, for gold to break below the $300 support of the time. Yet gold defied them all, rallying strongly out of those deep mid-summer lows. It surged 7.5% higher between then and late September in yet another typical autumn-rally scenario.
This isn’t just ancient history either, it happened last year too. In the summer of 2017 gold fell as much as 4.4% under May’s final close by early July. Bearishness and pessimism abounded, with pretty much everyone assuming that downtrend would continue. Yet gold bottomed right there before again blasting 11.2% higher by early September! Gold’s seasonal summer lows are great buying ops, not something to fear.
The great mistake naive traders make in market summers is assuming gold selling has no limits. That’s far from the truth, it’s very finite. Most of gold’s short-term price action is dominated by the speculators trading gold futures. The extreme leverage inherent there gives them wildly-outsized influence over short-term gold prices. I analyzed this summer’s gold-futures activity in depth just a couple weeks ago.
These elite traders can only dump so many long contracts and add so many short contracts before their selling is exhausted. They don’t have unlimited capital, and thus quickly reach their practical selling limits when dumping gold futures aggressively. Gold’s summer lows always result from heavy liquidations in gold futures by speculators, which are inherently self-limiting. This year is certainly no exception to that.
The latest gold-futures data before this essay was published is current to Tuesday July 10th, when gold was still near $1256. So it doesn’t yet reflect the sizable selling since. That day total spec gold-futures long and short contracts were running 19% and 81% up into their own past-year trading ranges. That means fully 4/5ths of their likely long selling and 4/5ths of their likely short selling had already been finished.
Gold was only down 3.3% summer-to-date at that point, well within its normal +/-5% seasonal trading range. All the big selling since likely ate up most of the remaining 1/5ths of potential long selling and new shorting. That has almost certainly left speculators’ collective gold-futures bets closer to the most-bullish 0% longs and 100% shorts relative to their past-year trading ranges. These guys are essentially done selling.
There’s no doubt they are very bearish on gold, and would like to sell more. But they can’t sell longs they don’t have, and there’s only so much capital they’ve ever thrown at shorting. Shorting gold via hyper-leveraged gold futures is astoundingly risky, with catastrophic losses always just a few days of strong gold rallying away. So the group of traders willing to take such extreme risks is fairly small with limited capital.
When gold-futures speculators run out of selling firepower, the only thing they can do is buy back in. This first comes in short-covering buying which feeds on itself, resulting in sharp gold rallies that later entice in new long buying. Gold’s summer-doldrums lows occur when speculators have already sold all the gold futures they can. Odds are we got very close to that essentially-hard limit this week, so gold is bottoming.
Unfortunately this typical weak summer-doldrums gold action driven by spec gold-futures selling really bleeds into overall gold psychology. Investors see gold falling in market summers, and soon assume it must have fundamental problems. So they wax bearish and start selling too, exacerbating weak summer-doldrums gold action. That futures-driven investment selling has been a big factor in gold’s weakness this summer.
This next chart looks at the holdings of the leading GLD SPDR Gold Shares gold ETF over the past few years or so. GLD’s physical gold bullion held in trust for its shareholders offers a great look into gold investment demand. Unlike most gold investment data which is reported quarterly, GLD’s holdings are published daily. They offer a unique high-resolution read on what American stock investors are doing in gold.
GLD’s mission is to track the gold price, but the supply and demand of GLD shares is independent from gold’s own. Thus GLD’s share price risks decoupling from gold’s price every single trading day. In order to maintain tracking, excess supply and demand of GLD shares relative to gold must be directly shunted into gold itself. That’s reflected in GLD’s bullion holdings rising and falling as investment capital sloshes in and out.
When American stock investors sell GLD shares faster than gold itself is being sold, GLD’s share price threatens to break away from gold’s to the downside. So GLD’s managers have to sop up that excess GLD-share supply to avoid failing their gold-tracking mission. They raise the capital to do that share buying by selling some of GLD’s gold bullion. So falling GLD holdings reflect American stock investors selling gold.
That’s exactly what’s happened this summer, actually on a large scale. This chart shows GLD’s holdings in blue superimposed over the gold price in red. All calendar-quarter changes in gold and GLD’s holdings in both percentage and absolute terms are noted. So far in gold’s young bull market since late 2015, the gold price has closely followed GLD’s holdings. Again they are a great proxy for overall investment demand.
Gold investment demand is closely tied to stock-market fortunes. Gold tends to rally when stock markets weaken, so investors feel little need to prudently diversify their portfolios with it when stocks are high so euphoria reigns. Thus GLD’s holdings fell as low as 820.7 metric tons in early February 2018 soon after those record stock-market peaks in late January. But that changed after stock markets’ first correction in years.
American stock investors started remembering gold again, and started buying GLD shares faster than the gold-futures speculators were buying gold. When GLD shares see differential buying pressure, their price is bid higher faster than gold. In order to prevent an upside decoupling, GLD’s managers issue enough new shares to absorb that excess demand. They then plow the resulting capital proceeds into more gold bullion.
Between early February and late April GLD’s holdings climbed 6.2% to 871.2t. With investors returning in a meaningful way, gold’s long-awaited major bull breakout was nearing. But then an unexpected monkey wrench was cast into the mix in the form of a major US dollar rally. Despite history proving otherwise, the gold-futures speculators are convinced a stronger dollar must portend weaker gold. So they aggressively sold.
The US Dollar Index started rallying in late April. Days before that the gold-futures speculators’ total long and short contracts were running 27% and 15% up into their past-year ranges. So speculators had room and capital firepower at that point to still do 5/6ths of their likely near-term shorting. Between then and the latest data from last Tuesday July 10th, their gold-futures longs fell 5.8% while their shorts soared 69.1%!
In absolute terms that was 84.9k contracts of gold-futures selling, the equivalent of 264.0 metric tons of gold, in just a dozen weeks. That works out to 95.6t of gold-futures selling per month, which is simply too much for normal demand to absorb especially in gold’s summer doldrums. So gold was forced from near $1350 in mid-April to around $1250 last week, with more gold-futures selling since not yet reflected in the data.
As gold started falling on that deluge of spec gold-futures selling, investors got spooked. They assumed gold’s weaker price action must reflect bearish fundamentals, which usually isn’t the case. It just showed speculators fleeing gold futures on a sharply-rallying US dollar leading into the summer doldrums. And the resurgent stock euphoria as US stock markets clawed back toward highs further tainted gold psychology.
So investors have joined speculators in being heavy gold sellers since late April. Between then and this week, GLD’s holdings have fallen 8.9% or 77.2t on relentless differential selling of GLD shares! That is on the high side for market summers. If either that US dollar short squeeze or the stock euphoria hadn’t happened, American stock investors wouldn’t have started liquidating gold. But they did, so here we are.
The gold investment selling so far in July has been particularly heavy in GLD terms. GLD’s holdings were down 25.0t month-to-date as of this Wednesday, a short couple-week span. That is challenging the 27.1t GLD draw in all of Q2’18! So waning gold investment demand driven by increasingly-bearish sentiment on gold is a major secondary driver of gold’s worse-than-normal summer swoon. But that’s not sustainable.
Much like speculators’ collective gold-futures positioning, there are only so many weak-handed investors in gold so easily spooked into exiting. Note above that GLD’s holdings have fallen near 800t three other times in this gold bull, it’s proven strong support. Once all the gold investors susceptible to being scared into selling low are out, that leaves only buyers. GLD 800t has been this gold bull’s selling-exhaustion level.
Back in April 2016 just after this gold bull was born following the first stock-market corrections in years, GLD’s holdings slumped to 802.7t. That wasn’t much above this week’s 794.0t. Gold investment buying soon resumed with the excitable shaken out, so gold blasted 10.3% higher by early July on heavy investment buying. GLD’s holdings nearing 800 tonnes proved the limit of investment selling, turning things around.
Investors started fleeing gold again in late 2016 following Trump’s surprise election win, which ignited a blistering stock rally. Heavy differential selling of GLD shares battered its holdings all the way back down to 799.1t in late January 2017. But with investor selling exhausted, buyers returned which helped push gold 7.4% higher by mid-April. Again GLD’s holdings and thus gold bounced sharply higher after 800t was hit.
Then last summer everyone was freaking out about the gold weakness just like in recent weeks. That led investors to dump GLD shares ferociously enough to batter its holdings to 786.9t in early August 2017. But once their selling was out of the way, all they could do was buy back in. So gold surged 7.2% from then to early September. Once marginal investors capitulate in GLD, buyers return to drive gold sharply higher.
So the rampant gold bearishness this week seems pretty histrionic and silly. Investors and speculators alike are largely assuming this summer-doldrums gold selling will persist. They are succumbing to their own worries and extrapolating the present out into infinity. But gold selling can’t continue unless there is more gold to sell. And the likely near-term selling largely looks tapped out from both speculators and investors.
Speculators’ gold-futures longs were getting really low before this past week, and must be considerably lower now. And their shorts were already very high, so they must’ve ramped to extremes to break gold below its summer-doldrums -5% support line. I can’t wait to see this week’s data late Friday afternoon, it will be telling! Just like last summer, once total spec positions hit unsustainable extremes gold will rally hard.
And investors have largely exited too, as shown by GLD’s holdings getting driven back under that rare 800t bull-market support line again. The great majority of the capital likely to be scared into selling low is already out of gold. This presents a serious quandary for the legions of gold bears. Gold can only head materially lower if major new selling emerges. Where can that come from with traders already tapped out?
History has proven countless times that succumbing to popular gold bearishness near summer-doldrums lows is groupthink foolishness. The herd is always wrong at major turning points, failing to see that the previous trends’ drivers are reaching their probable limits. Thus these very summer-doldrums lows are what birth gold’s major autumn rallies. The worse gold’s sentiment in market summers, the bigger these rebounds.
Gold sentiment was really bearish last July, even though gold’s 4.4% summer-to-date loss at worst was milder than this July’s 5.4% as of this Wednesday. Yet gold still powered 11.2% higher over the next 2.0 months. An even-bigger autumn rally is likely this year out of deeper summer-doldrums lows, especially if the lofty bubble-valued US stock markets start rolling over and the red-hot US dollar fades as expected.
Far from being something to fret about, the summer doldrums are a gift for prudent contrarian investors and speculators. They offer the best seasonal buying opportunities of the year in gold, silver, and their miners’ stocks. Late last summer as gold powered 11.2% higher, the benchmark HUI gold-stock index leveraged that to a strong 22.7% gain in that exact span. Today’s dirt-cheap gold stocks have far-greater potential.
They are deeply out of favor, either despised or totally ignored. And they are wildly undervalued, trading at levels implying gold prices were radically lower than prevailing levels. The gold miners are earning fat profits even at $1225 gold, and those will really amplify gold’s gains as it rebounds out of these summer-doldrums lows. Now is the time to get deployed into great individual gold stocks before they rebound sharply.
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The bottom line is this summer’s waning gold investment won’t last indefinitely as traders largely assume. Just like speculators’ gold-futures selling, there are limits to gold investment selling. The best proxy for gold investment demand, GLD’s holdings, has already fallen to levels that have proven strong buying support throughout this entire gold bull. Below 800 metric tons selling fizzles, with only strong hands remaining.
With both likely speculation and investment selling looking mostly tapped out for this summer, odds are gold’s major autumn rally will get underway any day now. And it ought to be bigger than usual this year with gold sentiment and positioning so darned bearish this summer. Buying low now to win the biggest gains later requires fighting this bearish herd sentiment. Gold’s summer-doldrums lows are very bullish historically.
Adam Hamilton, CPA