Gold Speculators Refuse To Give Up; Another Drop Likely - John Rubino (6/11/2017)

November 6, 2017

Normally winter is a good time for gold, with men buying their significant others jewelry for Christmas and lots of New Years Day marriage proposals. Here’s an overview of the dynamic from Adam Hamilton of Zeal Intelligence:

Seasonality is the tendency for prices to exhibit recurring patterns at certain times during the calendar year. While seasonality doesn’t drive price action, it quantifies annually-repeating behavior driven by sentiment, technicals, and fundamentals. We humans are creatures of habit and herd, which naturally colors our trading decisions. The calendar year’s passage affects the timing and intensity of buying and selling.

Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Gold’s seasonality generally isn’t driven by supply fluctuations like grown commodities experience, as its mined supply remains fairly steady all year long. Instead gold’s major seasonality is demand-driven, with global investment demand varying dramatically depending on the time within the calendar year.

This gold seasonality is fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world. And the biggest seasonal surge of all is just now getting underway heading into winter. As the Indian-wedding-season gold-jewelry buying that drives this metal’s big autumn rally winds down, the Western holiday season is ramping up. The holiday spirit puts everyone in the mood to spend money.

Men splurge on vast amounts of gold jewelry for Christmas gifts for their wives, girlfriends, daughters, and mothers. The holidays are also a big engagement season, with Christmas Eve and New Year’s Eve being two of the biggest proposal nights of the year. Between a quarter to a third of the entire annual sales of jewelry stores come in November and December! And jewelry historically dominates overall gold demand.

According to the World Gold Council, between 2010 to 2016 jewelry accounted for 49%, 44%, 45%, 60%, 58%, 57%, and 47% of total annual global gold demand. That averages out to just over half, which is much larger than investment demand. During those same past 7 years, that ran 39%, 37%, 34%, 18%, 20%, 22%, and 36% for a 29% average. Jewelry demand remains the single-largest global gold demand category.

That frenzied Western jewelry buying heading into winter shifts to pure investment demand after year-end. That’s when Western investors figure out how much surplus income they earned during the prior year after bonuses and taxes. Some of this is plowed into gold in January, driving it higher. Finally the big winter gold rally climaxes in late February on major Chinese New Year gold buying flaring up in Asia.

So during its bull-market years, gold has always tended to enjoy major winter rallies driven by these sequential episodes of outsized demand. Naturally the gold stocks follow gold higher, amplifying its gains due to their great profits leverage to the gold price. Today gold stocks are once again now heading into their strongest seasonal rally of the year driven by this robust winter gold demand. That’s super-bullish!

Since it’s gold’s own demand-driven seasonality that fuels the gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming. Price action is very different between bull and bear years, and gold is absolutely in a young bull market. After being crushed to a 6.1-year secular low in mid-December 2015 on the Fed’s first rate hike of this cycle, gold powered 29.9% higher over the next 6.7 months.

This is pleasant reading for anyone long gold or gold mining shares. But the futures markets continue to tell a different and less encouraging story. See Strange Things Happening In The Paper Gold Market, which noted that last month speculators were overly long and were as a result losing their shirts in the ongoing price correction — but were for some reason refusing to throw in the towel. The conclusion was that they’d need more convincing via another big price decline.

That decline happened — yet nothing has changed in the futures market. The speculators remain dangerously long and the commercials remain aggressively short, a structure which over the past decade has always preceded a price drop.

Here’s the same data presented visually. Note the trend flattening lately at bearish levels.

Now we’ll see whether favorable seasonal factors trump an unfavorable futures structure.

As always, this kind of analysis is fun and useful only for people looking for entry points. For stackers and other dollar cost averagers, monthly squiggles are meaningless on the long ride to $5,000.