Big Autumn Gold Rally
Source: Adam Hamilton, Zeal Research (9/10/10)
"August's bullish action was just the beginning of gold's newest rally."
In seasonal terms, autumn is the strongest time of the year for the ancient metal of kings. Big surges in gold investment demand emerge out of Asia. The initial one is post-harvest buying once Asian farmers learn how much surplus income their hard work generated in the latest growing season. They invest some of these savings in physical gold. Harvest time for them is like year-end for Westerners, when we figure out how much money we've earned beyond our living expenses.
After that, Indian festival season kicks in. India is the world's largest gold consumer, and its autumn festival season is considered the most fortuitous time for young Indians to get married. Their culture believes the timing of a wedding affects a marriage's longevity, happiness, success and luck. Families of Indian brides spend fortunes to adorn them with intricate 22-karat jewelry. These dowries provide more than beautiful adornment; gold's intrinsic value helps secure the bride's financial independence in her husband's family.
Thus gold's seasonals are very strong this time of year, so it indeed tends to rally every autumn like clockwork. But seasonals alone are not enough; they are, ultimately, a secondary influence on gold prices. More important is short-term sentiment and technicals. If gold comes into autumn drenched in greed and wildly overbought, the odds favor it correcting regardless of seasonal tendencies. Thankfully, just the opposite is true this year.
Heading into autumn 2010, there has been little enthusiasm for gold and it has lingered far closer to oversold levels than overbought ones. Thus sentiment and technicals favor a big autumn gold rally this year, while seasonals provide strong tailwinds that make gold's outlook even more bullish. Actually, the sentimental and technical scene today is the best setup for a big autumn gold rally I've seen in years.
To flesh out today's strong foundation for a major gold rally in the coming months, let's start with technicals and then move into sentiment. Price action, ultimately, drives sentiment—traders get depressed when prices are relatively low and euphoric when they are relatively high. Despite gold challenging new all-time nominal highs this week, believe it or not this metal is actually relatively low technically!
This chart presents a combination of gold technicals and an indicator I created many years ago called relative gold. Relative gold is rendered in red and slaved to the left axis. It expresses gold as a constant multiple of its 200-day moving average. Graphed over time, this creates a horizontal trading range showing when gold is relatively high (overbought) and relatively low (oversold). If you are not familiar with Relativity trading theory, read one of my essays on it to get up to speed.
On this chart, gold's recent price levels look pretty darned high compared to the last few years. But amazingly, gold is actually fairly cheap today technically. How? All price action is relative. For example, back in autumn 2005 when gold first broke over $500 in this bull, that level looked stupendously high. But today this very same $500 level seems end-of-the-world low. Throughout the course of any secular bull, ever-higher baseline prices are the norm. And relative to its latest baseline, gold is cheap.
Gold first broke over $1200 this year in early May, actually on the very day of the infamous Flash Crash. Extreme fear drove a deluge of panicky stock market capital into the GLD gold ETF. Demand from stock investors for GLD shares was so high that this fund's custodians had to buy almost 20 metric tons of gold that day to keep their ETF from decoupling to the upside from the metal. This huge 1.7% GLD holdings build drove a 2.8% rally in the gold price, propelling it over $1200.
Since that fateful day just over four months ago, gold has averaged $1216 on close. Whenever a price consolidates sideways near highs, it forms a base. And the longer any price level persists, the more traders grow comfortable with it and accept it as the new baseline norm. So $1200 no longer feels expensive, but typical. This is a far cry from the way $1200 was originally viewed in December 2009 the first time it was hit.
Last year's impressively big autumn gold rally that drove the first $1200 sighting ever is readily apparent in this chart. Some technicians even measure gold's current base back to those days over 9 months ago. While $1200 felt unsustainably high and risky then, thanks to gold's subsequent high consolidation this same level merely feels normal today. Gold's latest $1200+ base is well established psychologically.
And this behavior is typical. As you can see in this chart, gold tends to consolidate sideways during its summer doldrums. This gives traders plenty of time to grow comfortable with new prevailing price levels. And then once autumn arrives, gold tends to shoot higher on the back of strong global investment demand. This cyclical behavior is very common in gold, only interrupted by the crazy anomaly of 2008's epic stock panic.
Back in the summer of 2007 (market summers are calendar June, July and August), gold averaged $662 on close. Yet after its big autumn rally, gold's monthly average in December shot up 21.8%. Something similar would have likely happened in the autumn of 2008, but that crazy once-in-a-century stock panic drove such staggering levels of fear that it short-circuited gold's seasonal cycles. Nevertheless, gold made a very fast recovery after the panic and has powered higher in a strong uptrend ever since.
In the summer of 2009, gold again consolidated sideways and averaged $943. It was kind of funny, as late that July this metal's sentiment was very bearish near its seasonal lows. Most analysts and traders expected a big selloff. But as a contrarian I pointed out at the time that gold was finally poised technically for its long-awaited decisive breakout above $1000. It was basing before a big autumn surge. I was later proven right, while the naysayers were wrong, in December 2009 gold averaged $1127 (19.5% higher).
Then in the recent summer of 2010, gold averaged $1215. Between the summers and Decembers of 2007 and 2009, the average gold price surged up in a tight 20.7% gain. If we see a similar autumn rally this year, which is likely, gold will average $1466 in December 2010. Since this is just a monthly average, the odds of seeing $1500 this autumn are actually rather high. And anything above today's prices is easily new all-time-nominal-high territory, which will do wonders for this metal on the sentiment front.
In relative terms, the odds for such a big autumn rally this year are even better since gold is low in its trading range. Over the past six years or so, gold has tended to gradually oscillate in a horizontal range between 0.99x its 200dma on the low side to 1.25x on the high side. Gold is cheap when it is low in this range, the time to be long. Gold is expensive when it is high in this range, the time to be short.
In late July this year at its seasonal low, gold fell so out of favor that it hit 1.015x its 200dma. This is actually very similar to what we saw in August 2007 (0.998x) before that year's big autumn gold rally. Gold has not been remotely close to being technically overbought or even overextended since way back in early December 2009 when it first hit $1200 (at 1.248x its 200dma). This pattern of starting the autumn rally near gold's 200dma and ending it stretched 25%+ above this key metric is typical.
Today gold's 200-day moving average is near $1165. To stretch 25% above it and enter the greedy realm of overboughtness, gold would have to hit $1456. And realize that as gold marches higher in the coming months, this 200dma baseline will gradually rise as well. By December as the autumn gold rally winds down, seeing gold overbought at 1.25x its 200dma could very well be at a price around $1500.
So in a pure technical sense, gold is looking very bullish today. Despite being near all-time nominal highs, it isn't overextended at all. $1200+ gold is the new norm, first seen in December 2009 and enjoyed continuously on average since early May. Gold is entering autumn near the bottom of its relative trading range, not far above its 200dma. It will take a lot of buying, and the resulting rallying, to drive this metal back into the overbought territory at the top of its relative range.
Once again, price action drives sentiment. The reason traders aren't very excited about gold today is because it essentially hasn't made any progress since either May or June (when $1256 was first hit), depending on one's perspective. While sideways consolidations generate comfort with and acceptance of new prevailing price levels, they never spawn any excitement. Consolidations bore traders into apathy.
Given today's overwhelmingly apathetic sentiment, traders' near-term outlook on gold has a long ways to improve. And the only thing that can do it, start to bring back excitement and eventually greed, is for gold prices to continue rallying higher. Gold surged 5.5% in August, which certainly made a favorable impression on many traders' radars. As this rally continues, gold will break into super-important psychological territory.
In real inflation-adjusted terms, January 1980's all-time gold high was around $2400 in today's dollars. So gold isn't even close to a new real high yet. But few think in real terms, so the headline nominal price is all that matters psychologically. And gold is right on the verge of heading into new all-time-record-high territory in nominal terms. It first hit $1256 in mid-June, so anything materially above this will represent new all-time highs. Traders and the media love new highs.
All-time highs in any asset draw a lot of attention to it. The media reports on that asset excessively and tends to extrapolate its strong performance forward. Countless traders who weren't interested in the asset before get really excited about new record highs and start chasing the momentum. They deploy capital, which drives the asset even higher, getting still more traders interested. Thus new all-time highs often form a virtuous circle where favorable psychology drives expanding buying which feeds on itself.
The $1300 gold coming soon is going to be big mainstream financial news. $1400 will be even bigger. And when we hit $1500, this nice round number will make record gold highs mainstream general news. Realize all this gold excitement will be multiplying at a time when individual investors remain scared of the stock markets and cowering on the sidelines in record amounts of cash (literally trillions of dollars). If even a small fraction of that starts chasing gold, we'll see a massive spike well beyond the usual big-autumn-rally standards.
Anecdotally, in my little physical world I'm amazed how many people I come across that are getting really interested in gold for the first time. At Zeal we and our subscribers have already made fortunes in this bull, starting to buy physical gold coins in May 2001 ($260s gold) and riding the epic rally in precious-metals stocks ever since. So gold is certainly no longer new to contrarians like us who have been investing in this secular bull for a decade.
But this metal is still new to most, an asset the great majority of mainstream investors have yet to touch. New record gold highs during today's anxious stock market environment will really accelerate new-gold-investor creation. Mainstream investors are not contrarians, they never buy near lows when things are out of favor and cheap. Instead they wait for highs, piling in to chase momentum. And new record gold highs contrasted with their limp portfolios hobbled by pathetic zero-yielding cash will prove very enticing.
And of course if gold rallies big this autumn, the precious-metals stocks should rocket up and leverage its gains. Despite recovering strongly since the stock panic, as a sector PM stocks remain very undervalued today compared to prevailing gold prices. So not only are PM stocks almost certain to surge strongly with new gold highs, but they have a lot of catching up to do yet before they even reflect today's levels. Thus the prospects for PM stocks this autumn are simply dazzling.
At Zeal in recent weeks we launched our latest PM-stock campaign to ride this year's highly probable big autumn gold rally. Unlike most PM-stock traders who are new to this sector, we've been actively playing this game very successfully for a decade now. Between our acclaimed monthly and weekly subscription newsletters, over this decade-long span we've launched and realized 235 gold-stock trades and 104 silver-stock trades.
One of the reasons our monthly Zeal Intelligence newsletter is so popular is our ongoing performance in our real-world trades. Over the entire span since mid-2000, we've averaged an annualized realized gain on all our ZI gold-stock trades of +58.6%. All our ZI silver-stock trades ever made averaged +44.2%. Of course these averages include all our losing trades as well, even those during 2008's brutal stock panic. These results are tough to beat over a decade and hundreds of trades, we know our stuff.
So if you want to ride the big autumn gold rally, we can help you do it. In addition to closely following gold, commodities and the general stock markets, we've spent many years deeply researching the entire universe of publicly traded gold stocks and silver stocks. We publish comprehensive profiles of our favorites from time to time in deep fundamental reports. Subscribe today to Zeal Intelligence and start putting our vast and hard-won precious-metals-stock knowledge and experience to work for you!
The bottom line is gold looks incredibly bullish heading into autumn 2010. Its big seasonal investment-demand spikes out of Asia are just starting to ramp up. And it is entering its strong season at relatively low levels technically in an apathy-filled environment. Any rally at all will push this metal to new all-time nominal highs, which will really improve psychology and accelerate capital inflows into gold.
And this big autumn gold rally is happening while investors are scared of the stock markets and sitting on mountains of cash doing nothing for them. There couldn't be a more opportune time for the media to get fixated on new record gold prices, driving investor interest. While the metal's gains should be excellent, they will be easily dwarfed by those in the long-out-of-favor precious-metals stocks.
Adam Hamilton, CPA
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