Did you know there is a strong seasonal tendency for gold and gold stocks to rally in the winter months? This, combined with data showing investors and hedge funds have secretly been purchasing gold mining stocks is creating an explosive combination for investors.
In this article, we explain the seasonal tendency of gold stocks, as well as explore a selection of gold stocks that could be high on investors' watchlists. Let's begin!
Gold stocks' seasonal tendency
With Admiral Markets there are a variety of gold mining stocks and ETFs (Exchange Traded Funds) that are available to trade on or invest in. For example, traders or investors can focus on ETFs such as the VanEck Vectors Gold Miners ETF. This particular ETF currently comprises of 46 gold mining companies such as Barrick Gold Corp, Newmont Goldcorp and more.
During the past five years there has been a tendency for this particular ETF - which is considered a broad representation of gold stocks - to rally higher during the months of December and January, as the seasonal chart shows below:
A chart of the VanEck Vectors Gold Miners ETF showing the percentage of months in which the ETF closed higher than where it opened from 2015 to 2019. Source: StockCharts 2 December 2019
The chart above shows the percentage of months the VanEck Vectors Gold Miners ETF has closed higher than where it opened, from the year 2015 to 2019. It shows that during the months of December and January, the ETF has closed higher than where it opened 100% of the time. Of course, while encouraging, this is over a very small period of time. Let's now have a look at it over a longer timescale.
A chart of the VanEck Vectors Gold Miners ETF showing the percentage of months in which the ETF closed higher than where it opened from 2010 to 2019. Source: StockCharts 2 December 2019
The chart above shows the percentage of months the VanEck Vectors Gold Miners ETF has closed higher than where it opened, from the year 2010 to 2019. While there is no month with a 100% probability of closing higher than where it opened the December and January period are in the top three, showing a more than 50% probability of the ETF closing higher than where it opened.
Of course, trading and investing is about winning and losing as no decision will ever have a 100% guaranteed outcome. However, the above data does show there is an above-average tendency for gold stocks to rally during the winter months of December and January.
Why is this? Demand for gold tends to increase during the end of the year due to religious festivals in India and jewellery shopping at Christmas. This may not seem like a big deal but in 2017 data showed that 52.44% of the global demand for gold came from jewellery with just 4.98% from central bank purchases.
This combined with the current economic landscape is providing an interesting mix of factors for investors to take into account.
The fundamentals driving gold stocks into 2020
The price of gold can often correlate with the price of certain gold miners. However, the correlation has historically been tricky as there are many influences on the price of gold such as demand for jewellery, central bank purchases and demand from the technology sector for mobile phone chips.
Recently, gold demand has been driven by its use as a safe haven asset - as it can be melted down to create a form of money, among other reasons. The ongoing U.S-China trade tensions, the talking down of the US dollar by US President Donald Trump and the November 2020 US Presidential election are just some reasons investors have flocked to the traditional safe haven of the gold market.
Historically, the return from the mining sector was three times that of the gold price. But, with rising costs of exploration and cost pressures from labour and fuel gold mining stocks have struggled in the past. However, with a potential turn in gold prices driven by a surge in ETF inflows and the gold mining sector learning from their mistakes and cost-cutting their mining processes, the combination could bode well for gold mining stocks.
Let's take a look at the technical picture to identify the current trend of buyers and sellers active in the market.
How to Trade Gold Stocks
With Admiral Markets there are a variety of gold mining stocks and ETFs (Exchange Traded Funds) that are available to speculate on via CFDs (Contract for Differences), enabling the trader to go long and short. Longer-term investors can also invest in shares of companies or ETFs through Admiral.Invest, with investing fees starting at just $0.01 per share.
Traders can trade or invest in a variety of different gold mining stocks such as the world's largest gold miner Barrick Gold and more. Alternatively, traders can gain exposure to the overall gold mining sector through ETFs such as the VanEck Vectors Gold Miners ETF. This particular ETF currently comprises of 46 gold mining companies such as Barrick Gold Corp, Newmont Goldcorp and more.
Below is the long term price chart of the VanEck Vectors Gold Miners ETF (GDX):
Source: Admiral Markets MT5 Supreme Edition, GDX, Monthly - Data range: from 1 May 2006 to 2 December 2019, accessed on 2 December 2019 at 8:41 pm GMT. Please note: Past performance is not a reliable indicator of future results.
In the above chart, it is clear to see the long-term struggles of gold miners. It was only in 2015, the sector started to bottom out. However, since mid-2018 the sector has produced an impressive rally. Can it continue over the upcoming winter months? The seasonal tendency certainly supports it but let's look at the weekly price chart for more information.
Source: Admiral Markets MT5 Supreme Edition, GDX, Weekly - Data range: from 5 August 2012 to 2 December 2019, accessed on 2 December 2019 at 8:51 pm GMT. Please note: Past performance is not a reliable indicator of future results.
In the weekly chart above, it's clear to see the horizontal, black resistance line at $31.80. These horizontal lines act as levels of support and resistance where traders would often enter trades from as well as use as a price target level. As price is currently moving higher overall, many traders will be eyeing this as a price level where the move up could struggle. This means traders will often buy and hold on to trades, or investments, up to this level.
Of course, there is no guarantee the market will travel that far but trading and investing is about managing risk in probable outcomes, not certain ones. The daily chart provides even more useful information, as shown below:
Source: Admiral Markets MT5 Supreme Edition, GDX, Daily - Data range: from 1 March 2019 to 2 December 2019, accessed on 2 December 2019 at 8:55 pm GMT. Please note: Past performance is not a reliable indicator of future results.
The daily chart above shows a series of lower high cycle formations. This has created a descending resistance line traders can use to their advantage. If the price can break above this level, then it is a sign of potential strength from buyers and could open the pathway to a greater move to the upside. Of course, there is a risk that price could reject this level again and continue to push lower. Either way, a line in the sand has been drawn which can help traders identify who is control of the market.
Combining the seasonal tendency with the fundamental backdrop and technical picture is a very powerful combination but does require patience, discipline and sound risk management. Of course, after identifying such situations having access to the right trading products to execute your ideas is essential.
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