Gold stocks have had a nice bounce over the past couple weeks and gold investors are likely wondering if this long period of underperformance by the miners is finally drawing to an end. Even though gold is more than $150 higher than it was in November 2010, gold stocks are still at the same level as they were last November. Instead of leveraging gold, gold stocks have underperformed gold during this time period, and disappointed gold stock shareholders. Back in June I wrote an article about gold and gold stock divergences and discussed how gold stocks are often knocked down by selling in the general stock markets. This appears to be what happened over the past two months as even though gold trended higher, gold stocks went lower along with the rest of the stock market.
Investors familiar with the gold market might know that gold displays a seasonal tendency to be strong in the fall and spring and experience its weakest months in the summer. Gold and gold stocks have also displayed a stark contrast in performance when looking at the first half of the year compared to the second half of the year since 2003. The HUI has been up only about 2% during the first half of the year on average since 2003, but has gained almost 20% on average in the second half of the year. There has been only one down period during the second half of the year which occurred during the 2008 financial crisis. This year has also been the worst first half performance for the HUI since 2004.
Gold’s performance has also been much better during the second half of the year than the first half. Like gold stocks, gold has only had one down period during the second half of the year which occurred in 2008.
The final table shows the difference in performance between the HUI Gold Miners Index and gold during each time period. The first thing that jumps out is the fact that gold stocks have underperformed gold on average during the first half of the year since 2003, and outperformed gold during the second half of the year. Notice that in only three years, 2003, 2006, and 2009, that the HUI performed better than gold in the first half of the year. This year has been the weakest relative performance for the HUI versus gold since 2004. And in 2004, gold was down during the first half of the year along with the HUI. So this year has been likely the most painful first half of the year for gold stock investors, since gold was up but gold stocks drastically underperformed.
One key technical indicator to watch to see if the June lows will hold in gold stocks is the volume coming into gold stocks. Lack of sustained buying pressure is usually what has kept the gold sector from making a meaningful breakout in the summer. This has led to choppy action during the summer months which whipsaws traders trying to catch a breakout and a new trend higher. The next series of charts demonstrate this concept by looking at GDX and volume over the summer months since 2006, when GDX was created.
In 2006 gold stocks made a June bottom, but volume coming into them dropped off to start September and it wasn’t until October that buying pressure sustained itself higher.
In 2007 buying pressure in gold stocks picked up and continued right at the start of September after an August selloff.
In 2008 the summer doldrums led into the fall financial crisis and panic selling in the gold stocks. The down volume actually started in March when gold topped and continued all the way until November.
In 2009 it was very obvious where the buying pressure picked up as you can see on the chart immediately when September started the volume jumped up dramatically. In the summer months there was no pickup in volume and thus the choppy action sideways.
2010 was different than previous years in that the pickup in buying pressure actually started in August instead of waiting until September.
This year so far the bottom in buying pressure has actually been in May even though gold stocks made a lower low in June. If the trend higher in buying pressure has started this early then there’s a chance June has seen the lows of the year.
An early bottom for gold stocks to start the second half of the year would align well with the fact that gold stocks performed so poorly to start the year compared to the price of gold. It’s just going to depend on whether money flows into the sector now or waits a couple more months for the seasonally strong period to start.
