This article was published in Business Times’ column “Chart Point” on 8 January 2018.
GDX Weekly Chart
*highlighted area shows the tax-loss selling behaviour prior to December
As we embark on a new year, the seasonality effect on gold miners comes into the spotlight again. We will be referencing the VanEck Vectors Gold Miners ETF (GDX) as a proxy for the gold miners for the illustration. GDX tracks a market-cap-weighted index of global gold mining companies.
Since inception, back in 2007, a bottom in the GDX usually forms around the December and January period where it lasts for one to two months before rolling over. In total, there were 11 examples to draw from since 2007. Out of the 11 examples, two failed to signal any significant bottom. The GDX did make a marginal rebound on 27 December 2010 and 20 December 2012, but the recovery was short-lived. Both recoveries ended swiftly on 3 January 2011 and 2 January 2013 respectively. On the other hand, the rest of the nine examples worked out perfectly in signalling a bottom around December and January. Our studies have shown that the average rebound that follows after the seasonal bottom forms is +39%, trough to peak.
For example, the most recent seasonal rebound happened on 20 December 2016 where the GDX bottomed out perfectly and experienced a strong bull run of 38%. The strongest rebound and reversal in the downtrend was signalled by the December/January seasonal phenomenon as well in January 2016. The GDX was bottom bouncing around the 13.00 low since August 2015, and the bears remained in control throughout the whole period until the December/January seasonal phenomenon took place. The GDX fell briefly below the 13.00 on 19 January 2016 where the seasonal rebound happened. The GDX then made a strong recovery and entered into a raging bull market. During the first half of 2016, the GDX rallied 150% off the seasonal bottom.
The rationale behind the seasonal rebound is due to the tax loss selling behaviour in the gold mining space. Prior to the end of the year, investors tend to liquidate their losing positions in their gold stocks to benefit from the tax loss incentives. Investors can reduce the capital gain taxes by selling stocks that are underwater in their portfolio. This selling behaviour then leads to a self-fulfilling prophecy where traders sell in December in anticipation of the tax loss selling behaviour. Thus, leading to further selloff in the GDX as seen prior to December. The rebound in the Gold stocks can then be explained by the re-establishment of the trades after the tax loss incentives have been booked.
Hence, with the benefit of hindsight, as we moved into the second week of 2018, we can confirm that the GDX has formed its seasonal bottom on 12 December 2017. The GDX has staged a strong recovery since then with 11% gain. As the average return from the seasonal rebound since 2007 is around +39%, further upside is expected in the GDX for at least one more month.
From a price action perspective, this current up-leg should be aiming for the 25.58 resistance area followed by 28.54.