Gold has hit the
ground running in this young new year, a stark contrast to its
brutal post-election selloff. Rather remarkably, these strong
recent gains accrued despite literally zero buying from one of
gold’s most-important constituencies. The American stock investors
who almost single-handedly fueled gold’s strong bull market last
year are still missing in action since the election. That means big
gold buying is still coming.
All free-market
prices, including gold’s, ultimately result from the balance between
popular supply and demand. When supply outweighs demand as
evidenced by investment-capital outflows, gold is forced lower.
That’s exactly what happened after Trump’s surprise win in early
November. When investors flee gold for any reason, including
chasing record-high stock markets, the resulting oversupply really
hits prices.
When the votes
started to get tallied on Election Day’s evening, Trump pulled into
a surprise lead in the biggest battleground state of Florida. Gold
futures rocketed higher on that, soaring 4.8% to $1337 as the
early results came in! But as the plummeting stock-market futures
reversed sharply the next morning, that panic gold buying was
quickly unwound. That kicked off investors’ subsequent mass exodus
from gold.
Over the last
decade or so, gold ETFs have grown to dominate gold
investment. Their soaring popularity is the direct result of their
unparalleled efficiency. There is no cheaper, quicker, or easier
way for stock traders to move capital into this unique asset to gain
gold portfolio exposure. So gold investment has increasingly
shifted from the traditional holding of physical bars and coins to
owning gold-ETF shares.
The 800-pound
gorilla of the gold-ETF world has always been the American GLD SPDR
Gold Shares. As of the end of Q3’16, the latest data available from
the World Gold Council, GLD’s commanding lead among global gold ETFs
is impregnable. GLD held 948.0 metric tons of gold bullion in trust
for its shareholders, or a staggering 40.6% of the total holdings of
the world’s top-ten physically-backed gold ETFs!
This dominance
along with GLD’s extreme transparency make it the best proxy
for investment-capital flows into and out of gold. Every single
trading day, GLD’s managers release the total gold bullion this ETF
is holding. This is done in extraordinary detail to placate
anti-gold-ETF
conspiracy theorists, down to the individual-gold-bar level
including serial numbers and weights. This week’s list was 1305
pages long!
The day after the
election, GLD’s physical gold-bullion holdings were running 955.0
tonnes. But as the stock markets soared in the post-election
Trumphoria surrounding hopes of lowering taxes and slashing
regulations, investors started to flee gold. Gold is a unique asset
that often moves counter to stock markets, making it an
anti-stock trade. Thus gold investment demand collapses when
stocks trade near record highs.
Investors simply
feel no need to prudently diversify their stock-heavy portfolios
with gold when the stock markets seem to do nothing but rally. So
after Trump’s win, stock investors soon began to dump GLD shares at
far-faster rates than gold itself was being sold. This
differential selling pressure forced GLD’s managers to sell
physical gold bullion to raise the necessary cash to sop up the
excess GLD-share supply.
As a tracking ETF,
GLD’s mission is to mirror the gold price. But GLD shares have
their own supply and demand totally independent from gold’s, so
GLD-share prices are always on the verge of decoupling from gold.
The only way to maintain tracking is to shunt excess GLD-share
supply and demand directly into physical gold itself. So GLD
effectively acts as a conduit for stock-market capital to slosh into
and out of gold.
Stock investors
jettisoned GLD shares so fast in mid-November that this ETF’s
holdings fell sharply for 11 trading days in a row. Every day
GLD-share selling outpaced gold selling, so every day this ETF had
to buy back the excess shares to offset that heavy differential
selling. The money came from selling gold bullion, resulting in
daily draws in GLD’s holdings. That short span saw GLD’s holdings
plunge by 7.3% or 70.0t!
While this extreme
selling moderated in December, it still continued relentlessly.
Gold was driven down to $1128 the day after the Fed hiked rates for
the second time in 10.5 years. While that was expected, the Fed
officials’ rate-hike projections for 2017 were more hawkish than
expected. That happened to mark the very bottom for gold, yet the
heavy GLD selling persisted. That day GLD’s holdings were at
842.3t.
As of the
Wednesday data cutoff for this essay, gold has rebounded 5.6% since
then. It has rallied back up to late-November levels. A strong
bounce out of extreme bearishness was inevitable, as I
wrote that very
week. But what’s wildly unexpected is since gold bottomed GLD’s
holdings have fallen another 4.4% or 37.3t to 805.0t. GLD still
hasn’t seen a single holdings build since the day after the
election!
So gold somehow
managed to rally sharply in recent weeks without any capital inflows
from American stock investors. They not only weren’t buying GLD
shares, they continued to aggressively sell them as evidenced by a
couple big GLD-holdings draw days so far in January. This situation
is remarkable, as it implies the investment gold buying hasn’t
even started yet. That means big gold buying is still coming.
Some perspective
is necessary to understand the supreme importance of GLD capital
flows for gold’s performance. This first chart looks at gold and
GLD’s holdings over the entire lifespan of this pioneering gold
ETF. After its November 2004 birth, every subsequent year shows
what happened to both its gold-bullion holdings and the gold price.
Stock-market-capital flows via GLD have long dominated gold’s
fortunes.
While differential
GLD-share buying and selling isn’t the only force moving gold, it is
certainly one of the two primary ones along with
American
gold-futures trading. In general gold rises and falls based on
the capital inflows or outflows via GLD as evidenced by its builds
and draws. Gold almost always rallies in years stock traders buy
GLD shares faster than gold, and conversely falls in years where
they sell GLD faster.
In 2005, 2006,
2007, 2008, 2009, and 2010 gold rallied majorly on strong GLD
builds. When investors want to prudently expand their portfolio
gold exposure through adding GLD shares, this ETF’s resulting
physical-gold-bullion buying propels gold’s price higher. This
makes sense, as the more capital bidding on any particular asset the
faster its price will rise. That’s simply supply and demand in
action as expected.
2011 was the lone
year since GLD’s birth where the gold price disconnected from GLD’s
holdings. That year gold rallied another 10.2% despite a 2.0% GLD
draw. But with a mere 26.2t move, that was also the least-volatile
GLD-holdings year by far. So GLD’s holdings were essentially
unchanged, certainly not down materially. That relative cessation
of differential GLD-share buying or selling allowed gold to
decouple.
2012 again saw a
solid GLD build, and gold rallied in lockstep. By that point, GLD
had never suffered a sustained draw. Gold ETFs are a double-edged
sword, just as easy to sell as they are to buy. In early 2013 the
Fed’s radically-unprecedented new open-ended third
quantitative-easing campaign started to
levitate the stock
markets. So gold investment demand cratered as stocks seemingly
did nothing but rally.
American stock
investors dumped GLD shares with a vengeance that year, resulting in
an epic 40.9% or 552.6t GLD draw! That wild unparalleled
flood of gold-bullion supply spewed by GLD as it sold to raise the
cash to buy back the excess shares offered hammered gold 27.9%
lower. That made for gold’s worst year since 1981, soon after a
gold popular mania failed. That extreme gold-ETF selling kept
feeding on itself.
The more stock
investors dumped GLD shares, the more gold fell. The more gold
fell, the more investors wanted to dump GLD shares. That ugly
episode proved that gold ETFs and their easing of capital flows into
and out of gold would amplify both bulls and bears. 2014 and 2015
saw gold continue to fall as the differential GLD-share selling
continued. GLD’s draws those years ran 89.2t and 66.6t, key
reference points.
Despite the sharp
post-election selloff driven by that Trumphoria stock rally, gold
still advanced 8.5% last year. On Election Day it had been up 20.3%
year-to-date! 2016 proved gold’s first up year since 2012. And not
coincidentally, 2016 was the first year that saw a GLD build since
2012. And that 179.8t of gold-bullion buying GLD had to do last
year was actually the third-largest GLD-build year in this ETF’s
history.
So realize that
stock-market capital flows into and out of gold via this dominant
world-leading GLD gold ETF are critical. Gold rallies when stock
investors are buying GLD shares faster than gold, leading to builds
as that excess buying is shunted into gold. And gold falls when GLD
shares are sold faster than gold, which forces this ETF to sell
bullion to buy back its own shares. Gold only makes sense with this
knowledge!
Unless you
understand GLD’s commanding role, you can’t understand why gold has
been where it’s been or going where it’s going. This next chart
zooms in to the past couple years or so, and increases the analysis
resolution to quarterly. The reason gold soared in Q1 and Q2 last
year is because stock-market capital was flooding into GLD. And the
reason gold collapsed in Q4 is because half of that capital fled.
Gold’s lone up
quarter in 2015 in Q1 was the result of a GLD build. The other
three quarters of that year saw gold fall on increasing differential
GLD-share selling. Interestingly gold bottomed the day after the
Fed hiked rates for the first time in 9.5 years in December 2015, at
a 6.1-year secular low. Exactly a year later last month, gold again
bottomed the day after the next Fed rate hike. It’s
irrational to
fear Fed rate hikes!
Gold then
skyrocketed 16.1% higher in Q1’16 on a monstrous 27.5% or 176.9t
build in GLD’s holdings. Gold investment demand quickly shifted
from deeply out of favor to back in favor for one simple reason.
The lofty Fed-goosed stock markets were rolling over into a
correction-grade selloff as 2016 dawned. As the anti-stock trade,
gold investment demand soars when stock markets materially weaken
and stoke fear.
Gold’s first new
bull market since 2011 was overwhelmingly driven not just by gold
ETFs, but specifically by GLD alone. According to the
definitive arbiter of gold supply-and-demand measurement, the World
Gold Council, total global gold demand climbed 219.4t year-over-year
in Q1’16. Thus GLD’s 176.9t build accounted for a staggering 80.6%
of that jump! Traditional bar-and-coin demand merely rose 0.7% YoY.
So if American
stock investors hadn’t flooded back into GLD in Q1’16 as US stock
markets rolled over, there never would’ve been a new gold bull!
Love it or hate it, the hard reality is American stock-market
capital flows into and out of gold via GLD now dominate this
metal’s price behavior. That became even more apparent in Q2’16,
when gold rallied another 7.4% on another huge 16.0% or 130.8t GLD
build.
Per the WGC,
overall global gold demand climbed 139.8t YoY that quarter. That
means GLD alone was responsible for a mind-boggling 93.6% of the
world total! Again bar-and-coin demand was dead flat, the whole
gold story was differential GLD-share buying. Indeed in Q3 gold
stalled because that differential GLD-share buying ceased. Gold
drifted 0.4% lower in Q3’16 on a trivial
0.2% or 2.1t GLD draw that quarter.
So realize that
pretty much everything that happened to gold last year before the
election was the result of stock-market capital flowing into and out
of gold via the GLD conduit. Thus it shouldn’t be a surprise
that the brutal gold selloff after the election was driven by
extreme differential GLD-share selling. On Election Day, GLD’s
holdings were actually only just 3.4% under their bull-market high
seen back in early July.
That subsequent
extraordinary 11-trading-day 7.3% GLD draw was driven by US stock
markets surging to new all-time record highs per the benchmark S&P
500. Stock investors were so enthralled by Trump’s promises of
lower taxes and less regulation that they lapsed into euphoria.
Just as in 2013 to 2015, they figured why bother owning
counter-moving gold if stocks are going to do nothing but rally
indefinitely?
The resulting
extreme differential GLD-share selling ultimately drove a massive
13.3% or 125.8t Q4’16 draw! Those stock-capital outflows were
nearly equivalent to Q2’16’s 130.8t inflows. But gold didn’t bottom
at Q2 levels since
futures
speculators joined the stock investors in aggressively dumping
gold. Q4’s enormous 125.8t GLD draw dwarfs those 89.2t and 66.6t
draws seen in the full years of 2014 and 2015.
With so much
capital fleeing gold, forcing GLD to spew so much gold bullion into
the market to buy back its excess shares offered, it shouldn’t be
surprising gold cratered to a 12.7% loss in Q4. That was one of
gold’s worst quarters ever, driven by one of GLD’s biggest draw
quarters ever. Gold prices are driven at the margin by investment
capital flows, and there is no bigger pool of gold investment
capital than GLD investors’.
Given GLD’s
ironclad dominance over gold prices, the disconnect between gold and
GLD holdings in recent weeks is utterly stunning. Every day the
first piece of data I check is what happened in GLD’s holdings the
day before. They aren’t reported until evenings well after the
markets close. So ever since gold started to rally in late
December, I’ve been looking for GLD builds to resume. Yet they
still haven’t.
As of Wednesday,
GLD had not seen a single build in 42 trading days since the day
after the election! That now rivals a 42-trading-day span in
mid-2013 as the longest in history without any GLD builds. If you’d
told me a month ago that gold could mount a nearly-month-long 5.6%
rally despite not only zero GLD builds but a cumulative 4.4% draw, I
would’ve laughed. That’s wildly improbable based on modern history.
Yet here we are.
Gold’s bull market of 2016 is resuming after this metal’s 17.3%
plunge mostly since the election, which didn’t breach the 20%
new-bear threshold. And American stock investors not only didn’t
drive it, but they are actively fighting it. That means the gold
investment buying hasn’t even started yet from the only group of
global investors who really matter! Big gold buying is still
coming via GLD shares.
American stock
investors totally ignored gold in late 2015 until the US stock
markets retreated decisively enough to crack the complacency bubble
driven by record highs. GLD’s holdings fell to a 7.3-year secular
low the day after the Fed’s first rate hike in nearly a decade in
December 2015 as stock markets remained near records. It wasn’t
until the stock markets started selling off that gold
investment demand reignited.
Right after that
December-2015 rate hike, the S&P 500 dropped 1.5% and 1.8% on
back-to-back trading days. That relatively-minor selloff was enough
to convince hyper-complacent stock investors that maybe owning a
little gold to diversify their stock-heavy portfolios wasn’t a bad
idea. January 2016 would see a lot more major S&P 500 down days
with losses of 1.5%, 1.3%, 2.4%, 2.5%, 2.2%, and 1.6% as selling
accelerated.
That heavy
stock-market selling ultimately fueling a correction-grade 13.3% S&P
500 selloff was exactly what triggered last year’s new gold bull.
And once that investment gold buying got underway, it took on a life
of its own as investors love to chase winners. Even though the S&P
500 bottomed decisively for the year in mid-February, gold
kept powering dramatically higher until early July on continued
heavy GLD buying.
This precedent is
exceedingly bullish for gold today. As I explained in depth in an
essay at the very end of 2016, a
major stock bear
still looms. The US stock markets were radically overvalued
before that crazy Trumphoria rally, which blasted them up to formal
bubble valuations! Corporate earnings are simply far too low
to support the high prevailing stock prices, which are purely the
product of greed and euphoria.
Even if Trump
proves a miracle worker, the much-anticipated lower tax rates and
regulation-slashing is going to take some time to implement. I
can’t imagine anything big happening on those fronts before late
2017 or early 2018 at best. In the meantime, the stock markets are
long overdue for at least a 10%+ correction and more likely a 20%+
new bear. That will once again revive major gold investment demand.
If a 13% stock
correction ignited a 30% gold bull in the first half of 2016,
imagine what a real bear would do for gold prices. American stock
investors are
radically underinvested in gold today, with essentially zero
portfolio exposure. So as stocks inevitably sell off as the
impossible Trumphoria expectations inevitably lead to deep
disappointment, there is vast room for American stock investors to
diversify back into gold.
While gold has
indeed looked impressive in recent weeks, we haven’t seen anything
yet compared to what will happen when differential GLD-share buying
explodes again. Gold’s upside in early 2017 truly has the potential
to even exceed early 2016’s strong gains! The stock markets are far
more precarious now than a year ago, and the more downside they
suffer the more investors will shift capital back into gold.
This coming major
new upleg in this young gold bull can certainly be played with GLD
or call options on it. But the gains in the gold miners’ stocks
will dwarf the gains in gold, since their profits growth
greatly leverages
gold’s upside. As I
discussed in
depth last week, we are already seeing that. Over that recent
less-than-a-month span where gold rallied 5.6%, the leading
gold-stock index already surged 21.0% higher!
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The bottom line is
big gold buying is still coming. American stock investors, the
driving force behind all of gold’s major moves for years, haven’t
even started returning to gold yet. The leading GLD gold ETF hasn’t
seen a single build since the day after the election, and has
continued to suffer major draws in early 2017. Gold’s sharp rebound
out of its post-election lows despite a GLD-selling headwind is
remarkable.
Just as a year
ago, all it will take to rekindle gold demand from American stock
investors is a correction-grade stock-market selloff. And one is
way overdue and increasingly likely thanks to all the extreme
distortions of valuations and sentiment the Trumphoria rally
spawned. As stock complacency cracks, American stock investors will
rush back to gold to diversify their portfolios and thus catapult it
much higher. | 
