Gold
has had a wild ride since Trump’s surprise election win in early
November. This metal first plunged then surged, ultimately making
little headway. It wasn’t until mid-April that gold regained its
pre-election levels. This overall lackluster gold action was
confounding given all the mounting uncertainties. But it once again
highlights that gold investment demand is often hostage to the US
stock markets’ fortunes.
Before the election, gold surged every time Trump appeared to
advance in the polls. Trump had a well-earned reputation as a
loose cannon, implying far greater unpredictability. Increasing
prospects of a Trump victory drove gold to $1305 the Friday before
the election. But that weekend the FBI cleared Clinton again on her
classified-e-mail front. So gold sold off sharply on rising odds
Clinton would indeed win.
On
Election Day gold closed near $1276, a price that essentially wasn’t
seen again until just a couple weeks ago. As the early voting
results came in that evening, Trump took a surprise lead in Florida
which started to grow. As the biggest battleground state with 29
electoral votes, Florida was an absolute must-win for Trump. Gold
futures soared in real-time to $1337 that evening, 4.8% over that
day’s close hours earlier!
For
months before that vote, all indications were gold would surge on a
Trump victory. Gold investment demand grows on uncertainty, and
Trump is unpredictability personified. Gold’s election-evening
gains didn’t seem unreasonable, merely matching the 4.8% surge seen
the day after the UK’s Brexit vote in late June that also
surprised. But a couple days after Trump’s victory, gold spiraled
into a 5-week-long plunge.
How
could gold’s price action pivot so radically across that election as
uncertainties indeed soared? It was an exceedingly-vexing outcome
for gold investors and speculators, leaving them confounded and
disheartened. This improbable result sprung from an
equally-improbable one. Contrary to virtually all expectations
pre-election, the stock markets surged in extraordinary
Trumphoria after his underdog win.
Though traders often forget, gold has long been hostage to stocks.
Gold is a unique asset that tends to move counter to stock markets,
making it something of an anti-stock trade. So gold
investment demand surges when stock markets weaken, as investors
seek to prudently diversify their stock-heavy portfolios. But when
stock markets surge, counter-moving gold is soon forgotten so its
investment demand withers.
Given gold’s global supply-and-demand fundamentals, it’s remarkable
just how dominant investment demand is in driving gold’s
prevailing price levels. The definitive arbiter of gold fundamental
data is the World Gold Council. It reported that global gold
investment demand accounted for only 36% of overall total demand in
2016, and just 22% in 2015. Jewelry dwarfed that at 47% and 57%
respectively those years.
Yet
it’s not gold’s perennial largest demand category of jewelry that
really moves its price, but its much-smaller investment one.
Investment demand drives gold prices at the margin because it is
exceedingly volatile compared to gold’s other demand
categories. Between 2010 and 2016, the best jewelry-demand year was
only 31% bigger than the worst one. But this same variance in
investment demand was huge at 119%!
And
there’s nothing that’s driven global gold investment demand in
recent years like US stock-market fortunes. That sounds
dubious, but the hard market data is crystal-clear. Gold investment
demand surges when US stock markets weaken, and slumps when they
strengthen. That’s what birthed the apparent gold anomaly after the
election. Trump won, but gold demand didn’t surge because stock
markets soared.
This
strong inverse relationship has played out for years, but
it’s often forgotten. The sole reason gold plunged between 2013 and
2015 was extreme
Fed easing was artificially
levitating the US
stock markets. That killed gold investment demand, as there is
no perceived need for prudent portfolio diversification when stocks
seemingly do nothing but rally indefinitely. This same dynamic
continued to play out last year.
This
first chart looks at the benchmark S&P 500 stock index (SPX) and
gold since early 2016. Much of if not most of gold’s price action
since then can be explained by stock-market moves. While other gold
drivers arise from time to time like Fed machinations, gold is
hostage to stocks. That makes gold one of the best investments to
own when stock markets suffer in the major bears that inevitably
always follow major bulls.
Back
in mid-December 2015 leading into the Fed’s first rate hike in 9.5
years, gold was despised. The SPX was less than 3% under its
all-time-record peak of 2131 seen the prior May. Complacency was
off the charts, as the stock markets had fully recovered from their
first correction-magnitude selloff seen in an astounding 3.6 years
in August. The Fed’s extreme easing and jawboning for more
short-circuited all selling.
Thus
gold slumped to an extreme 6.1-year secular low climaxing a
long bear. With those Fed-distorted stock markets magically
powering higher month after month with no meaningful selloffs,
investors didn’t want anything to do with gold. It hadn’t seen a
bull market since 2011, and was left for dead. But that soon
reversed after some long-suppressed SPX selling finally erupted in
the wake of that initial Fed rate hike.
The
SPX plunged 1.5% and 1.8% in the couple trading days after the first
rate hike of the Fed’s recently-confirmed
12th rate-hike
cycle since 1971. Then a few weeks later in the first week of
2016, the SPX suffered more big down days of 1.5%, 1.3%, 2.4%, and
1.1%. American traders were selling in sympathy with plunging
Chinese stock markets rebelling against ill-fated new circuit
breakers designed to retard selling.
Throughout January 2016, more sharp SPX down days of 2.5%, 2.2%,
1.2%, 1.6%, and 1.1% were seen. While there were some big daily
rebound rallies in between, investors started to realize something
was changing. The effective Fed Put they had relied upon for years
to buy every dip was no longer assured with rate hikes
underway. So after years of neglect, investors finally turned to
gold to shore up bleeding portfolios.
The
SPX ultimately dropped 13.3% in 3.3 months leading into mid-February
2016, its worst selloff seen in 4.4 years! That led to massive gold
buying soon rekindling a new bull market. Note above that gold’s
huge rally that month coincided exactly with the SPX’s plunge.
Gold’s initial surge climaxed with a monster 4.1% daily rally the
very day the SPX bottomed. A stock-market correction
unleashed a new gold bull.
But
out of those lows the SPX soon reversed sharply in a V-bounce. So
gold’s upward progress all but ceased between mid-February and
mid-April as the stock markets clawed higher again. Gold could only
surge to new bull highs in late April once the SPX started
rolling over again. After intensely studying this young new
gold bull since its birth, I’m convinced it never would’ve happened
without a major stock selloff.
As
the stock markets recovered in mid-May, gold plunged on a hawkish
FOMC meeting. It wasn’t until the UK’s Brexit vote in late June
with its surprise outcome clobbering the SPX that gold was finally
able to surge to new bull-market highs. But that renewed gold run
ceased the very day the SPX managed to hit its first new record high
in nearly 14 months in mid-July. Gold investment demand immediately
waned.
Gold
suffered a healthy correction exacerbated by a rare
futures mass
stopping in early October. Gold couldn’t catch a meaningful bid
again until the stock markets began rolling over in October as
Clinton started sliding in the polls. Then leading into the day
before the election, the FBI cleared Clinton on her classified
e-mails for a second time. The SPX surged sharply, driving a
parallel sharp gold plunge that day.
Then
contrary to expectations, the stock markets soared after
Trump’s victory. With a Republican sweep of the presidency, Senate,
and House, euphoria set in over fast passage of deregulation,
health-care reform, and massive tax cuts. With the SPX blasting to
dazzling new record highs, investors jettisoned gold they’d amassed
before the election. That heavy selling persisted until
mid-December just after the SPX peaked.
See
the strong inverse correlation here between gold and stocks?
It isn’t always mathematically precise, with gold sometimes rallying
and falling with stocks instead of against them. But from a
broad-brush-stroke level, gold investment demand and hence gold
prices weaken when stock markets are rallying. Gold buying doesn’t
materially resume until those stock rallies cease, which rekindles
gold investment demand.
Gold’s latest major bottom in mid-December happened the day after
the Fed hiked rates for the second time in 10.5 years. Gold fell
not on that universally-expected rate hike, but the FOMC officials’
more-hawkish-than-expected forecast of three rates hikes in 2017.
Despite that, gold still only started rallying again as the SPX’s
raging Trumphoria surge in the election’s wake petered out. Stock
markets were the key.
Gold’s newest upleg slowed considerably in early February when the
SPX surged on Trump teasing of “something … phenomenal in terms of
tax”. And as the SPX powered to a series of new record closes in
the weeks after that, investors soon started dumping gold again.
Gold didn’t stabilize and bottom until the Fed’s 3rd rate hike in
mid-March confirming a new cycle. By that time the SPX’s progress
had stalled again.
But
investors didn’t start really bidding gold higher again until
mid-April as the SPX started threatening to break below its critical
50-day moving average. Sub-50dma levels hadn’t been seen since
Election Day. A 50dma breakdown after a strong, euphoric run often
heralds more serious selling nearing. The prospects of the first
major post-election stock selloff erupting once again rekindled gold
investment demand.
Just
this week this inverse relationship reasserted itself after Sunday’s
presidential election in France. The results came in exactly as
expected, averting the markets’ worst-case scenario of far-right
and far-left candidates winning both runoff spots. European stock
markets soared, rekindling stock euphoria in the US. So gold
dropped sharply early this week despite a much-weaker US dollar
driven by a big euro rally.
The
sentiment of gold investors is heavily influenced by stock-market
fortunes. They only want to buy en masse when the SPX weakens.
That makes them remember diversifying their stock-heavy portfolios
with gold is a wise idea. But once the SPX rebounds, that newfound
marginal gold investment demand soon wanes. Because of this
critical psychological link, gold is effectively held hostage by
stock-market levels.
But
this warring inverse relationship between gold and stocks is also
fundamental, not just sentimental. This next chart looks at the
physical gold bullion held in trust for shareholders of the world’s
largest and dominant gold ETF. The GLD SPDR Gold Shares act as a
conduit for the vast pools of stock-market capital to flow into and
out of the global gold markets. GLD is the actual mechanism
for stocks’ gold influence!
GLD’s mission is to mirror the gold price, but its shares have their
own unique supply-and-demand profile independent of gold’s. So the
only way to maintain GLD tracking of gold prices is to shunt any
excess GLD-share supply or demand directly into gold itself.
Thus rising GLD holdings reveal stock-market capital flowing into
gold bidding it higher, while falling ones show capital leaving
forcing gold lower.
As
the biggest SPX selloff in 4.4 years spawned gold’s young bull
market back in early 2016, stock-market capital flooded into
physical gold bullion via GLD shares. This differential
GLD-share buying by scared stock investors desperately seeking
diversification drove this ETF’s biggest monthly build in its
holdings in 7.0 years! That heavy GLD buying by American stock
investors was gold’s whole story in Q1’16.
The
World Gold Council only publishes gold’s global fundamental data
quarterly, so that’s the highest-resolution read available. In
Q1’16 GLD’s holdings soared 176.9 metric tons. According to the
WGC’s latest data published in February 2017, total global gold
demand only climbed 183.8t YoY in Q1’16. Thus the heavy GLD gold
buying alone accounted for a staggering 96.3% of total worldwide
gold-demand growth.
That
GLD buying soon stalled in mid-March as the SPX rallied sharply out
of its correction low. But as the stock markets started rolling
over again, differential GLD-share buying resumed in late April.
That excess share demand forced GLD’s managers to issue new shares
to keep GLD tracking gold. All the proceeds were immediately plowed
into buying gold bullion. Excess GLD-share demand flows through
to gold.
In
Q2’16 GLD’s holdings climbed by another 130.8t. That accounted for
an incredible 91.4% of the total 143.1t YoY growth in total world
gold demand per the WGC’s latest data! Quite literally, without all
that differential
GLD-share buying from American stock investors there would be
no new gold bull! And the driving force behind their flight
into counter-moving gold was weakness in the general stock markets.
With
US stock markets inexplicably surging to new record highs soon after
late June’s Brexit surprise, gold investment demand evaporated.
GLD’s holdings actually fell 2.1t in Q3’16. And without
differential GLD-share buying pressure, global gold demand actually
fell a considerable 105.3t YoY that quarter. American stock
investors were still carrying the entire young gold bull at that
point, there was no other real buying.
Note
above in this chart that GLD’s holdings started climbing in Q4’16
before the election surprise and resulting extreme Trumphoria stock
rally. But once the SPX started soaring on big-tax-cuts-soon hopes,
stock investors started fleeing gold. The intense greed and
complacency in the stock markets left gold relatively unattractive.
Why diversify portfolios when stocks are soaring and expected to
continue to do so?
So
in Q4’16, GLD’s holdings plunged 125.8t. Once again, that was the
entire story in worldwide gold demand. The WGC reported total
global gold demand dropped 128.7t YoY that quarter, so that crazy
Trumphoria-fueled
mass exodus from GLD was responsible for a staggering 97.7%!
You just can’t make this stuff up, these numbers are stunning. Last
year, GLD was truly the entire story behind gold’s price
action!
GLD’s holdings only rebounded modestly in Q1’17, up just 10.2t. And
as of this writing, the WGC’s read on last quarter hasn’t been
published yet. But there was evidence in the initial months of this
new year that Asian investors were taking the gold-buying
baton from American stock investors. Not only did gold see
overnight rallies when US markets were closed, but the weak GLD
build can’t explain gold’s 8.5% Q1 rally.
The
key gold lesson since early 2016 is that US stock-market fortunes
heavily influence if not dominate gold investment demand. So
the crazy Trumphoria stock-market surge after the election is likely
the sole reason why gold fared so poorly in the initial months.
Despite the great uncertainties that Trump brings to the table, the
perceived need to diversify portfolios waned dramatically as stocks
soared on euphoria.
Thus
as soon as these very-overvalued stock markets inevitably roll over
into their
long-overdue next bear market, gold investment demand should
explode again. Gold is the best investment to own during major
stock bears, as surging investment demand
drives it higher
while stocks fall. That’s way superior to holding traditional
cash during stock bears, as gold actually grows capital while cash
merely preserves it.
April’s GLD-holdings action showed gold investment demand already
starting to pick up again as the latest SPX record highs of early
March fade. That trend will accelerate as stock selling starts to
intensify. Without the overwhelming distractions from excessive
euphoria, greed, and complacency, investors will soon remember the
great wisdom of prudently diversifying stock-heavy portfolios with
counter-moving gold.
While gold being hostage to stocks has been bearish for it during
the stock markets’ recent terminal bull years, the opposite will
prove true in the coming stock-market bear years. Gold is the
bear-market asset of choice, climbing when everything else is
falling. GLD shares and gold itself will enjoy high demand as long
as stock markets drift lower on balance. But the gold miners’
stocks will really leverage gold’s gains.
During the last secular gold-stock bull, the leading gold-stock
index amplified gold’s underlying gains by 2.8x. Gold stocks
can actually multiply wealth during stock bears when everything else
is slowly getting mauled. This young
gold-stock bull’s
upside targets are radically higher than current levels,
creating vast opportunities to profit greatly as this Fed-distorted
freakishly-artificial stock bull faces its overdue reckoning.
Despite gold’s super-bullish stock-bear prospects, these mercurial
beasts are still quite challenging to navigate. We can help with
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The
bottom line is gold is hostage to stocks. This unique asset tends
to move counter to stock markets, so gold investment demand is
inversely correlated with their fortunes. Investors ignore gold
when the stock markets are high and euphoric, feeling no need to
diversify their stock-heavy portfolios. But once stocks inevitably
start retreating, investors soon remember gold’s value and flock
back to deploy capital in it.
That’s why gold suffered such heavy selling in the wake of Trump’s
surprise victory. The stock markets soared on the resulting
Trumphoria, killing gold demand. But as this extreme rally driven
by unfounded hopes unwinds, so too will the gold-investment trends.
GLD will again see heavy differential buying as investors rush to
re-diversify, catapulting gold and its miners’ stocks to new
bull-market highs in coming months. |