Gold
investment capital flows are a primary driver of gold-price trends,
fueling both major uplegs and corrections. Massive outflows from
dominant gold exchange-traded funds really intensified gold’s recent
extended correction into early March. But gold’s young upleg since
has increasingly dampened that mass exodus of American stock
traders. Stabilizing gold investment precedes new buying, which is
bullish for gold.
The
venerable World Gold Council tracks and publishes the best-available
global gold fundamental data on supply and demand. The
all-important demand side is broken down into four categories which
are jewelry, investment, central banks, and technology. That’s
normally their size order. From 2015 to 2019, these categories
averaged accounting for 51%, 29%, 12%, and 8% of overall global gold
demand each year.
But
2020’s pandemic chaos shuffled these rankings, with lockdowns
hammering jewelry demand while investment demand exploded. Those
four categories represented 38%, 47%, 7%, and 8% of last year’s
overall world gold demand. Yet even when jewelry is bigger,
investment demand is far more important for moving gold prices.
That’s because it is way more volatile, fluctuating greatly with
investors’ herd psychology.
In
the decade from 2010 to 2019, annual global jewelry demand varied by
669.1 metric tons or 33% at most. Yet the smaller yearly world
investment demand, which averaged 4/7ths of jewelry demand during
that span, had a much-bigger variance of 919.9t or 110%! So
mercurial investment demand commands an outsized influence over
gold-price trends, which was even more pronounced last year as
COVID-19 raged.
The
WGC’s awesome gold data is only released quarterly, with Q4’20’s
Gold Demand Trends report the latest-available as I penned this
essay. During 2020’s four quarters, investment demand ballooned to
a staggering 52%, 58%, 55%, and 18% of gold’s world total. And of
investment, exchange-traded funds buying physical gold
bullion accounted for 54%, 74%, and 55% in Q1 to Q3. Q4 saw massive
capital outflows.
The
WGC also tracks the world’s physically-backed gold ETFs, and as last
year wound to a close two American behemoths continued to dominate
that space. Those are the GLD SPDR Gold Shares and the IAU iShares
Gold Trust. Exiting Q4’20 holding 1,170.7t and 525.1t on behalf of
their shareholders, these colossi commanded 31% and 14% of all the
gold held by all the world’s gold ETFs! The third-largest was just
6%.
Led
by GLD and IAU, investment capital flows into and out of gold ETFs
are increasingly dominating gold demand and thus gold-price trends.
Since they report their bullion holdings every market day, these
gold ETFs also offer the highest-resolution read available on
gold investment demand. Changes in gold-ETF holdings, particularly
GLD’s and IAU’s, reveal whether investors are shifting money into or
out of gold.
The
only way gold ETFs can mirror gold’s price action is if their
managers shunt excess ETF-share supply and demand directly into
the underlying physical gold market. If GLD or IAU shares are
bid up faster than gold itself, they threaten to decouple to the
upside and fail their tracking mission. This must be averted by
issuing enough new gold-ETF shares to offset that differential
demand. The proceeds are used to buy gold.
So
when GLD or IAU holdings are rising, it shows American stock-market
capital flowing into gold bullion. These dominant ETFs have to act
as capital conduits on the selling side too. When GLD or IAU shares
are sold faster than gold, their shares prices will soon disconnect
to the downside. So ETF managers must buy back enough of their
shares to absorb that differential supply. They raise the funds by
selling gold.
So
the daily changes in GLD+IAU holdings reveal stock-market capital
flows to and from gold. And due to their massive sizes and the
increasing importance of gold ETFs in general, GLD+IAU holdings are
the best daily proxy for overall global gold investment
demand. That World Gold Council quarterly data sure confirms this,
as the last several quarters of 2020 reinforce. GLD+IAU are a force
of nature in the gold markets.
This
chart superimposes GLD’s and IAU’s physical-gold-bullion holdings in
metric tons over gold prices in the last couple years or so.
GLD+IAU are rendered in dark blue, GLD alone in light blue, and IAU
would be in yellow had its holdings been big enough for this chart’s
axis. Gold’s price is shown in red. There’s no doubt
American-stock-market capital flows into and out of gold via these
ETFs has a huge price impact.
From
last March’s COVID-19-lockdown-fueled stock panic to early August,
gold soared 40.0% higher in just 4.6 months in a mighty upleg.
During that exact span, GLD+IAU holdings rocketed 460.5t or 35.3%
higher! That was an enormous amount of differential gold-ETF-share
buying, huge inflows of American stock-market capital pushing gold
higher. Based on its average price in that span, a ballpark
estimate is $25.9b.
Unfortunately that can’t be directly compared to the WGC’s overall
investment data, which is parsed only in calendar-quarter terms.
But peak GLD+IAU inflows during that last gold upleg came in Q2’20,
where these two ETFs’ holdings soared 276.8t or 20.4% higher. That
represented nearly 64% of the entire gold buying by all the world’s
gold ETFs! And that in turn weighed in at 74% of overall global
investment demand.
Because American stock traders command such vast pools of capital,
and since GLD and IAU are their gold trading vehicles of choice,
these colossal ETFs increasingly dominate the global gold markets.
So tracking the trends in their daily holdings changes is
exceedingly important for everyone speculating or investing in gold,
silver, and their miners’ stocks. GLD and IAU are pipelines
linking stock markets to gold.
That
gargantuan differential gold-ETF-share buying last summer helped
catapult gold parabolic, leaving it extraordinarily overbought in
early August. The popular greed leading into that major topping was
immense. The great majority of gold-stock-ETF traders are
momentum players, piling on en masse after trends run long and
big enough to be widely noticed. They only like to buy or sell as a
herd when everyone else is.
This
momentum-following dynamic causes gold-ETF holdings to lag major
toppings and bottomings in gold. Those are mostly driven by
gold’s other primary driver, which is
speculators’
gold-futures trading. While they wield vastly less capital than
American stock traders, the futures speculators employ extreme
leverage which greatly amplifies their gold-price impact. That
necessarily compresses their trading time horizons.
Each
gold-futures contract controls 100 troy ounces of gold, which was
worth $178,200 in the middle of this week. Yet speculators are only
required to keep $10,000 cash in their accounts for each contract
they bought or sold. That implies crazy maximum leverage of 17.8x,
radically exceeding the decades-old 2x legal limit in the stock
markets! The unforgiving risks at those extremes forces speculators
to be myopic.
A
mere 5.6% gold move against their bets would wipe out 100% of their
capital risked! So all they can care about is ultra-short-term
gold-price action measured in days to weeks on the outside. This
hyper-leveraged gold-futures trading is what carves major gold tops
and bottoms. But those inflection points are rarely obvious in
real-time, so gold’s prevailing herd psychology doesn’t start
adjusting until well later.
When
gold peaked in early August, GLD+IAU holdings ran 1,765.0t. But
even as gold rolled over into a young correction, they continued
climbing on balance for another 2.3 months into mid-October.
That minor 2.0% build happened despite gold selling off 7.8%. It
takes some time for gold sentiment to shift after a major high or
low, so the momentum-driven gold-ETF-share trading lags gold’s
upleg-correction transitions.
After a couple months with gold grinding lower on balance, American
stock traders increasingly realized gold’s meteoric ascent had
failed. With that upward momentum broken, they stopped upping their
capital allocated to gold via ETFs. But they generally seemed
content to hold their new positions in GLD and IAU, until gold
plummeted 4.4% on November 9th. That gold-futures-driven
collapse really scared them.
That
was the day Pfizer reported its new mRNA COVID-19 vaccine was over
90% effective in trials, which offered the first real hope this
pandemic would end. Gold-futures traders aggressively dumped
contracts on that paradigm shift, which also pushed the US stock
markets and US dollar sharply higher. Big gold-futures selling
often snowballs to become self-feeding, as falling gold triggers
stop losses forcing gold lower still.
The
heavy differential GLD- and IAU-share selling in gold’s last
correction didn’t start until that frightening day shattered
remaining bullish sentiment. Then newly-fearful American stock
traders joined the gold-futures speculators in hammering the yellow
metal lower. Unfortunately speculators’ gold-futures trading can be
the small tail wagging the vastly-larger gold-investment dog.
Gold’s price action drives its popular psychology.
So
heavy gold-futures selling, which is never sustainable for long
because speculators’ capital is limited, effectively sends false
price signals. At 18x leverage, every $1 of gold-futures
selling has the same gold-price impact as $18 of outright gold
selling! So American stock traders see gold plummeting, assume that
must prove weakening fundamentals, and join in to amplify gold’s
selloff. That dynamic works in reverse too.
After that frenzied selloff into late November where gold-futures
and gold-ETF-share dumping reinforced each other, gold’s correction
appeared to bottom on November 30th. Closing at $1,775, gold was
finally oversold after a 13.9% correction over 3.8 months. That
happened to be right in line with the precedent from this secular
gold bull’s earlier three corrections, which averaged 14.3% losses
over 4.1 months each.
So
gold-futures speculators started to buy, driving this metal sharply
higher in December. But like usual, differential GLD- and IAU-share
buying also lagged gold. That day gold bottomed, the GLD+IAU
holdings were running 1,722.7t. But over the next several weeks
where gold surged 4.8% higher, these two dominant gold ETFs’
holdings fell another 1.9% to 1,690.6t. That again reflected
sentiment gradually shifting.
The
serious fear spawned by gold’s November plunge took some time to
dissipate. The great sentiment pendulum swinging from greed to fear
slows near extremes before accelerating back the other way.
But as gold’s gains mounted in its apparent young upleg, American
stock traders started buying the gold-ETF shares again in late
December. The GLD+IAU builds resumed until gold suffered another
brutal plummeting.
On
January 8th, gold collapsed 3.5% after the psychologically-heavy
$1,900 level
failed overnight. That spooked gold-futures speculators into
fleeing again, battering gold sharply lower. Just like back in
early November, that single-day plummeting completely changed
psychology among American stock traders. Again they started
selling gold-ETF shares faster than gold was being sold,
exacerbating its accelerating selloff.
The
chart above has two vertical dotted-blue lines showing when these
two gold plummetings happened. Those were exactly when heavy
differential GLD+IAU share selling ignited, the gold-futures tail
wagging the gold-investment dog! Yet again into early March,
gold-futures and gold-ETF selling intensified as they played off
each other. The more contracts and shares sold, the faster gold
fell unleashing still more dumping.
That
prematurely slayed gold’s young upleg, cascading into an
anomalous extended correction fueling dismally-bearish
psychology. Gold plunged into March 8th when it bottomed again at
$1,681. That made for a monster 18.5% correction over 7.0 months,
the worst yet seen in this secular bull. But speculators’ big
gold-futures selling was quickly exhausting itself, with their
contracts available to puke out quite finite.
I
wrote a contrarian essay explaining that
gold momentum
selloff in early March, published the trading day before gold
bottomed. I concluded then “The good news is the gold-futures
selling that ignited all this is finite, and is likely nearing
exhaustion. After that, gold should rally hard.” Indeed that soon
came to pass. But as gold bounced sharply into mid-March and April,
American stock traders still kept on fleeing gold ETFs.
Once
again that lag effect kicked in, where it takes a month or two for
gold sentiment to start reflecting a sharp futures-driven trend
change. By late April about six weeks later, GLD+IAU holdings had
dropped another 52.7t or 3.4%. That was during a span where gold
surged 6.7% higher. But with gold rallying on balance again, the
rate of differential gold-ETF-share selling was waning just
like it had back in December.
This
best daily proxy for global gold investment demand was
stabilizing, which is a very-bullish omen for gold. Major gold
uplegs are driven by big investment capital inflows into the yellow
metal. These are first triggered by rising gold prices after
correction bottomings, resulting from speculators buying gold
futures. Eventually gold rallies long and high enough to start
enticing American stock traders to return, to resume buying.
Again the great majority of gold-ETF-share traders need to see
gold momentum to entice them to pile on to chase it. While that
hasn’t happened yet as evidenced by GLD+IAU holdings still not
climbing, it is coming. The pace of gold-ETF draws slowing,
revealing dwindling bearishness, is necessary before mounting
bullishness starts fueling capital inflows into gold again. These
holdings troughs come early in uplegs.
That’s when American stock traders increasingly realize the
preceding gold correction has given up its ghost. They are really
attracted to gold’s mounting early-upleg momentum, and want to
redeploy capital to chase those gains. So their differential
gold-ETF-share selling slows, then stops, then starts reversing into
differential buying. And once that gets underway in earnest, it
forms a virtuous circle forcing gold higher.
The
more GLD and IAU shares traders buy, the more these giant gold ETFs’
managers have to shunt excess demand directly into gold itself.
Again they have to issue new shares to offset any demand above
gold’s own, and the proceeds are used to buy more physical gold
bullion boosting their holdings. And the more gold buying, the
faster gold rallies. That entices more traders to buy even more
gold-ETF shares!
We
are nearing that crucial inflection point where gold investment
demand reemerges in a young upleg before soon becoming
self-sustaining. And there’s certainly good reason for
diversifying portfolios with gold. Central banks are printing money
at astounding epic rates like there is no tomorrow, and as a result
stock markets are
dangerously overvalued while serious price inflation is becoming
increasingly evident everywhere.
The
main beneficiaries of investment-demand-driven major gold uplegs are
the gold miners’ stocks. The larger ones in the leading
GDX gold-stock
ETF generally leverage gold moves by 2x to 3x. And the smaller
fundamentally-superior mid-tier and junior gold miners with
far-better production-growth prospects tend to well outperform
larger peers. So we used gold’s weakness in recent months to fill
our newsletter trading books.
At
Zeal we walk the contrarian walk, buying low when few others are
willing before later selling high when few others can. We overcome
popular greed and fear by diligently studying market cycles. We
trade on time-tested indicators derived from technical, sentimental,
and fundamental
research. That’s why all 1178 stock trades recommended in our
newsletters since 2001 averaged hefty +24.0% annualized realized
gains!
To
multiply your wealth trading high-potential gold stocks, you need to
stay informed about what’s going on in this sector. Staying
subscribed to our popular and affordable
weekly and
monthly
newsletters is a great way. They draw on my vast experience,
knowledge, wisdom, and ongoing research to explain what’s going on
in the markets, why, and how to trade them with specific stocks. Subscribe
today while this gold-stock upleg remains young! Our
newly-reformatted newsletters have expanded individual-stock
analysis.
The
bottom line is gold investment demand is stabilizing. After
plunging and exaggerating gold’s recent extended correction, the
physical-gold-bullion holdings of the two giant dominant gold ETFs
are carving a trough. Gold’s mounting upside momentum in this
young-upleg rallying is increasingly shifting sentiment from bearish
back to bullish again. American stock traders are intrigued, and
tempted to start chasing.
They
are ready to resume buying, bidding up gold-ETF shares faster than
gold is being bought. Those big capital inflows will force the gold
ETFs to shunt that excess demand directly into gold, amplifying its
gains. That will stoke more greed among gold-ETF and gold-futures
traders, unleashing more self-feeding buying. As gold powers higher
in the resulting strengthening upleg, gold stocks will really
leverage its upside. |