While gold has been grinding higher, it hasn’t soared yet despite
raging inflation and rolling-over stock markets. The main reason
has been the lack of investment capital inflows. But long-apathetic
investors are starting to return, flocking back to gold
exchange-traded funds as the US stock markets threatened a
correction. That buying is a bullish gold omen, fueling upside
momentum that will attract in more investors.
Still largely flying under traders’ radars, gold has been lackluster
but sure isn’t faring poorly. Over 3.9 months between late
September to late January, gold powered 7.1% higher in a young
bull-market upleg. That way-outperformed the S&P 500 and bitcoin in
that span, which fell 0.1% and 10.6%. And gold’s solid recent gains
are despite a major 1.7% surge in the US Dollar Index fueled by
extreme Fed hawkishness.
Gold-futures speculators watch the dollar as their main trading cue,
and it has been very strong with all the Fed jawboning. The FOMC
accelerated its quantitative-easing taper, ending its colossal QE4
money-printing campaign early. First Fed officials then the FOMC
itself threatened more and more rate hikes, starting sooner.
Futures-implied federal-funds-rate expectations skyrocketed to
seeing five hikes this year!
And
Fed officials started discussing quantitative tightening, beginning
to reverse their mind-boggling $4,911b of QE4 bond monetizations in
just 27.6 months. The Fed has never lurched so hawkish in so little
time as in these recent months! Fed-tightening surprises ignited
multiple bouts of heavy gold-futures selling. Yet the yellow metal
still gradually climbed on balance, carving higher lows and
higher highs in an uptrend.
But
gold hasn’t rallied long enough or high enough yet to impress
investors, who need upside momentum to entice them back.
Gold uplegs can’t grow large without major investment buying, as
investors’ vast pools of capital dwarf gold-futures speculators’
trading firepower. Comprehensive global gold investment data is
only published quarterly by the World Gold Council, in its
outstanding Gold Demand Trends reports.
The
latest covering Q4’21 was just released last Friday, revealing a
huge 117.5% year-over-year jump in overall world gold investment
demand last quarter! That was fairly surprising given gold’s
good-but-not-exciting 4.1% gain in Q4. Traditional
physical-bar-and-coin demand only grew a far-smaller 18.0% YoY, or
48.5 metric tons. The primary driver of that demand surge was a
way-bigger 113.7t jump in gold-ETF demand.
But
that only resulted from less selling, not actual buying. In
Q4’20, global gold-ETF bullion draws totaled 131.2t. In Q4’21 they
greatly moderated to just 17.6t, but investment capital continued
flowing out of gold ETFs. The WGC’s GDTs also rank the world’s
physically-backed gold ETFs by holdings size at quarter-ends. Two
American behemoths had 27.3% and 13.7% of all the gold held by all
the world’s gold ETFs in Q4!
They
are of course the mighty GLD SPDR Gold Shares and IAU iShares Gold
Trust ETFs, commanding 41.1% of global gold-ETF bullion holdings.
The distant third place is held by a UK gold ETF at just 6.8%. As
the leading gold ETFs, GLD and IAU have long dominated global
gold-ETF capital flows. These in turn have long proven the
dominant driver of overall world investment demand, which is
what moves gold prices.
In
Q4’20, GLD+IAU suffered a sharp 5.1% or 91.3t holdings draw as
American stock investors fled then-correcting gold. That was
7/10ths of the world gold-ETF total that quarter. Q4’21’s GLD+IAU
draw of 1.4% or 21.5t was way better, but still accounted for nearly
5/4ths of all global gold-ETF bullion selling. As GLD+IAU capital
flows dominate gold investing, they are a great high-resolution
proxy for how that is faring.
GLD
and IAU publish their bullion holdings daily, radically superior to
the once-a-quarter updates from the WGC. Rising holdings reveal
American stock-market capital flowing into gold, while falling
holdings show it shifting back out. In order to accomplish their
tracking mission of mirroring gold-price moves, GLD and IAU both
act as conduits for stock-market capital to migrate into and out
of gold. The mechanism is simple.
Gold-ETF-share supply and demand is independent from gold’s own.
When gold-ETF shares are being bought faster than gold futures which
drive gold’s world reference price, gold-ETF share prices threaten
to decouple from gold to the upside. So gold-ETF managers must
issue enough new shares to offset that excess demand. They use the
proceeds from those new-share sales to buy more physical gold
bullion.
And
the opposite is also true, differential gold-ETF-share selling will
soon force a downside disconnect in gold-ETF share prices compared
to gold’s. So excess selling must be absorbed by gold-ETF managers
buying back shares. They raise the cash to make these purchases by
selling some of their underlying gold bullion. So GLD+IAU holdings
changes reveal investment capital flowing into and out of gold
itself.
This
chart superimposes GLD+IAU holdings in metric tons over gold prices
during the past few years or so. Major gold uplegs and corrections
are highly correlated with gold-ETF capital flows. Recently
until just the last couple weeks, investors largely remained
indifferent to gold. That’s the primary reason this young gold
upleg hasn’t grown bigger yet. Investment capital inflows were
missing in action for most of it.
Gold’s last major selloff bottomed in late September, at a 9.6% loss
over 3.9 months which was just shy of 10%+ correction territory.
That was driven by bouts of heavy-to-extreme gold-futures selling on
Fed officials’ incessant hawkish jawboning about ending QE then
hiking rates. That day gold bottomed, GLD+IAU holdings ran 1,489.5t
which was already a 17.0-month low. Investors had fled for most of
that span.
GLD+IAU holdings had peaked at an all-time-record high of 1,800.5t
in mid-October 2020, soon after gold’s own record nominal close of
$2,062 in early August. The major 17.3% or 311.0t GLD+IAU
holdings draw in the 11.5 months since that holdings crest explains
why gold first corrected then consolidated sideways during that
timeframe. With gold lacking exciting upside momentum, investors
weren’t interested.
Despite gold bottoming in late September before starting its current
young upleg, that investment selling persisted. Though gold rallied
4.9% higher by late December after the FOMC’s uber-hawkish meeting
with that QE turbo-taper and Fed officials’ aggressive rate-hike
outlook, GLD+IAU holdings had slumped another 1.7% or 24.9t. Gold
investment capital flows usually lag major gold toppings and
bottomings by a few months.
With
extended time horizons and no leverage, investors just take longer
to perceive gold trend changes. They aren’t in the weeds like
speculators constantly analyzing technical and sentimental timing
indicators. So gold investment demand keeps moving on inertia
until new gold uplegs or corrections become obvious sometime after
their precipitating troughs and peaks. Only established momentum
changes investors’ minds.
In
late December at 1,464.6t, GLD+IAU holdings had sunk to a 20.2-month
low. But finally then several months after gold’s young upleg
started stealthily marching higher, investors began to notice. They
started nibbling in late December and early January, driving several
daily 0.1%ish GLD+IAU holdings builds before a bigger 0.4% one. But
with the US stock markets at record highs, gold investment demand
was low.
For
centuries gold has proven the ultimate portfolio diversifier,
tending to rally whenever stock markets materially weaken. But gold
gets overlooked and ignored when record stock markets generate
enormous euphoria and complacency. Stock traders start assuming
those lofty markets will rally indefinitely, so they feel no need to
prudently diversify their stock-heavy portfolios. So gold
investment demand really flags.
But
in early January those uber-hawkish Fed officials torpedoed the
lofty S&P 500, when the latest FOMC minutes revealed they had
discussed starting quantitative tightening soon in
mid-December! Since stocks’ record prices and dangerous bubble
valuations had been directly fueled by the Fed’s trillions of
dollars of QE4 money printing, prospects were ominous for QT
starting to destroy some of that epic liquidity deluge.
QT
is the death knell for QE-levitated stock markets, as the
Fed’s last
dismally-failed QT attempt in 2018 proved. So traders fled,
battering the S&P 500 a stunning 9.8% lower during the next few
weeks or so! The lion’s share of that near-correction plunge came
in four trading days in mid-January, when the S&P 500 collapsed
5.7%! It closed under its 200-day moving average for the first time
since late June 2020.
That
very day, Friday January 21st, American stock investors started
remembering they really need to diversify their fast-bleeding
portfolios. So they flooded into GLD shares with a vengeance, doing
enough differential buying to force a monster 2.8% holdings build
in this leading gold ETF! IAU’s didn’t follow, it tends to appeal
more to institutional investors due to its lower 0.25% annual
expense ratio compared to GLD’s 0.40%.
But
GLD+IAU holdings still soared a massive 1.9% or 27.6t that day to
1,501.0t! That was the biggest build in this pair of
globally-dominant gold ETFs since way back in late June 2019.
Investors had finally started returning to gold,
acknowledging its mounting upleg and prodded by the brutal
US-stock-market selloff on Fed officials’ hawkish jawboning. More
GLD+IAU daily builds of 0.1% to 0.2% would soon follow.
Interestingly those came despite the S&P 500’s big-and-sharp 6.1%
rebound bounce in just four trading days. That sure looked
bear-market-rally-like, as stock markets’ fastest large surges
erupt during bear markets right out of major downlegs. So gold
investors didn’t flee as the stock markets reversed hard, but added
more gold. GLD+IAU holdings were back up to 1,508.8t this Tuesday,
as their daily builds persisted.
Big
reversals in GLD+IAU-holdings trends are rare, and they usually
prove decisive. Big gold investment buying often becomes
self-feeding, driving a virtuous circle. The more stock-market
capital that flows into gold ETFs, the higher that differential
share buying drives gold prices. The higher gold heads, the more
investors chase its upside momentum fueling even more gains. Gold
investment demand is likely to keep recovering.
Several major factors will drive that. The looming Fed tightenings
stock traders fear haven’t even started yet. Other than doubling
the pace of that QE4 taper, all Fed officials have done so far is
merely hawkishly jawbone. Their bold talk soon has to yield to
action, actually starting a new rate-hike cycle which the FOMC
just officially signaled for its next mid-March meeting. And QT is
set to get underway soon after by mid-2022.
Despite the S&P 500 plunging 5.3% in January, these elite US stocks’
trailing-twelve-month price-to-earnings ratios remained in bubble
territory averaging 30.2x! Historical fair value over the past
century-and-a-half is near 14x. So these lofty stock markets still
have serious downside risks as the Fed starts hiking rates and
rolling off its QE4-monetized bonds. A highly-likely stock bear
will greatly boost gold investment.
The
raging inflation plaguing the US will also motivate investors to
flock back to gold. The latest headline read per the lowballed
Consumer Price Index was up a scorching 7.0% YoY, its hottest
print since way back in June 1982! So far gold has
lagged that
massive inflation spike driven by this profligate Fed’s reckless
and foolish $4,702b of QE4 money printing since March 2020’s
pandemic-lockdown stock panic.
That
ballooned the Fed’s balance sheet by a terrifying 113.1% in just
23.0 months, effectively doubling the US-dollar monetary base!
Far-more money chasing relatively-way-less goods and services is
fast bidding up their prices. During the last major inflation
spikes of the 1970s, gold prices literally tripled and
more-than-quadrupled! So far mostly-flat in this latest one,
there’s no reason gold shouldn’t at least double.
Regardless of whether investors return to gold as a
stock-market-bear hedge or runaway-inflation hedge, buying begets
buying. The more investment capital flows into gold, the higher
its price will climb. And nothing attracts in investors like
exciting upside momentum. Gold-futures speculators will also buy
heavily as gold rallies, closing out exceedingly-risky leveraged
shorts while adding extensive new long positions.
Helping motivate both investors and speculators to flock back, gold
is on the verge of a
massive upside
breakout. Since its last major upleg peaked in early August
2020, gold first corrected then consolidated forming a colossal
pennant formation rendered in this chart. Looking like
triangular flags, these chart patterns exhibit ascending lower
support converging with descending upper resistance gradually
forcing breakouts.
And
pennants are continuation patterns, meaning those breakouts
usually happen in the same direction in which those formations were
entered. In gold’s case, that was sharply higher in a flagpole
formed by huge bull uplegs in 2020. Gold’s coming big upside
breakout should light a fire under both investors and gold-futures
speculators sitting on the sidelines. They will rush in to
aggressively chase big upside momentum.
So
gold investment demand is likely to soar this year, catapulting gold
dramatically higher. The coming Fed-rate-hike cycle that will
hammer stock markets is actually bullish for gold for that very
reason. Since 1971, the FOMC has executed fully twelve rate-hike
cycles. During the exact spans of all dozen, gold averaged nice
26.1% gains. In the majority seven where gold rallied, it blasted
an average of 54.7% higher!
In
the remaining five gold slumped an asymmetrically-small 13.9%. Gold
fared the best in Fed-rate-hike cycles if it entered them
relatively-low and they were gradual, no more than one hike per
regularly-scheduled FOMC meeting. Both conditions are true heading
into this next cycle, making gold’s outlook very bullish. With
headline inflation near 7%, even eight rate hikes to 2% will
leave real rates deeply-negative at -5%.
Gold
investment demand
soars in
negative-real-rate environments, since investors are guaranteed
to lose purchasing power by parking in cash. Rising rates also
hammer existing bond prices as yields are forced higher. With
losses almost certain in stocks, cash, and bonds, gold really
shines! Investors remember why they ought to own it and start
redeploying massive capital in this ultimate alternative
investment.
The
biggest beneficiaries of much-higher gold prices ahead are the
fundamentally-superior
mid-tier and
junior gold stocks. Despite gold’s mounting young upleg, these
great gold stocks have been lingering near major lows thanks to the
periodic bouts of heavy gold-futures selling. Our newsletter
trading books are full of high-potential smaller gold stocks trading
at dirt-cheap prices. They will soar as gold’s upleg grows!
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The
bottom line is investors have finally started returning to gold
after ignoring its young upleg for several months. As stock markets
plunged on the uber-hawkish Fed threatening rate hikes and QT,
differential demand for major-gold-ETF shares soared. That
triggered a sharp reversal in their holdings, heralding an
accelerating investment-demand-driven gold upleg. Investors love
chasing gold upside momentum.
Their buying feeds on itself, pushing gold higher fueling even more
investment demand. That should only grow as these QE-levitated
stock markets roll over into a long-overdue bear on the coming
Fed-rate-hike cycle and QT. The raging inflation the Fed’s reckless
QE4 money printing unleashed, and the resulting deeply-negative real
rates, will greatly boost gold investment demand. Gold will return
to favor in a big way. |