The
big gold-ETF buying that catapulted gold higher into early August
has gone missing in action. That’s why gold stalled out since,
drifting sideways flirting with a correction. To continue powering
higher, gold needs these major stock-market-capital inflows via
exchange-traded funds to resume. The near-term fortunes for the
precious-metals complex are heavily dependent on how American
traders position in gold ETFs.
For
better or worse, exchange-traded funds are increasingly dominating
gold’s price trends. Their relative importance has been mounting
for years, and cannot be overstated. Major gold ETFs are becoming
the global gold market. Despite lingering concerns about gold ETFs’
physical bullion holdings, speculators and investors keep flocking
to them. They are the easiest way to get gold portfolio exposure,
quick and cheap.
The
World Gold Council’s latest quarterly fundamental data on global
gold supply and demand yet again revealed gold ETFs’ dominance. The
WGC’s Q2’20 Gold Demand Trends report showed global demand being
gobbled up by gold ETFs like Pac-Man! Gold surged 12.9% in Q2,
which enjoyed one of the most-bullish psychological backdrops ever.
A worldwide pandemic raged, which had just spawned a stock panic.
Last
quarter uncertainty and worry were off the charts, as governments’
draconian national lockdowns to slow the spread of COVID-19 deeply
scarred economies. You’d think gold demand would explode in that
kind of extreme anomalous environment, right? According to the WGC,
which gathers the best-available data on gold’s fundamentals, Q2
global demand was actually weak. It fell 10.7% YoY to 1015.7
metric tons!
Every major demand category collapsed except for gold ETFs.
Jewelry demand, which is normally about half of the world total,
crashed 52.5% YoY to 251.5t! Even traditional investment demand for
physical bars and coins plummeted 32.0% YoY to 148.8t. Central-bank
demand cratered 50.5% YoY to 114.7t. And technology demand plunged
17.5% YoY to 66.6t. Make no mistake, Q2 gold demand was a total
disaster.
Added together these major demand categories imploded a
mind-boggling 45.2% YoY to 581.6t! After accounting for 93% of
total gold demand in Q2’19, they caved to just 57% in Q2’20. The
sole bright spot in worldwide gold demand last quarter was gold-ETF
buying. Stock traders’ demand for gold-ETF shares was so extreme
that the physical gold bullion these ETFs had to buy skyrocketed
470.5% YoY to 434.1t!
Those towering gold-ETF-demand levels shattered the previous record
high of 341.1t in Q1’16. There’s no doubt gold prices would’ve
fallen hard last quarter if it wasn’t for that epic
gold-ETF-share demand. And two American gold-ETF giants utterly
dominate worldwide gold-ETF demand, the GLD SPDR Gold Shares and IAU
iShares Gold Trust. Following their holdings is essential for
gaming gold trends today.
Every quarter the WGC ranks the world’s biggest physically-backed
gold ETFs by their bullion holdings. At the end of Q2, GLD and IAU
commanded 32.5% and 12.6% of all the gold held by all the world’s
gold ETFs! Their next-largest competitor trading in the UK is a
distant third at just 6.3%. And GLD’s and IAU’s combined 45.1%
world share actually understates their importance, because they are
so actively traded.
From
Q1’20 to Q2’20, total global gold-ETF holdings surged 13.7%
sequentially to 3620.7 metric tons of physical gold bullion. That
was a record 435.9t quarterly build. But the Q2 builds in GLD and
IAU really outpaced the world total, seeing their holdings soar
21.9% or 211.9t and 16.6% or 64.9t. That massive 276.8t total from
these two American behemoths was almost 64% of the entire
global build in gold ETFs!
So
gold demand and thus gold prices would’ve collapsed if not crashed
last quarter if not for epic gold-ETF demand, and together GLD and
IAU accounted for nearly 2/3rds of that. So everyone interested in
the price trends of gold, silver, and their miners’ stocks have to
closely watch GLD and IAU. The precious metals can’t materially
rally without major inflows of stock-market capital into these
increasingly-dominant ETFs.
The
gold-ETF dynamics behind this are simple yet not widely understood.
The mission of gold ETFs is to track the underlying gold price. But
the supply of and demand for gold-ETF shares is independent of
gold’s own. So when gold-ETF-share buying or selling outpaces or
lags that in gold, ETF-share prices will decouple from gold’s and
fail their tracking missions. There’s just one way to maintain that
critical link.
Excess supply or demand of gold-ETF shares has to be directly
shunted into underlying physical gold, on a near-real-time
basis. That equalizes supply-demand differentials, synchronizing
gold-ETF-share prices with gold’s. When ETF-share buying exceeds
gold’s, share prices threaten to decouple from gold to the upside.
Gold-ETF managers avert this by issuing enough new shares to offset
that differential demand.
They
immediately plow the capital raised from selling those shares into
buying more physical gold bullion. So when gold ETFs’ holdings are
rising, stock-market capital is flowing into gold. Naturally
that normally helps lift its price. The opposite is true when
gold-ETF shares are being sold faster than gold, which soon breaks
gold ETFs’ gold-price mirroring to the downside. Again gold-ETF
managers have to act to prevent this.
They
sell enough gold bullion to raise sufficient money to buy back the
excess gold-ETF-share supply. Thus when gold ETFs’ holdings are
falling, stock-market capital is flowing back out of gold. Since
GLD and IAU both report their physical-gold-bullion holdings
daily, tracking their trends reveals whether American stock
traders are buying or selling gold via these dominant ETFs. That’s
the key to gold’s fortunes.
As
this first chart shows, differential GLD and IAU buying has gone
missing in action since gold peaked in early August. The gold price
in red is rendered under GLD’s and IAU’s total daily holdings shown
in dark blue, GLD’s daily holdings in light blue, and IAU’s daily
holdings in yellow. Since IAU’s holdings are considerably smaller
than GLD’s at 515.2t this week, they aren’t visible with this
chart’s lower bound at 700t.
 
Since gold’s dazzling all-time-record high of $2062 on August 6th,
it has drifted sideways to lower. At worst gold initially plunged
7.5% in a sharp correction. But that quickly stabilized into the
trading range gold has been stuck in for the past 5 weeks, a high
consolidation. Not surprisingly given GLD’s and IAU’s dominance
over gold prices, their total holdings peaked at a record 1765.0t
that same day gold crested.
Gold
stalled out when American stock traders stopped aggressively buying
gold-ETF shares. And if they start materially selling, gold will
certainly fall into a 10%+ correction. So far the differential
gold-ETF-share selling has been trivial, with these combined GLD and
IAU holdings only slumping 0.9% at worst to 1749.2t in mid-August.
Interestingly they gradually recovered since to a new record high of
1768.1t this week.
That
masks a growing bifurcation in demand for GLD and IAU shares. As of
the data cutoff for this essay at Wednesday’s close, GLD’s holdings
are still down 1.2% from early August’s 7.4-year secular high. As
the pioneering gold ETF launched way back in November 2004, GLD’s
first-mover advantage has made it much more popular. In the middle
of this week, GLD’s holdings commanded 71% of the GLD-plus-IAU
total.
Lesser-hyped IAU wasn’t born much later, starting in January 2005.
But it languished deep in GLD’s long shadow for much of its
existence. When this secular gold bull’s first upleg topped in July
2016, GLD had holdings running 4.6x as large as IAU’s. But IAU has
enjoyed superior growth since, compressing this ratio to just 2.4x
this Wednesday. Since gold’s recent early-August peak, IAU’s
holdings actually climbed 3.7%!
IAU
is catching up with GLD because of a major selling point really
appealing to institutional investors, a lower expense ratio. GLD’s
managers have always charged 0.4% of that ETF’s assets annually to
pay all the bills necessary to keep it running and earn profits.
That includes salaries of the people as well as all the costs of
physically moving and storing gold bullion. But IAU significantly
undercut that charging only 0.25%.
IAU’s 15-basis-point-lower expense ratio doesn’t sound like much,
but saving 37.5% on yearly gold-ETF fees is important to
professional money managers running tens of billions of dollars.
That realm is so hyper-competitive that they have to squeeze out
returns wherever they can. They increasingly seem to be preferring
IAU over GLD, driving the former’s holdings relentlessly higher with
less volatility than the latter.
Given the chronic underinvestment in gold by institutional
investors, which collectively have under 1% of their capital in this
ultimate portfolio diversifier, IAU might not see heavy differential
selling when gold corrects. But GLD certainly will, as it is much
more popular with speculators and retail traders. If they start
dumping gold-ETF shares faster than gold is being sold, that will
almost certainly force a bigger gold selloff.
This
secular gold bull has suffered three previous corrections, 17.3%
into late 2016, 13.6% into mid-2018, and 12.1% into March 2020’s
pandemic stock panic. American stock traders’ selling both helped
fuel and exacerbated all these corrections, with the combined GLD
and IAU holdings falling 13.1% or 156.7t, 6.3% or 69.5t, and 3.3% or
44.5t. It doesn’t take much gold-ETF differential selling to push
gold sharply lower.
Potential catalysts abound that could spook the legions of
speculators that flooded into gold-ETF shares in late July and early
August forcing gold parabolic. The euphoric US stock markets
could keep rallying on extreme Fed money printing, retarding gold
investment demand. The deeply-oversold US dollar could surge,
driven by the overbought euro falling. That would motivate
gold-futures speculators to dump gold.
The
US-presidential-election outcome could affect gold sentiment.
Trump’s surprise victory four years ago unleashed heavy gold selling
as stock markets soared on tax-cut hopes. The hot-money Robinhood
crowd that loves chasing momentum may simply lose interest with gold
stalled for over a month now. The herd of millennial traders is
chasing big and fast gains, and is quick to move on to the next
surging thing.
This
gold bull’s precedent shows that once heavy differential
gold-ETF-share buying flags, it generally presages coming
differential selling. Traders who greedily rush into gold-ETF
shares at relatively-high prices when euphoria runs rampant late in
major gold uplegs rapidly suffer serious losses when gold
subsequently corrects. These weak hands frantically dump their
gold-ETF shares, amplifying gold’s selloffs.
But
even if those late-to-the-party speculators hold, gold’s next major
upleg can’t start marching higher. This bull’s precedent clearly
proves gold now needs big stock-market-capital inflows via
the dominant gold ETFs to fuel sustained gains! This gold bull’s
four major uplegs have seen 29.9% gains into mid-2016, 20.4% into
early 2018, 42.7% into early 2020 before the stock panic, and 40.0%
in just 4.6 months since that.
Heavy differential demand for gold-ETF shares overwhelmingly
drove this bull’s three largest uplegs, and contributed to the
fourth. Sequentially they saw big combined GLD and IAU holdings
builds of 52.1% or 409.3t, 6.3% or 65.6t, 30.4% or 314.2t, and 35.3%
or 460.5t! Gold isn’t heading materially higher again until
American stock traders resume buying gold-ETF shares much faster
than gold itself is being bought.
And
that seems really unlikely so soon after gold shot parabolic to
extraordinarily-overbought levels in early August. That
overboughtness and the resulting greedy, euphoric sentiment needs to
be worked off in a normal and healthy correction before gold’s next
upleg can start running. That will require a major 10%+ gold
selloff, and maybe even a deeper 200dma approach. Gold isn’t out of
the woods yet by any means.
The
big gold-ETF buying that catapulted gold higher before and after
March’s stock panic missing in action is also the reason
gold-stock prices have stalled too. This next chart is updated from
my essay last week explaining why the gold stocks
remain in
correction mode. Since their earnings greatly leverage gold
prices, their stock prices tend to mirror and amplify gold’s. They
haven’t made any headway since early August.
The
GDX VanEck Vectors Gold Miners ETF is the most-popular gold-stock
index and trading vehicle. Like usual, GDX’s price action so far
this year looks just like gold’s but at a larger magnitude. Because
of their total dependence on prevailing gold prices, gold stocks
need differential gold-ETF-share buying just as much as gold does.
Their massive post-panic upleg failed right when gold’s did on
flagging gold-ETF buying.
Gold-stock speculators and investors definitely need to closely
follow GLD’s and IAU’s holdings, since they so powerfully drive gold
price trends. As goes gold, so go the gold stocks! Whether GDX
continues consolidating high, rolls over into a major correction, or
resumes grinding higher totally depends on what American stock
traders do with GLD and IAU. Their capital flows drive the
entire precious-metals complex.
And
I suspect big differential gold-ETF-share selling is more
likely in the near-term than a resumption of the huge buying into
early August. Gold surged too far too fast to be sustainable,
hitting extraordinary levels of overboughtness. Momentum-chasing
millennial traders seemed to lead that charge, as reported in
since-discontinued positioning data from their favorite brokerage
Robinhood which pioneered free stock trading.
Millennials were hit disproportionately hard by the widespread
government lockdowns last spring as this pandemic mounted. A big
fraction of them worked in the service industries, which ground to a
halt. So they were stuck at home with nothing to do, collecting fat
unemployment checks greatly boosted by huge pandemic stimulus
spending. So many used that financial windfall to fund their
first-ever forays into stock trading.
Robinhood account openings skyrocketed, and young traders enjoyed
big and fast gains with the stock markets soaring on extreme Fed
money printing. In just 3.0 months into early June, the Fed’s
balance sheet skyrocketed an astonishing 66.3% or $2.9t higher!
Millennial traders rushed to pile in to the big winners, chasing
their upside momentum. They found gold in mid-July, which helped
force it parabolic.
Gold’s post-panic upleg was normal and sustainable before that,
climbing higher in a solid uptrend. But over the next several weeks
into early August, gold soared a blistering 14.9% higher. That
stretched it way up to 1.260x its 200dma, bull-slaying levels
of overboughtness that killed its last secular bull! GLD’s and
IAU’s holdings rocketed up 5.1% or 61.1t and 6.5% or 30.2t during
that span, which is what forced gold higher.
And
Robinhood positioning data showed millennial traders led the way.
In those same few weeks, the total number of Robinhood users owning
GLD skyrocketed 58% higher! Their IAU ownership soared 33%.
And it wasn’t just those younger traders flooding in. The reason
Robinhood doesn’t charge users for stock trading is it instead sells
their real-time order-flow data to high-frequency-trading firms,
which front run it.
So
when millennial Robinhood traders were stampeding into gold via GLD
and IAU, orders of magnitude more capital was rushing in from
hedge funds milliseconds before those trades! That Robinhood data,
from young new traders blindly chasing any momentum, was the tail
wagging the vastly-larger hedge-fund dog. And once those
millennials moved on from gold in early August, so did the hedge
funds front running them.
Until that millennial and more-broadly retail-trader zeal for gold
returns, it is hard to imagine big differential gold-ETF-share
demand spinning up again. And without that, gold is dead in the
water for now. If the Robinhooders and all the professional
capital aping them start dumping GLD and IAU en masse, gold and thus
the gold stocks will fall into much-deeper corrections. That is a
real risk given gold’s flagging momentum.
Under heavy fire for the extreme speculative risks its young and
naive users were taking, Robinhood ceased publishing its users’
collective positioning data soon after gold peaked! It is probably
still selling it to hedge funds privately, but outside of those
rarefied circles no one knows what the Robinhooders have done with
their gold-ETF holdings. If they haven’t exited yet, big
differential gold-ETF-share selling is still coming.
So
it seems prudent to be wary of gold here, at least until early
August’s epic overboughtness is mostly worked off. Again gold
skyrocketed to 1.260x its 200dma at peak, and so far the lowest it
has retreated is still way up at 1.143x its 200dma earlier this
week. Incredibly that is still above the
extremely-overbought upper resistance of
gold’s relative
trading range! Big gold-ETF-share selling is way more likely
than big buying.
All
bull markets naturally flow then ebb, taking two steps forward
before retreating one step back. Their price action gradually
meanders around uptrends. This normal upleg-correction pattern
keeps sentiment balanced, extending bull markets’ longevity. And it
is a huge boon for traders, offering excellent mid-bull
opportunities to buy relatively low before later selling relatively
high. That greatly expands bulls’ potential gains!
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We layered into dozens of new positions before
gold stocks grew too overbought, which were stopped out recently at
huge realized gains running as high as +199%! Our subscribers
multiplied their wealth within months.
To
profitably trade high-potential gold stocks, you need to stay
informed about what’s driving gold. Our popular newsletters are a
great way, easy to read and affordable. 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 and take advantage of our 20%-off sale!
Corrections are the time to do your gold-stock homework, preparing
to redeploy as they pass.
The
bottom line is the big gold-ETF buying that catapulted this metal
higher into early August has gone missing in action since then. The
major gold ETFs’ holdings have stalled out, explaining gold’s
flagging momentum. With the global gold market increasingly
dominated by GLD and IAU, gold can’t advance without American stock
traders shifting big capital into gold through these conduits. But
their buying has vanished.
This
gold bull’s precedent shows differential gold-ETF-share selling
usually follows soon after big and fast holdings builds exhaust
themselves. Compounding these risks after gold’s recent parabolic
upleg are the young traders who heavily drove it. Their modus
operandi is chasing upside momentum, and once that fails they are
quick to abandon trades. They may still need to exit their
frenziedly-acquired gold-ETF shares. | 
