Gold
investment demand was strong in the months following gold’s decisive
breakout to new bull-market highs in late June. The metal’s upside
momentum fueled big capital inflows, accelerating its gains. But
soon after gold’s upleg stalled, so did the investment buying. With
stock markets still near record highs, the normal
portfolio-diversification motive for owning gold is lacking. Thus
recent gold demand is fragile.
Gold
investment demand is a major driver of gold price trends. Gold
naturally surges when investment capital is flooding in, and slumps
when it flows back out. While investment demand is a
relatively-minor fraction of overall global gold demand, it is the
most-volatile major demand category by far. The best data available
on world gold supply and demand is published quarterly by the
venerable World Gold Council.
Over
the last 5 calendar years, gold investment demand has accounted for
20.4%, 22.3%, 36.9%, 29.8%, and 26.5% of total global gold demand.
But the absolute-tonnage difference in investment from its worst to
best year in that span was a whopping 84.3%! In comparison jewelry,
gold’s largest demand category, only varied by 20.5%. The huge
variability in investment demand gives it an outsized impact on
gold prices.
The
latest fundamental data available from the WGC is current to Q2’19.
In the first half of this year, gold investment demand ran 26.8% of
the world total. That is right in line with the 27.2% average from
2014 to 2018. And H1’19’s total gold investment demand of 584.5
metric tons was right in line with half of the last 5 calendar
years’ annual average at 592.6t. Gold investment was looking pretty
normal before late June.
But
everything changed when gold finally
decisively broke
out to new bull-market highs. Today’s gold bull was born way
back in mid-December 2015, out of deep secular lows. Its maiden
upleg soared to a big 29.9% gain in a blisteringly-fast 6.7 months.
Then for 2.9 long years, gold couldn’t break out above that early
crest. Despite major lows trending higher and no bear-market-grade
selloffs, there were no higher highs.
So
investors’ interest waned, and apathy slowly morphed into
bearishness. Without new bull highs, the powerful new-high
psychology couldn’t kick in. That greatly expands gold’s
visibility through financial-media exposure, and motivates investors
to buy aggressively to chase the momentum. That all finally started
to change on June 20th, when gold’s $1389 close finally eclipsed its
initial $1365 peak from July 2016.
Gold’s bull-breakout surge ignited after top Fed officials changed
their bias on the future interest-rate direction from hiking to
cutting. That major dovish shift lit a fire under gold. Just
after that, gold investment demand exploded. Thankfully there’s a
great daily proxy for it since the definitive WGC read is only
published quarterly. That is found in the holdings of the leading
GLD SPDR Gold Shares gold ETF.
While there are plenty of gold ETFs around the world, GLD was the
original. Launched all the way back in November 2004, it has grown
into a behemoth. As of the end of Q2, GLD’s 794.0t of gold held in
trust for its shareholders accounted for 31.2% of all the gold held
by all the world’s gold ETFs! That dwarfs the 2nd- and 3rd-largest
gold ETFs at 11.6% and 7.6%. GLD’s size gives it unparalleled
impact on gold prices.
GLD
effectively acts as a conduit for the vast pools of American
stock-market capital to slosh into and out of physical gold
bullion. Often when quarters see big gold moves in either
direction, the change in GLD’s holdings alone accounts for most of
the change in total global gold demand! And since GLD’s
managers publish its holdings daily, they offer an invaluable
high-resolution read on gold-investment-demand trends.
GLD’s mission is to track the gold price, and it can’t succeed
unless supply-demand differentials between its share price and the
underlying gold market can be equalized. Excess GLD-share supply
and demand is shunted directly into physical gold itself, ensuring
GLD’s price exactly mirrors gold’s. If GLD’s holdings are rising,
American stock-market capital is flowing into gold. If they are
falling, investment money is exiting.
When
stock investors bid up GLD shares faster than gold is rising, its
price threatens to decouple to the upside. To prevent that failure,
GLD’s managers issue enough new shares to offset that excess
demand. They use the money raised to buy more physical gold
bullion, pushing GLD’s holdings higher. Thus rising GLD holdings
are the best daily indicator available of rising gold investment
demand, which is bullish for gold.
When
stock investors sell GLD shares faster than gold is falling, its
price will break away from gold to the downside. GLD’s managers
must step in to absorb that excess supply. So they sell physical
gold bullion and use the money to buy back GLD shares. The result
is GLD’s share price continues to track gold, but its underlying
holdings shrink. GLD’s holdings are the most important daily data
available for gold investors.
Current GLD-holdings trends imply the recent strong gold investment
demand is fragile. That is short-term bearish for gold,
amplifying downside risks when investors start to flee. This chart
superimposes GLD’s holdings in blue over the gold price in red
during this secular bull. GLD-holdings growth has stalled out
multiple times in this latest upleg when gold momentum flagged.
Investment demand hasn’t been durable.
Strategically the major uplegs and corrections in gold tend to
follow investment demand as represented by GLD’s holdings. GLD’s
massive physical-gold-bullion hoard swells when gold is rising on
balance, and shrinks when it is falling. That powerful 29.9% maiden
upleg of this bull mostly in H1’16 was driven by an enormous 55.7%
or 351.1t build in GLD’s holdings! Big investment-capital inflows
push gold higher fast.
Gold’s brutal subsequent 17.3% correction within H2’16 was partially
driven by a 14.2% or 138.9t GLD-holdings draw. American stock
investors dumping GLD shares en masse to pull capital out of gold
hits its price hard. This gold bull’s second 20.4% upleg straddling
2017 only saw a trivial 0.8% or 7.0t GLD build. Gold investment
demand isn’t gold’s only major driver, it competes with another
major one often eclipsing it.
Speculators’ collective trading in gold futures, which is
done at wildly-extreme leverage, usually trumps gold investment
demand. Gold-futures trading is more important over the short-term,
while investment demand fuels longer-term trends. So what is
happening in GLD’s holdings must be integrated with what is going on
with specs’ gold-futures positioning. I last took a deep dive into
that in another
essay a month ago.
This
gold bull’s second major correction unfolded largely in H1’18, where
gold dropped 13.6%. GLD’s holdings fell 8.9% or 75.9t in that span,
showing investment outflows were a major factor. Our current upleg
is this gold bull’s third, which saw gold blast 32.4% higher at best
in early September. Over that 12.6-month span, GLD’s holdings
surged 15.8% or 122.5 metric tons. Most of that came in recent
months.
Back
in mid-May gold was languishing in the high $1200s, investors wanted
nothing to do with it. GLD’s holdings slumped to 733.2t, which was
just 0.4% above being a 3.2-year secular low! Sentiment was just
dismal in gold and its miners’ stocks. Ever the contrarian betting
against the herd, heading into that I wrote an essay on “Gold-Bull
Breakout Potential”. Bearish sentiment flags times to buy low
ahead of surges.
Gold
investment demand started picking up again as gold recovered in
early June, on more tariff threats from Trump. By mid-June, GLD’s
holdings had climbed 4.2% or 30.9t in 5 weeks. That along with
gold-futures buying helped fuel a nice 4.9% gold rally. But the
real fireworks came after the June 19th FOMC meeting, where top Fed
officials started predicting rate cuts instead of hikes. That
ignited furious gold buying.
Gold
finally broke out to its first new bull-market high in 2.9 years the
very next day. GLD’s holdings were dead flat both those days, but
the second day after the Fed American stock investors flooded back
in with a vengeance. On June 21st, GLD’s holdings skyrocketed 4.6%
or 34.9t higher on extreme differential demand for GLD
shares! That was the biggest daily percentage build since September
2008 in the stock panic.
There’s nothing more bullish for gold than sustained investment
demand, as stock-market capital is vast compared to the gold
market. But with the flagship US S&P 500 stock index hitting new
record highs, the motivation wasn’t there to prudently buy gold to
diversify stock-heavy portfolios. Investors were buying gold just
to chase its upside momentum. So once that stalled, so did
their gold capital inflows via GLD.
Gold’s decisive bull-market breakout initially lasted 4 trading days
in late June, where gold closed at $1389, $1399, $1419, and $1423.
Gold didn’t see any more highs for the next several weeks, leading
to that GLD-share demand withering. From late June to mid-July,
GLD’s holdings traded in a very-tight range between 794.0t to
802.0t. Gold investment inflows didn’t resume until gold made more
highs in late July.
It
closed at $1425 on July 17th, unleashing the next round of
momentum-chasing gold investment buying. From then until gold’s
latest $1554 peak in early September, differential GLD buying flowed
and ebbed with gold’s progress. When gold achieved new
bull-market highs, American stock investors would get excited and
flood into GLD. But when gold stalled or retreated, their buying
mostly dried up in real-time.
Gold
blasted another 10.7% higher in that 7-week span straddling August,
partially driven by a huge 12.1% or 96.5t GLD-holdings build! But
the specific GLD-build days were highly conditional. If gold wasn’t
hitting new upleg highs on any particular trading day, investment
demand just wasn’t there. This isn’t unusual, as investors love
chasing momentum. But investment demand isn’t always so contingent.
Some
of the biggest and strongest gold uplegs happen when US stock
markets are weakening. Gold is the ultimate portfolio diversifier,
tending to rally when stocks sink. So investors flood into it
regardless of what the gold price is doing when they expect material
stock-market selling ahead. In those scenarios GLD’s holdings build
on balance most of the time, not dependent on new gold highs. That
is durable demand.
The
problem with momentum-driven gold investment demand is it’s
fragile. When gold upside stalls or flags as speculator
gold-futures buying moderates or reverses to selling, investment
capital flows follow. Investors have no reason to shift more of
their portfolios into gold other than chasing gains, so they tend to
sell when those gains cease. That puts downward pressure on gold,
exacerbating a selloff vicious circle.
The
more investors sell, the faster gold falls. The faster gold falls,
the more investors sell. Momentum-driven gold investment demand
amplifies selloffs, rather than retarding them like
diversification-driven gold investment demand. For the better part
of several weeks after gold’s early-September peak, GLD holdings
started drifting lower again. As gold dropped 4.3% over 7 trading
days, GLD’s holdings fell 2.4% or 21.4t.
Gold
got a reprieve in late September, surging back over $1500 to close
at $1515 on the 20th after the stock markets started sliding on bad
US-China trade-war news. Gold rallied for a few days hitting $1532,
which was well short of its $1554 September 4th high. But that
again unleashed momentum-driven gold investment demand, so GLD’s
holdings surged 4.7% or 41.3t to a 2.9-year high. They’ve flatlined
ever since.
Over
the past couple weeks as gold meandered around $1500, GLD’s holdings
traded in another tight range between 920.8t to 924.9t. Not even
some significant stock-market weakness into early October sparked
any meaningful differential GLD-share buying. When the S&P 500
plunged 3.0% in October’s first couple trading days and gold rallied
1.9%, GLD’s holdings merely climbed a trivial 0.3% or 2.9t!
Momentum-driven gold investment demand thrives on new gold highs.
Gold rallying out of a selloff often isn’t enough to fuel
excitement. And gold falling materially is likely to lead to
sizable investment selling as investors flee. Since they aren’t
trying to diversify stock-heavy portfolios, they’ll have a low
tolerance for corrections. The recent fragile momentum-driven gold
investment demand reversing is a big risk for gold.
Again speculators’ gold-futures trading is gold’s dominant
short-term driver. As I warned a month ago, their collective bets
were and have largely remained excessively bullish. They’ve
been effectively all-in longs and all-out shorts, leaving them
little room to buy more but vast room to sell. The resulting
gold-futures-selling overhang is ominous, making a big and sharp
gold selloff necessary to normalize their bets.
As
gold rolls over into the resulting correction, the recent investors
are going to flee. They will dump GLD shares way faster than gold
itself is being sold, forcing GLD’s managers to sell down their
physical-gold-bullion holdings to buy back that excess GLD-share
supply. That investment-driven selling pressure will amplify gold’s
downside, and spawn more psychological pressure for other traders to
join in the selling.
Since GLD’s holdings peaked at 924.9t in late September, at worst
they’ve merely slipped a trivial 0.4% to 920.8t by early October.
That 4.1t draw is a rounding error. Remember this gold bull’s first
and second corrections saw massive 138.9t and 75.9t GLD draws before
gold bottomed! That averages out to 107.4t, or 26.2x larger than
GLD’s worst draw so far in gold’s probable third bull-market
correction. Selling is coming.
With
each passing trading day the evidence for gold being in another
correction grows. For 5 weeks now it has been drifting lower on
balance, carving lower highs and lower lows in a well-defined
downtrend. The 4.1t of GLD selling so far is a tiny fraction of the
huge 160.8t GLD build from just before gold’s bull-market breakout
in late June to GLD holdings’ late-September peak. A 75t-to-100t
draw would be justified!
This
gold bull hasn’t seen any corrections without major differential
GLD-share selling. And after GLD’s holdings skyrocketed on momentum
buying since mid-summer, a mean reversion lower is highly likely.
Any material GLD-share selling will exacerbate gold’s inevitable
futures-driven selloff. That’s a big near-term risk for gold and
the stocks of its miners. Last week I wrote an essay on the
gold-stock
correction underway.
The
GDX VanEck Vectors Gold Miners ETF is their leading benchmark.
Compare this updated chart with GLD’s holdings in the first chart.
Note that whenever gold investment outflows help push gold lower in
major corrections, the gold stocks get hammered. GDX’s brutal 39.4%
and 31.3% bull-market corrections coincided with major GLD-draw
periods. Fragile gold investment demand is also a serious
gold-stock risk!
Since I discussed gold stocks’ situation and outlook in depth last
week, I’m not going to reiterate all that here. The point is
gold-stock speculators and investors need to follow GLD’s
holdings to stay abreast of gold investment demand. The gold
miners’ stocks enjoy strong gains when gold sees capital inflows
from investors. But boy when those investors flee for any reason,
the gold stocks really take it on the chin!
Recent months’ gold-investment-demand behavior exacerbates gold’s
near-term selloff risks. When the gold-futures speculators are
forced to unwind their excessively-bullish positions, investors are
going to join in. Their buying since mid-summer has been totally
momentum-driven, dependent on a steady stream of exciting new
gold highs. With diversification not a concern, they will sell hard
as gold retreats.
To
multiply your capital in the markets, you have to trade like a
contrarian. That means buying low when few others are willing, so
you can later sell high when few others can. In the first half of
2019 well before gold stocks soared higher, we recommended buying
many fundamentally-superior gold and silver miners in our popular
weekly and
monthly
newsletters. We later realized big gains including
109.7%, 105.8%,
and 103.0%!
To
profitably trade gold stocks, you need to stay informed about gold’s
major drivers and their likely near-term impacts. Our 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! Get
onboard now so you can mirror our coming trades for gold’s next
upleg after this correction largely passes.
The
bottom line is recent months’ strong gold investment demand is
fragile. Those inflows from American stock investors have been
conditional, totally dependent on gold’s upside momentum. Their
differential GLD-share buying has stopped whenever gold’s advance
stalled or flagged. With the US stock markets way up near
all-time-record highs, there’s little perceived need for portfolio
diversification driving durable demand.
So
as this latest strong gold upleg inevitably rolls over into a
healthy bull-market correction, investment selling is going to
exacerbate gold’s downside. When gold’s gains turn to losses,
momentum-chasing investors won’t hesitate to flee. Their selling
and speculators’ gold-futures selling will reinforce and amplify
each other. A major gold correction will crush gold stocks, but
create great buying opportunities in its wake. | 
