One
of gold’s primary drivers is American stock-market capital sloshing
into and out of gold through major exchange-traded funds. Their
sustained inflows and outflows partially fuel gold’s bull-market
uplegs and corrections. Interestingly the differential
gold-ETF-share selling that exacerbated gold’s recent correction is
greatly slowing. Gold’s next upleg depends on those capital flows
reversing to buying, accelerating its gains.
Gold’s largest and most-popular exchange-traded funds are
increasingly coming to dominate gold price trends. Cheap and easy
to trade, they act as direct conduits for the vast pools of
stock-market capital to access gold. Stock traders use these
gold-ETF shares to instantly gain or shed gold exposure in their
portfolios. The collective capital flows through gold ETFs are
responsible for ever-more of gold’s price action.
The
best-available data on global gold supply-and-demand trends is
published quarterly by the venerable World Gold Council. Its
outstanding Gold Demand Trends reports are essential reading for all
traders interested in the precious-metals realm. Among many things
tracked by the WGC analysts is the size of the world’s gold ETFs.
Two American behemoths have come to utterly dominate that
gold-moving space.
They
are of course the GLD SPDR Gold Shares and IAU iShares Gold Trust.
GLD was the original gold exchange-traded fund, launched way back in
November 2004. It was a bold WGC initiative to make gold far more
accessible to stock-market investors. Before that pioneering
gold ETF, diversifying into gold required directly buying physical
coins which unfortunately often proved expensive, inefficient, and
cumbersome.
GLD
grew popular, parlaying its first-mover advantage into an
insurmountable lead among gold ETFs. As last quarter ended, GLD
held 1,268.9 metric tons of physical gold bullion in trust for its
shareholders. The WGC’s latest Q3’20 GDT report revealed GLD then
commanded a whopping 32.7% of all the gold held by all the
world’s physically-backed gold ETFs! That dwarfed the second-place
gold ETF at 518.2t and 13.4%.
Interestingly that is IAU, which wasn’t born much later in January
2005. But for long years IAU labored in relative obscurity eclipsed
by GLD’s long shadow. For example when gold’s last secular bull
peaked way back in August 2011, IAU’s gold-bullion holdings ran just
13.1% of GLD’s. But recently in August 2020 when gold’s latest bull
upleg crested, IAU’s holdings had surged ahead to triple to 39.2%
of GLD’s own!
IAU
has really only been catching up with GLD over the past few years or
so. I suspect that has arisen from institutional buying, as IAU has
a major advantage over GLD. IAU’s annual expense ratio of 0.25%
makes it cheaper to own than GLD’s 0.40% per year. These
cover the operating costs necessary to run physically-backed gold
ETFs, including paying people and vaulting varying gold bullion
depending on demand.
Saving 15 basis points in yearly fees with IAU appeals to
professional money managers, as their super-competitive world
requires finding every advantage. IAU is also owned by BlackRock,
the world’s largest asset manager running an astounding $7.8t of
assets! When BlackRock managers want gold exposure for their
clients, they naturally use their in-house IAU. So IAU’s growth has
outpaced GLD’s in recent years.
With
this overtaking showing no signs of abating, analyzing stock-market
capital flows into gold ETFs now requires looking at GLD and IAU
together instead of just GLD. Together they commanded 46.0% of
all the gold bullion held by all the world’s gold ETFs at the end of
Q3’20! The third-place physically-backed gold ETF in the UK merely
ranked at 6.5%. So GLD+IAU overwhelmingly dominate gold-ETF capital
flows.
Gold
ETFs’ mission is to track and mirror the underlying gold price. But
the supply and demand for gold-ETF shares is independent from gold’s
own. So the only way these ETFs can maintain price parity with gold
is to shunt excess gold-ETF-share supply and demand directly into
gold itself. That requires making these ETFs actual conduits
for stock-market capital to flow into and out of real physical gold
bullion.
When
gold-ETF-share demand exceeds gold’s, those share prices will
decouple from gold’s to the upside. Gold-ETF managers prevent this
by issuing enough new shares to offset this differential demand in
real-time. Then they immediately plow the proceeds from those
new-share sales into buying more physical gold bullion for their
vaults. So when gold-ETF holdings are rising, stock-market capital
is flowing into gold.
And
when gold-ETF-share supply runs higher than gold’s, those share
prices threaten to disconnect to the downside. Gold-ETF managers
avert this by buying back enough shares to absorb the differential
supply in real-time. They raise the money to finance those
purchases by selling some of their gold-bullion hoards. So when
gold-ETF holdings are falling, stock-market capital is shifting back
out of gold.
This
chart shows the physical-gold-bullion holdings of these dominant
gold ETFs during gold’s current secular bull market. Gold is the
red line in the background, divided into its major uplegs and
corrections. Superimposed over that is GLD+IAU holdings in
dark-blue and GLD holdings in light-blue. IAU’s holdings would be
rendered in yellow, but their recent record high of 531.0t remains
below this chart’s lower axis.
For
all of this gold bull’s uplegs and corrections, the percentage and
absolute changes in these dominant gold ETFs’ holdings are shown.
Note that the fortunes of gold are heavily dependent on the
stock-market capital flows into and out of GLD and IAU. The red
gold-price line and blue GLD+IAU-holdings line are almost
interchangeable. All traders interested in precious metals must
follow these ETFs’ bullion balances.
 
Before we get into gold’s latest upleg and correction in
major-gold-ETF terms, there’s a crucial high-level observation to
consider. Crests and troughs in gold-ETF holdings tend to lag
gold upleg toppings and correction bottomings. GLD+IAU holdings
usually peak in the months after gold uplegs give up their own
ghosts. And these ETFs’ physical gold bullion usually hits a cycle
nadir in the months after gold itself has.
Several factors likely play into GLD+IAU holdings’ leisurely
reactions to major gold-price trend reversals from uplegs to
corrections and vice versa. Gold-ETF shareholders have proven to be
momentum players, a common trait among stock traders. They
rush to add gold exposure when the yellow metal is surging, trying
to ride its upside. But once gold stalls out, stock traders’
interest in this contrarian asset starts to fade.
Major gold-upleg toppings are usually drawn-out affairs, with gold
consolidating high after peaking instead of selling off sharply. So
the greed and enthusiasm for gold often continues coasting
even after gold has topped. Stock traders still expect it to soon
resume marching higher on balance, so they continue to buy gold-ETF
shares. Those flows don’t end and reverse into selling until gold’s
correction becomes obvious.
Then
later when those healthy mid-bull selloffs finally bottom, they’ve
finished their mission of rebalancing both sentiment and
technicals. Yet fearful and depressed traders assume gold will keep
spiraling even lower. So their gold-ETF-share liquidations during
corrections continue gliding along on pure momentum, until gold
rallies enough to convince them a new upleg might be underway. So
gold-ETF holdings lag gold.
Another factor is gold-ETF-share positions are usually a minor
secondary focus for most stock traders. They are happy to ride
gold’s upside momentum when it gets exciting, but they don’t
carefully monitor gold like dedicated contrarian speculators. So
trend changes have to persist for some time before they sufficiently
catch stock traders’ attention. Only then will they start reacting
with new buying-and-selling behavior.
A
final likely reason the major gold ETFs’ holdings lag gold’s trend
reversals is these capital flows aren’t the yellow metal’s only
primary driver. Speculators’ gold-futures trading dominates gold
price action when stock traders aren’t doing much buying or
selling. Though these speculators command far less capital than
stock traders’ vast pools, the extreme leverage inherent in gold
futures gives them an outsized price impact.
That
also is exceedingly-risky, forcing the gold-futures specs to have
myopic ultra-short-term focuses that are measured in days or weeks
on the outside. So specs’ lightning-fast gold-futures trading
probably forces major gold toppings and bottomings well before stock
traders even realize it and respond. Whatever the reasons, GLD+IAU
peaks and troughs have lagged gold toppings and bottomings during
this bull market.
Gold’s latest upleg emerging from mid-March’s stock panic was a
monster, soaring 40.0% over the next 4.6 months into early August.
That was partially fueled by massive differential buying of
both GLD and IAU shares. Over that exact span, GLD’s holdings
rocketed 37.5% or 345.7t higher while IAU’s shot up 30.0% or
114.8t. Together GLD+IAU holdings soared a colossal 35.3% or 460.5t
higher during that short span!
The
second-biggest upleg of this secular gold bull was driven higher by
the biggest stock-market capital inflows into gold seen in
this same bull. That wasn’t the only driver, as
spec gold-futures
buying played a role too. But the main reason gold surged so
sharply mid-year was American stock traders were buying GLD and IAU
shares far faster than gold was being bought. Gold-ETF flows’
dominance showed in WGC data.
Q2’20 was where the lion’s share of gold’s last upleg unfolded. The
yellow metal blasted 12.9% higher that quarter, fueled almost
exclusively by an enormous 20.4% or 276.8t build in GLD+IAU
holdings! The World Gold Council’s supply-and-demand numbers for Q2
proved gold-ETF demand was the only reason gold surged.
Surprisingly overall global gold demand fell 10.6% year-over-year
that quarter to 1,016.5t.
Gold’s biggest demand category jewelry collapsed 52.5% YoY, while
traditional physical bar-and-coin investment also plunged 29.6%.
Remember April and May were peak government-economic-lockdown months
in officials’ attempts to slow COVID-19’s spread. People were too
distracted to buy gold, trying to overcome the challenges of just
living. They were also worried with job losses mounting, socking
away cash.
Even
if they wanted to buy physical gold, jewelry stores and coin shops
were mostly forced to shutter. But buying gold-ETF shares through
brokerage accounts was as easy as ever. The only reason gold surged
12.9% in Q2 instead of plummeting is global physical-gold-bullion
demand from gold exchange-traded funds skyrocketed an astounding
466.3% higher YoY to 431.2t! That was utterly-enormous 355.0t
growth.
And
American stock traders were mostly responsible for that
game-changing gold demand, as that huge 276.8t Q2 surge in GLD+IAU
holdings accounted for nearly 4/5ths of that world total!
What is happening in these dominant gold ETFs’ holdings is
overwhelmingly driving gold’s price trends. That’s why traders must
pay attention to GLD and IAU. Their capital flows drive gold,
silver, and gold-stock uplegs and corrections.
The
day gold’s latest upleg peaked way up at $2,062 in early August,
GLD+IAU holdings ran 1,765.0t. That happened to be an
all-time-record high, solely because of the impressive rise in IAU’s
popularity. At 497.0t its holdings were their highest ever
witnessed. But GLD’s at 1,268.0t remained 6.3% below their own
record high of 1,353.3t from December 2012. IAU’s holdings soared
130.2% during that same span!
The
month or so after gold’s latest topping showed a fascinating
divergence between GLD’s and IAU’s holdings. By mid-September,
GLD’s holdings had slumped 1.7% since gold crested 6 weeks earlier.
Yet IAU’s climbed 4.0% over that same span, almost fully offsetting
the losses in the much-larger GLD. Were retail stock traders
starting to dump GLD shares while institutional ones continued to
add IAU shares?
Differential GLD-share buying soon resumed though, while IAU’s
holdings kept creeping higher to record after record. In
mid-October nearly 10 weeks after gold’s last upleg had topped,
GLD+IAU holdings finally peaked at 1,800.5 metric tons. Yet again
stock-market capital deployed in gold via these dominant ETFs lagged
gold’s upleg-correction cycles. But differential gold-ETF-share
selling flared as gold kept selling off.
Gold’s correction following that last upleg was tricky, with the
yellow metal mostly consolidating high in this selloff’s
initial months. That failed to bleed off enough greed to yield a
major bottoming, as I warned about in a
gold-correction
essay in mid-October. At that point gold’s correction-to-date
had still averaged relatively-high prices of $1,930. So American
stock traders didn’t seem very worried that gold would fall farther.
But
gold’s in-progress correction accelerated in late October and
November, pummeling this metal to new correction lows. Finally at
the end of November gold’s correction looked to be maturing,
extending to 13.9% over 3.8 months. That was right in line with the
precedent from this bull’s earlier corrections, which averaged 14.3%
losses over 4.1 months. Gold had also fallen to oversold levels
under its 200-day moving average.
So
finally a strong case could be made that
gold’s correction
was largely over, that enough selling work had been done to
sufficiently rebalance sentiment and technicals. GLD+IAU holdings
had slumped back down to 1,722.7t by that day, down 4.3% from their
mid-October record high and 2.4% since the day gold itself peaked in
early August. But as usual that gold-ETF-share exodus would
continue coasting well after gold.
With
gold falling to new correction lows, American stock traders were
increasingly worrying about the yellow metal’s lack of upside
momentum. So they kept on dumping GLD and IAU shares even as gold
bounced sharply in early December. GLD+IAU holdings kept falling on
balance into late December, slumping as low as 1,690.6t. That
extended their own total correction to 6.1%, or a major 109.9t
holdings draw.
The
main reason I’m writing this essay is this differential
gold-ETF-share selling is slowing. During this gold bull’s
prior corrections, GLD+IAU selling proved aggressive initially after
stock traders finally understood gold was really selling off. But
those sharp selloffs soon started moderating, the pace of
liquidations in gold-ETF shares slowing. We are seeing that again
today, a deceleration which is bullish for gold.
Once
differential gold-ETF-share selling ceases and reverses into buying,
that really accelerates gains in gold’s subsequent uplegs.
In August, September, October, and November, GLD+IAU holdings
changed by +23.5t, +30.2t, -2.2t, and -62.1t. That normal
post-gold-topping pattern is very evident, lagging builds lasting
until stock traders get spooked then selling really snowballs. But
this month that considerably slowed.
With
December almost over, this month’s GLD+IAU draw so far is only
running -29.0t. That suggests the crucial upleg-boosting shift from
differential gold-ETF-share selling to resuming buying should be
nearing. The sooner stock-market capital starts flowing back
into gold bullion via these major-gold-ETF conduits, the bigger
gold’s next upleg will grow. So GLD+IAU holdings even stabilizing
after a correction is really bullish.
That
marks the turning point when stock-market capital outflows from gold
stall out before inflows resume. The major-gold-ETF holdings draws
during and after corrections in this gold bull only suffered a
single downleg before stopping and reversing. So precedent
suggests differential gold-ETF-share selling isn’t a pulsing
flowing-and-ebbing thing but one sustained liquidation bout. Once
that runs its course, buying resumes.
Thus
GLD+IAU holdings seeing their capital outflows moderate ahead of a
stabilizing is an important sign this apparent young gold-bull upleg
is indeed righteous. And it is ready to accelerate as differential
gold-ETF-share buying returns. And once stock-market capital
inflows into gold resume, they tend to run for many months
until gold grows too overbought exhausting its latest upleg. All
this is certainly bullish for gold.
The
recent GLD+IAU-holdings action buttresses the case that gold carved
a major correction bottom in late November so a new bull-market
upleg is getting underway. That thesis has led us to
aggressively redeploy in fundamentally-superior gold-mining stocks
starting in late November. The major gold stocks tend to amplify
gold’s upside in bull uplegs by 2x to 3x, with smaller mid-tier gold
stocks outperforming more.
Despite adding 10 and 4 new gold-stock and silver-stock trades in
our weekly and monthly newsletters over the past 5 weeks or so, our
redeployment continues. Late in gold corrections and early in its
uplegs are the best times to deploy capital in great mining stocks
at relatively-low prices. Then later after those gold uplegs mature
and gold stocks soar, those trades can be sold at relatively-high
prices realizing big gains.
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The
bottom line is the differential selling in the dominant gold ETFs
looks to be slowing. The GLD+IAU holdings draws spawned by gold’s
latest correction are moderating now that it has passed. That is a
bullish omen for gold, as its subsequent upleg can accelerate after
differential gold-ETF-share selling pressure ends. When that
reverses into buying, stock-market capital inflows into gold amplify
its upleg gains.
Major-gold-ETF-holdings troughs are an important confirmation that
gold’s correction has yielded to the subsequent upleg. While
GLD+IAU holdings haven’t decisively carved their latest, they are
moving in that direction. That ups the odds gold’s next bull-market
upleg is indeed underway, making for a great time to add gold-stock
positions to ride it higher. Buying in relatively-low early in
uplegs makes for big gains later on. | 
