Gold
investment demand is soaring in the wake of the COVID-19 stock
panic! Investors are rushing back into gold to diversify after
seeing mind-boggling central-bank money printing and government
spending. Since that epic monetary inflation won’t be unwound, and
investors were radically underinvested in gold before the panic,
this trend is likely to persist for years. It will catapult gold
and its miners’ stocks far higher.
The
most comprehensive look into global gold investment demand is
published quarterly by the World Gold Council. Its experts have
been deeply studying the gold markets for decades, which shows in
their outstanding Gold Demand Trends reports. These must-read
analyses are released about a month after calendar quarters end.
But while that data is invaluable, in fast-moving markets like these
it simply isn’t enough.
Fortunately there’s a high-resolution daily proxy that often
closely tracks global gold investment. That’s the physical gold
bullion held in trust for shareholders of the leading and dominant
American GLD SPDR Gold Shares gold ETF. Sponsored by the WGC, it
launched way back in November 2004. That and GLD being in the
biggest stock markets on the planet have given it an insurmountable
first-mover lead in its space.
In
their latest GDT covering Q4’19, the WGC’s analysts revealed GLD
commands 31% of the gold held in all the world’s gold ETFs! Its
next-biggest competitors are much smaller at 12% and 7%. But even
more importantly than its massive size, GLD’s holdings have
closely tracked later-reported quarterly global gold investment
demand in many key quarters for gold. Sometimes GLD’s holdings
almost solely drive big quarters.
This
secular gold bull’s maiden quarter was Q1’16, when the yellow metal
blasted 16.1% higher. GLD’s holdings soared 27.5% higher that
quarter, adding an enormous 176.9 metric tons of gold bullion to its
vaults. According to the WGC’s subsequent comprehensive data,
overall global gold demand grew by 200.4t YoY that quarter dominated
by ETF demand. GLD’s colossal build alone represented
7/8ths of that total!
Global gold-ETF demand is incredibly volatile, the dominant swing
category driving most of the changes in overall world gold demand.
Gold-ETF shares are incredibly easy and cheap to trade, acting as
direct conduits into the gold market for the world’s vast pools
of stock-market capital. So in many if not most quarters, what is
going on in the world’s biggest gold ETF closely mirrors overall
global gold investment.
GLD’s simple mechanics are important to understand. When American
stock investors buy GLD shares faster than gold itself is being
bought, this ETF’s share price threatens an upside decoupling from
gold. That differential share demand would cause GLD to fail its
gold-price-tracking mission. So its managers have to act in
real-time to shunt any excess GLD-share demand back into the
underlying global gold markets.
They
do this by issuing enough new GLD shares that day to satisfy the
excess demand. The proceeds raised from these share sales are then
plowed into physical gold bullion. So when GLD’s holdings are
rising, American stock-market capital is flowing into gold.
When they are falling, capital is flowing back out. Differential
GLD-share supply is sopped up by managers buying back shares,
financed by selling gold.
GLD’s managers publish its physical-gold-bullion holdings daily in
great detail, down to the individual-gold-bar level. In the middle
of this week, GLD’s Gold Bar List ran 1566 pages of serial numbers,
refiners, weights, assays, and production years! Watching trends in
GLD’s holdings offers an excellent proxy on what’s likely happening
in global gold investment demand. And it has been soaring
since the stock panic!
This
chart superimposes GLD’s daily holdings over today’s secular gold
bull, which started galloping in mid-December 2015. Gold investment
demand was incredibly strong in its initial couple quarters, but
dwindled over the next few years with gold failing to break out to
new bull-market highs. Once that
finally happened
in June 2019, gold investment demand started returning and has
mostly remained strong since.
Back
in May 2019, gold slumped to $1271 and you could hardly give it
away. Investors were enamored with the record-high US stock
markets, and couldn’t care less about prudently diversifying their
stock-heavy portfolios. So GLD’s holdings slumped to 733.2t with
gold investment demand evaporating. But gold started recovering on
trade-war and tariff fears, so differential-GLD-share demand started
picking up too.
The
day after gold finally decisively broke out to its first new
bull-market high in 3.0 years in late June, GLD’s holdings rocketed
4.6% higher in a massive build to 799.0t! Gold was finally back on
investors’ radars after long languishing in obscurity. By late
September, GLD’s holdings would soar 26.1% higher to 924.9t. But
after rocketing so fast, gold was super-overbought on excessive
speculator gold-futures buying.
I
warned about the resulting ominous
gold-futures-selling overhang in mid-September. Then as gold
indeed retreated, investment demand as indicated by GLD’s holdings
waned. By mid-January they were down 5.5% to 874.5t, despite a
flaring military conflict between the US and Iran. The Fed’s
extreme QE4 bond monetizations were
seriously goosing
US stock markets, breeding euphoria which stunts gold demand.
But
with China’s government locking down that entire country to fight
COVID-19’s spread, investors soon started nibbling on gold again.
GLD’s holdings climbed 6.5% into mid-February on the day the US
stock markets hit their last all-time-record peak on the
Fed’s risky QE4
stock ramp. An important metric then proved American stock
investors were radically underinvested in gold, which will
take years of buying to rectify.
GLD’s holdings of 931.6t were worth $48.3b with $1611 prevailing
gold prices. Yet the 500 elite stocks of the flagship US S&P 500
stock index had a monster collective market capitalization of
$29,823.7b. That implied American stock investors had 0.16% gold
exposure! That’s no typo, it was literally 1/6th of one percent.
Relative to wildly-overweight stock holdings, gold investment was
nonexistent leading into the panic.
American stock investors and speculators that had been lulled into
extreme complacency by the Fed’s epic QE4 Treasury monetizations
finally started worrying about a COVID-19 pandemic in late
February. That helped gold continue rallying to $1675 in early
March. Seeing the yellow metal at a 7.1-year high after US stock
markets had plummeted 18.9% in under a few weeks kept investment
capital flowing into gold.
American stock investors’ differential-GLD-share demand drove its
holdings to 963.8t on that day gold peaked. But as I’d warned in
late February, that gold surge was
peculiar and
precarious. There just wasn’t enough identifiable investment
demand per GLD’s holdings, or speculator gold-futures buying, to
justify that kind of gold surge being sustainable. Indeed gold
confounded most by soon beginning to plummet!
Governments’ draconian responses to the COVID-19 outbreak triggered
an ultra-rare stock panic, when major indexes crater by 20%+ in 2
weeks or less. That unleashed incredibly-extreme fear fueling
stock-panic trading dynamics. Speculators and investors were so
terrified that they dumped everything to flee into cash,
including gold. That safe-haven cash demand unleashed a
violently-big-and-sharp rally in the US dollar.
Gold-futures speculators look to the dollar for trading cues, and
its meteoric rise quickly convinced them to rapidly exit their
excessively-bullish upside bets on gold. As they liquidated massive
amounts of gold-futures long contracts, gold plunged with the
plummeting stock markets. That’s really counterintuitive, although
the same thing happened during the last stock panic in late 2008.
Stock-panic dynamics are strange.
Over
an extraordinary 8 trading days in mid-March where the S&P 500
plummeted another 12.3%, gold collapsed a similar 12.1%! That was a
vicious bull-market correction greatly compressed into less than a
couple weeks. Investors fled that carnage, hammering GLD’s holdings
5.8% lower to 908.2t in essentially that same span. They were
confused and perplexed that gold wasn’t surging on safe-haven
capital inflows.
The
day before GLD’s holdings bottomed, gold hit $1472 on close. That
was down $203 in those 8 short days, an exceedingly-brutal rout! In
intraday terms, gold’s total loss was even greater. But such an
ugly capitulation flush was very bullish, forcing out the weak
hands including huge amounts of speculator gold-futures long
selling. That left gold much better positioned to start rallying in
the aftermath of the stock panic.
The
major gold stocks bottomed over the next couple trading days,
free-falling to unbelievably-deep stock-panic lows. In last week’s
super-popular essay, I analyzed
gold stocks’
crash and subsequent V-bounce. After being all-out gold stocks
for months waiting for an overdue correction, and actually shorting
them, we started aggressively redeploying capital in
fundamentally-superior gold stocks the day after.
There’s nothing scarier for investors, nothing that shatters their
worldviews, like these ultra-rare stock panics. March 2020’s
COVID-19-government-lockdown-fueled one was the first since October
2008, and before that the last one happened in October 1907. In
just 10 trading days into mid-March, the S&P 500 cratered a
jaw-dropping 22.8%! Its total loss by late March was a
soul-crushing 33.9% in less than 5 weeks!
Seeing over a third of their investable wealth obliterated in
just over a month, from euphoric all-time-record highs that led them
to falsely believe everything was awesome, shook investors to their
cores! Maybe it wasn’t such a great idea to be all-in stocks.
Maybe it really is prudent to diversify stock-heavy portfolios
contrary to what Wall Street advisors had been telling them for
years. Maybe stocks don’t rally forever.
Maybe market cycles still exist. Maybe even trillions of dollars of
Fed money printing can’t stave off a long-overdue serious bear
market. So in the wakes of stock panics, gold investment demand
soars as the wisdom of portfolio diversification is remembered.
Starting in late March the very day the S&P 500’s latest interim
stock-panic low was carved, investment capital started deluging back
into gold via GLD shares.
GLD
enjoyed three massive 1.7%, 1.3%, and 1.4% daily holdings builds
right out of the gates! That kicked off a 13-trading-day streak
continuing into the middle of this week with 12 GLD builds. The
only draw day was a trivial 0.0%. Those dozen daily builds averaged
a strong 0.7% each. In that short span GLD’s holdings blasted 8.9%
higher to 988.6t! That propelled them over an important milestone
this Monday.
American stock investors’ gold demand peaked with GLD’s holdings at
982.7t in early July 2016 after this gold bull’s mighty maiden
upleg. Total gold investment, at least in tonnage terms, had
languished way under that for most of the time since. But this
latest flood of stock-market capital into GLD finally lifted its
holdings to a new high-water mark in this secular gold bull!
Heavy gold buying on balance should persist for years.
There are a couple major reasons, the precedent following late
2008’s stock panic and the impact of this latest one being vastly
more extreme due to government actions. This next chart rewinds
this same data back to 2008 and the few years following. Just like
in March 2020, during that October 2008 stock panic gold was
crushed. In just 21 trading days where the S&P 500 plummeted 30.0%,
gold collapsed by 16.7%!
But
once that mid-panic rush for cash finishes catapulting the US dollar
higher spawning huge selling in gold futures, investors realize the
great folly of portfolios all-in stocks. So they finally start
diversifying, which includes allocations into gold. These don’t
have to be big, even gradually moving up to 5% gold would have an
enormous impact on its prices. And it literally takes years to
shift serious capital into gold.
From
its stock-panic low of $711 to its all-time high of $1894 in August
2011, gold blasted 166.5% higher over 2.8 years! Big
investment-capital inflows were a major driver of that strong bull
run, with GLD’s holdings soaring 71.5% or 535.5t higher over that
same span. But it’s not just stock-panic devastation that drives
gold investment demand in those extreme events’ wakes, their
resulting higher gold prices contribute.
Investors love chasing winners, so seeing gold rally on
balance for years after a stock panic eventually attracts in legions
of investors. The better gold’s gains get, the more of them want to
buy in to ride that bull and the more capital they deploy. We saw
this gold-is-winning phenomenon last summer, with big investment
buying catapulting gold higher even when the stock markets were
still near all-time-record highs.
After that last stock panic, gold investment buying per GLD’s
holdings actually peaked well over a year before gold itself. At
best by late June 2010, GLD’s holdings had soared 114.9% higher over
1.8 years to hit 1320.4t! Gold had rallied 64.7% during that
GLD-centric span. It is also interesting to note that the
post-stock-panic gold buying was heavily front-weighted as
funds flooded into GLD following that brutal selloff.
And
the situation we are facing today after March 2020’s stock panic is
radically more bullish for gold than the outlook after
October 2008’s. While this COVID-19 pandemic is scary, it pales in
comparison to what governments’ insane overreactions to it are doing
to the US economy. These unconstitutional lockdown orders most
Americans suffer under, essentially illegal house arrest without due
process, are devastating.
With
businesses being forced to shut, countless people are losing their
jobs and livelihoods. The last few weeks of initial-jobless-claims
data show a mind-boggling 16.8m Americans have filed for
unemployment! That’s an unconscionable 40 jobs lost for
every single confirmed case of COVID-19 across the US at that
point! The economic impact of Americans being deprived of our
rights of liberty and commerce is apocalyptic.
Just
last week, prestigious Wall Street investment bank Goldman Sachs
published a report forecasting US GDP collapsing at a 9% annualized
rate in Q1 and crashing an epic record 34% annualized in Q2! Other
major Wall Street firms and various US government agencies have
similar expectations of Q2 GDP cratering 25% to 33%. A quarter
to a third of the US economy is getting wiped out by these
quarantine orders!
And
even when they are lifted, the deep fears they have sown will
leave scars lasting a generation. This unnatural chimeric COVID-19
virus isn’t going away, so Americans are going to be less likely to
gather, eat out, and travel for years to come. The businesses
involved in mass entertaining, feeding, and moving people aren’t
going to recover for a very long time. These government-slayed jobs
aren’t coming back soon.
I
started closely following the Chinese coronavirus outbreak, and
writing extensively in our newsletters about what was going on in
that country, in late January. The news out of China was
deeply troubling while the US stock markets were still hitting
euphoric record highs on the Fed’s QE4. I’ve spent a crazy amount
of time on this virus, including reading many technical studies on
it by scientists from around the world.
Literally all of them agree that the vast majority of COVID-19 cases
are so relatively mild that they aren’t tested or documented.
Conservative estimates by medical experts say at least 4/5ths
of the infected aren’t tested into confirmed cases. Out of the
remaining 1/5th tested and confirmed, the mortality rate in the US
is running about 1%. But with actual cases at least 5x as high,
that number is really closer to 0.2%.
And
the great majority of those deaths come in unhealthy elderly people
with chronic conditions which would’ve killed many of them anyway
within a few years. COVID-19 is mostly pulling deaths forward
from the seasonal flu, lung problems, heart disease, diabetes, and
obesity. Elderly people with those issues are vulnerable, and
should shelter in place. The rest of us could easily provide
everything they need to thrive.
But
crashing the economy by a third or more, destroying countless jobs,
businesses, and thus lives of the 99.8% of Americans who aren’t
going to die from COVID-19, is absurdly asinine! The
economic havoc this wreaks, and the serious wide-ranging societal
problems it spawns, will radically dwarf the worst that COVID-19
could ever do. The US government is trying to mitigate its
self-inflicted catastrophe by money printing.
Ever
since the last stock panic investors have had to closely follow the
Fed’s balance sheet, which it ballooned through long years of
quantitative easing. I recently wrote a couple comprehensive essays
on what the Fed was doing with its
QE4 Treasury
monetizations. In the 4 weeks ending this Wednesday, the
absolute growth in the Fed’s balance sheet has been far beyond what
any superlatives could ever hope to convey.
It
skyrocketed an insane 41.1% or $1,771.2b higher in just 4 weeks,
soaring way up to an unthinkably-extreme new all-time-record high of
$6,083.1b! The Fed’s Treasury holdings under the wildly-expanded
QE4 blasted 44.0% or $1,111.4b higher to another crazy record
$3,634.4b over this same brief span! The Fed is directly
monetizing the stupendous debt the US government is incurring to
pay Americans not to work.
This
is as close to hyper-inflation as the US has ever seen, and
Fed money printing is going to continue soaring as long as this
crisis lasts. But even after these ludicrous countrywide
house-arrest orders are finally rescinded, the Fed isn’t going to
unwind that epic inflation. The examples of QE1, QE2, and QE3
proved that, totaling $3,617.5b of money printing over 6.4 years
starting in the last stock panic back in late 2008.
After long years of endless stock-market record highs fueled by
those very QE
excesses, the Fed finally found the courage to try to unwind QE
through quantitative tightening. But QT’s monetary destruction
ultimately only totaled $825.0b, less than 23% of the QE that
necessitated it! All it took to short-circuit QT was a deep
stock-market correction mostly in Q4’18. The Fed will never unwind
its epic COVID-19 inflation.
The
trillions of dollars of freshly-conjured money paid to the American
people will chase a vastly-slower-growing pool of goods and services
on which to spend it, relentlessly bidding up their prices. The
resulting serious price inflation in household expenses will further
scare investors. This colossal deluge of new money the panicking
Fed and US government are unleashing will fuel high gold investment
demand for years.
Even
Wall Street firms that have long ignored gold are sounding the
warning on this. Late last week the chief investment strategist at
Bank of America put out a stunning report on what the 2020s are
going to look like due to the incalculable damage being done to the
US economy by the lockdowns. That is going to unleash terrible
stagflation, so he recommends allocating 25% each in gold, cash,
stocks, and bonds!
A
few months ago, any Wall Street firm even recommending 5% in gold
would’ve been shocking. I’ve written for decades that every
investor always needs a 10% to 20% gold allocation. While even
this nightmare won’t push that ratio of the values of GLD’s holdings
to the S&P 500 companies’ market caps to 25%, there’s no doubt
American stock investors’ gold allocations are heading far higher in
the coming years.
That’s going to fuel monster gains in the gold miners’ stocks, which
should be the world’s best-performing sector as long as investors
are still actively diversifying into gold. Following that late-2008
stock panic as gold powered 166.5% higher over the next several
years, the leading
GDX gold-stock
ETF rocketed up by 307.0%. The major gold stocks more than
quadrupled, and gold’s setup today is wildly more bullish
than that!
At
Zeal we started aggressively redeploying in fundamentally-superior
gold stocks back in mid-March just after GDX bottomed. We’ve long
done the hard and tedious fundamental work of winnowing down the
gold-stock field to uncover the likely big winners. These are
recommended in our popular
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The
bottom line is gold investment is soaring after last month’s
extraordinary stock panic! The terrible losses that inflicted
helped stock-heavy investors remember the wisdom of prudently
diversifying their portfolios with gold. After the last stock
panic, gold investment demand remained elevated for years as
investors upped their paltry allocations. Another similar secular
shift is likely in coming years, but much bigger.
While COVID-19 is scary, the unprecedented economic damage
heavy-handed governments are doing by shutting down their economies
is radically worse. They are trying to paper over the tens of
millions of lost jobs with vast money printing far beyond anything
ever witnessed. This extreme inflation is wildly-bullish for gold
investment demand. The trillions of dollars being conjured out of
thin air will greatly bid up gold. | 
