Stock Traders Flock to Gold

by Adam Hamilton, Zeal, LLC Gold surged this week on massive buying from stock investors and speculators. This critical group of traders and their vast pools of capital utterly abandoned gold in the past couple years. So to see them start to flock back is a watershed event, heralding a major reversal in gold’s fortunes. And with their gold exposure remaining near extreme lows, they have vast buying left to do to restore prudent portfolio diversification. Successful investors have always practiced this essential concept of not putting all their eggs in one basket. This great wisdom is ancient, stretching back at least three millennia to King Solomon’s reign in ancient Israel. In the Biblical book of Ecclesiastes he advised, “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” Portfolio diversification is absolutely critical. Most investors today keep the vast majority of their capital in stocks and bonds, which is fine. But truly wise ones also diversify into alternative investments, which simply mean not stocks, bonds, or cash. Gold has always been the leading alternative asset, largely thanks to its strong negative correlation with the stock markets. Gold thrives when stocks are weak, making it indispensable to managing overall portfolio risk. American stock investors’ preferred vehicle for diversifying into gold is the flagship SPDR Gold Shares gold ETF, which trades under the symbol GLD. This is the world’s largest gold ETF by far, and offers some great advantages to stock traders. They can instantly buy or sell GLD shares, gaining or shedding gold exposure, with normal stock-trading accounts. And this is very efficient, with very low transaction costs. GLD’s mission is to track the gold price, which it has done flawlessly since its birth in November 2004. Investors and speculators owning GLD shares get gold-price exposure that’s virtually identical to gold’s underlying price moves. Achieving this mirroring isn’t trivial for GLD’s custodians, because the real-time supply and demand of GLD shares rarely matches gold’s own. That requires GLD to act as a conduit. When stock traders buy GLD shares faster than gold itself is being bought, they threaten to decouple to the upside. That would cause GLD to fail its tracking mission. So its custodians quickly step in to the markets to offset that excess demand. They issue enough new GLD shares to supply that differential demand, and then use the proceeds to buy physical gold bullion that is held in trust for shareholders. Thus GLD is effectively a capital pipeline directly linking the vast pools of stock-market capital to gold. Differential buying pressure on GLD shares is quickly equalized into the underlying global physical gold market. So the more capital stock investors and speculators choose to deploy into GLD shares, the faster the gold price rises. GLD shunts stock-market capital into and out of gold, a double-edged sword. When stock traders sell GLD shares faster than gold itself is being sold, this ETF’s price will decouple to the downside. GLD’s custodians must quickly absorb that excess share supply, so they buy back enough shares to maintain gold tracking. They raise the capital necessary to make these purchases by selling some of the physical gold bullion held in trust for shareholders. Stock capital sloshes back out of gold. Even though the world’s gold miners launched this flagship gold ETF via their World Gold Council to increase gold investment demand, conspiracy theorists have long attacked it. So GLD has always been super-transparent. Every single day, it publishes its total gold-bullion holdings itemized down to the individual-gold-bar level including refiners, serial numbers, and weights. This week this list was 1164 pages long! Watching GLD’s daily physical-gold-bullion holdings data is exceedingly important for all gold investors and speculators. It effectively shows stock-market capital flows into and out of gold itself. When GLD’s holdings are rising, stock-market capital is migrating into gold. When they are falling, it is exiting out. And this week an extraordinary reversal happened likely heralding a major sea change in gold investment. This first chart looks at GLD’s gold-bullion holdings over the past year or so in blue, measured in metric tons. They are superimposed over the gold price rendered in red. Stock investors and speculators just flooded back into gold through incredible differential GLD-share buying in recent days. I’ve carefully studied and watched GLD’s holdings for over a decade now, and I’m just amazed by this serious buying. Continue Reading>>>

Sharing is caring!