Big Gold Buying Coming by Adam Hamilton
Gold has hit the ground running in this young new year, a stark contrast to its brutal post-election selloff. Rather remarkably, these strong recent gains accrued despite literally zero buying from one of gold’s most-important constituencies. The American stock investors who almost single-handedly fueled gold’s strong bull market last year are still missing in action since the election. That means big gold buying is still coming.
All free-market prices, including gold’s, ultimately result from the balance between popular supply and demand. When supply outweighs demand as evidenced by investment-capital outflows, gold is forced lower. That’s exactly what happened after Trump’s surprise win in early November. When investors flee gold for any reason, including chasing record-high stock markets, the resulting oversupply really hits prices.
When the votes started to get tallied on Election Day’s evening, Trump pulled into a surprise lead in the biggest battleground state of Florida. Gold futures rocketed higher on that, soaring 4.8% to $1337 as the early results came in! But as the plummeting stock-market futures reversed sharply the next morning, that panic gold buying was quickly unwound. That kicked off investors’ subsequent mass exodus from gold.
Over the last decade or so, gold ETFs have grown to dominate gold investment. Their soaring popularity is the direct result of their unparalleled efficiency. There is no cheaper, quicker, or easier way for stock traders to move capital into this unique asset to gain gold portfolio exposure. So gold investment has increasingly shifted from the traditional holding of physical bars and coins to owning gold-ETF shares.
The 800-pound gorilla of the gold-ETF world has always been the American GLD SPDR Gold Shares. As of the end of Q3’16, the latest data available from the World Gold Council, GLD’s commanding lead among global gold ETFs is impregnable. GLD held 948.0 metric tons of gold bullion in trust for its shareholders, or a staggering 40.6% of the total holdings of the world’s top-ten physically-backed gold ETFs!
This dominance along with GLD’s extreme transparency make it the best proxy for investment-capital flows into and out of gold. Every single trading day, GLD’s managers release the total gold bullion this ETF is holding. This is done in extraordinary detail to placate anti-gold-ETF conspiracy theorists, down to the individual-gold-bar level including serial numbers and weights. This week’s list was 1305 pages long!
The day after the election, GLD’s physical gold-bullion holdings were running 955.0 tonnes. But as the stock markets soared in the post-election Trumphoria surrounding hopes of lowering taxes and slashing regulations, investors started to flee gold. Gold is a unique asset that often moves counter to stock markets, making it an anti-stock trade. Thus gold investment demand collapses when stocks trade near record highs.
Investors simply feel no need to prudently diversify their stock-heavy portfolios with gold when the stock markets seem to do nothing but rally. So after Trump’s win, stock investors soon began to dump GLD shares at far-faster rates than gold itself was being sold. This differential selling pressure forced GLD’s managers to sell physical gold bullion to raise the necessary cash to sop up the excess GLD-share supply.
As a tracking ETF, GLD’s mission is to mirror the gold price. But GLD shares have their own supply and demand totally independent from gold’s, so GLD-share prices are always on the verge of decoupling from gold. The only way to maintain tracking is to shunt excess GLD-share supply and demand directly into physical gold itself. So GLD effectively acts as a conduit for stock-market capital to slosh into and out of gold.
Stock investors jettisoned GLD shares so fast in mid-November that this ETF’s holdings fell sharply for 11 trading days in a row. Every day GLD-share selling outpaced gold selling, so every day this ETF had to buy back the excess shares to offset that heavy differential selling. The money came from selling gold bullion, resulting in daily draws in GLD’s holdings. That short span saw GLD’s holdings plunge by 7.3% or 70.0t!
While this extreme selling moderated in December, it still continued relentlessly. Gold was driven down to $1128 the day after the Fed hiked rates for the second time in 10.5 years. While that was expected, the Fed officials’ rate-hike projections for 2017 were more hawkish than expected. That happened to mark the very bottom for gold, yet the heavy GLD selling persisted. That day GLD’s holdings were at 842.3t.
As of the Wednesday data cutoff for this essay, gold has rebounded 5.6% since then. It has rallied back up to late-November levels. A strong bounce out of extreme bearishness was inevitable, as I wrote that very week. But what’s wildly unexpected is since gold bottomed GLD’s holdings have fallen another 4.4% or 37.3t to 805.0t. GLD still hasn’t seen a single holdings build since the day after the election!
So gold somehow managed to rally sharply in recent weeks without any capital inflows from American stock investors. They not only weren’t buying GLD shares, they continued to aggressively sell them as evidenced by a couple big GLD-holdings draw days so far in January. This situation is remarkable, as it implies the investment gold buying hasn’t even started yet. That means big gold buying is still coming.
Some perspective is necessary to understand the supreme importance of GLD capital flows for gold’s performance. This first chart looks at gold and GLD’s holdings over the entire lifespan of this pioneering gold ETF. After its November 2004 birth, every subsequent year shows what happened to both its gold-bullion holdings and the gold price. Stock-market-capital flows via GLD have long dominated gold’s fortunes.