Gold-ETF Selling Slows

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.

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.

At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can. We overcome popular greed and fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental, and fundamental research. That’s why all 1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0% annualized realized gains!

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Adam Hamilton, CPA

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