Gold Investment Strong
Adam Hamilton June 12, 2020 2677 Words
Gold investment demand remains strong, buoying the yellow metal and its minersí stocks. Investors have continued actively diversifying into gold despite soaring stock markets and weaker summer seasonals. The Fedís extreme money printing fueling these precarious stock-market heights is perilously inflationary, making upping gold portfolio allocations essential. This ongoing capital shift is likely to keep pushing gold higher.
The dominant driver of goldís major price trends is investment demand. While it isnít the largest demand category, it varies greatly depending on global-financial-market conditions. The best global gold supply-and-demand data is only published quarterly by the venerable World Gold Council, in its must-read Gold Demand Trends reports. They highlight the big volatility inherent in gold investment demand in recent years.
From 2015 to 2019, jewelry demand averaged 51.2% of overall gold demand. But the biggest jewelry year out of the last 5 was only 1.2x the smallest one in tonnage-demand terms. Investment demand only averaged 29.0% of overall gold demand in 2015 to 2019, yet the difference between the best and worst years in this span was 1.7x. The WGCís latest GDT on Q1í20 again proved how important investment is.
Last quarter was extremely volatile for gold since it got sucked into mid-Marchís stock-panic capitulation. But even after that roller-coaster ride, gold still managed a 4.0% gain in Q1. Global gold demand per the WGC only edged up 1.2% year-over-year to 1083.8 metric tons. That was despite jewelry demand plummeting 38.9% YoY to 325.8t, as the worldís largest market China was mostly locked down for COVID-19!
Goldís largest demand category cratering wouldíve gutted its price if investment demand hadnít soared 79.6% YoY to 539.6t. The 239.1t more gold investors bought in Q1í20 compared to Q1í19 more than offset the 207.6t collapse in jewelry. And investors werenít buying traditional bars and coins, with their demand drooping 6.2% YoY. All goldís investment-capital inflows in Q1 came in gold exchange-traded funds.
Physically-backed gold ETFs tracking prevailing gold prices trade in major stock markets around the world. When stock investors buy gold-ETF shares faster than gold itself is being bought, their share prices will decouple from gold to the upside failing their tracking mission. To prevent that, ETF managers must shunt excess gold-ETF-share demand directly into physical gold bullion itself to equalize capital flows.
They do this daily by issuing enough new gold-ETF-shares to absorb any differential demand. Then they use the resulting proceeds to buy more physical gold bullion for their funds. So when gold-ETF holdings are rising, it reveals stock-market capital is flowing into gold. Global ETF gold demand skyrocketed an enormous 594.5% YoY in Q1í20 to 298.0t! Thatís the only reason gold prices have surged instead of collapsed.
With ETFs increasingly dominating the world gold market, every quarter the WGC ranks the physically-backed ones. The two largest by far are the American GLD SPDR Gold Shares and the IAU iShares Gold Trust. At the end of Q1, their total gold bullion held in trust for shareholders represented 30.4% and 12.3% of all the gold held by all the worldís gold ETFs! The next-largest German competitor was just 6.6%.
Launched way back in November 2004 by the World Gold Council, GLD has maintained a strong first-mover advantage ever since. Iíve been analyzing its daily-reported holdings for years, as GLD capital flows alone have often driven nearly all of goldís price moves in volatile quarters. While IAU only came a bit later in January 2005, it has always struggled under GLDís shadow. Thatís despite a major advantage.
GLDís managers charge 0.40% of their ETFís total holdings each year to pay all the expenses necessary to keep GLD running. IAUís expense ratio is considerably smaller at 0.25%, which is a big difference for institutional money managers deploying billions. That, along with IAUís total gold bullion running about 4/10ths of GLDís, is contributing to faster growth in this upstart competitor. IAU could eventually catch GLD.
So analysis of the huge American stock-market capital flows into and out of gold ideally would include GLDís holdings plus IAUís. Unfortunately I donít have IAUís full daily holdings history since January 2005, which Iíve been searching for. Iím offering a free one-year subscription to our weekly newsletter, worth $679, to the first person who provides me that verified full dataset. IAUís holdings are getting increasingly important.
But for now GLDís physical-gold-bullion holdings still remain the best-available daily proxy for global gold investment demand. This chart superimposes them over gold prices during this secular bull. Note that major gold uplegs and corrections are generally highly correlated with American stock-investor capital flowing into and out of GLD shares. Gold investment has proven very strong since Marchís crazy stock panic.
Gold investment demand was solid early this year before that stock panic. It first flared on geopolitical fears over the US-Iran conflict briefly going kinetic in early January, and later on the mounting COVID-19 worries and resulting stock-market selling. By March 9th, GLDís holdings had climbed 7.9% or 70.5t year-to-date. That helped push gold 10.4% higher before the stock panicís fear maelstrom sucked in everything.
Nothing scares investors more than stock panics, which are technically 20%+ collapses in leading stock benchmarks in 2 weeks or less. They so greatly terrify traders that they rush to sell everything to flee to cash, even gold. During the previous October 2008 stock panic, gold plunged 16.7% over 21 trading days when the flagship US S&P 500 stock index (SPX) plummeted 30.0%! Gold isnít immune to extreme fear.
As the SPX started sliding in late February 2020, gold initially enjoyed safe-haven buying. From the day the SPX peaked at an all-time high until March 9th, gold rallied 4.0% to $1675 despite the SPX plunging 18.9%. But once that stock-panic threshold was crossed, the gold baby was thrown out with the stock bathwater. Over the next 8 trading days as the SPX plunged another 12.3%, gold dropped 12.1% in sympathy.
A major driver of that was American stock investors fleeing GLD shares. In roughly that same span, they dumped GLD much faster than gold was being sold. That forced a 5.8% or 55.6t holdings draw, which of course amplifies goldís stock-panic selloff. Gold-ETF managers have to sop up excess supply by buying back ETF shares, and they raise the proceeds to finance this by selling off some of their physical gold bullion.
But just two trading days after gold bottomed in mid-March when its sharp V-bounce started becoming apparent, traders flocked back to GLD. Theyíve been aggressively deploying capital in gold through this leading and dominant gold ETF ever since. As this chart shows, GLDís holdings have rocketed vertically since goldís stock-panic lows. Thatís similar to what transpired after that last stock panic in October 2008.
In early April soon after this latest government-economic-lockdown stock panic, I wrote about the soaring gold investment demand. I included a chart showing what happened to gold prices and GLDís holdings after goldís previous late-2008 stock-panic nadir. Over the following 2.8 years, gold blasted 166.5% higher fueled by a massive 71.5% or 535.5t GLD-holdings build! Stock panics stoke gold investment for years.
So American stock traders flooding into gold again after March 2020ís panic shouldnít be surprising. Since its March 19th stock-panic low of $1472, gold has already surged 18.7% higher at best by its latest interim high of $1748 on May 20th. GLDís major 20.6% or 190.1t holdings build during that span is the main reason why! The WGCís next GDT on goldís Q2í20 fundamentals will likely reveal continuing ETF dominance.
And American stock investors didnít stop buying GLD shares when gold stalled last month for a healthy high consolidation since. Their differential GLD-share buying persisted into early June, which is usually a weak time seasonally for gold investment demand. Between March 20th to June 3rd, GLDís holdings rocketed up 24.8% or 225.2t! Thatís already over triple this ETFís entire holdings build during all of Q1.
And this gold investment demand has been very consistent. In that 51-trading-day span, GLD enjoyed fully 36 holdings-build days averaging 0.6% each. Thatís getting to sizable, on the way to 1.0%+ which I consider large for any given trading day. And there were only 4 holdings-draw days averaging trivial 0.1% declines. Gold investment buying has not only been strong, but persistent in the wake of this stock panic.
The crushing wealth declines in stock panics are devastating psychologically, scarring investors for years after those extraordinary events. They shock investors into remembering prudent portfolio diversification is wise, that being all-in stocks is way too risky. Gold plays a critical role in diversifying since it is a rare asset not highly correlated with stock markets. Gold tends to rally when stocks weaken or are expected to.
So for decades now Iíve argued that every investor always needs a 10%-to-20% gold allocation in their portfolios! It acts like insurance, stabilizing wealth by offsetting losses during stock bears or other major selloffs. And thereís no greater wake-up call to the inherent riskiness of stock markets than panic-grade plummetings. Investors tend to return to gold for years after stock panics rapidly decimate their wealth.
From February 19th to March 23rd, the SPX cratered 33.9%! Investors wonít soon forget forfeiting over a third of their wealth in just over a month. And American stock investors held virtually no gold before that brutal psychological shock. An excellent gold-investment-level proxy is the ratio between the total value of GLDís holdings to the collective market capitalizations of the 500 elite stocks of that flagship S&P 500 index.
As the SPX reached its last all-time-record high in mid-February before the stock panic, GLDís holdings were only worth 0.16% of the SPX companies! That implies American stock investors were running gold exposure around 1/6th of one percent. While this particular ratio will never get up to 10% or 20%, it sure reveals the radical underinvestment in gold. It will take huge sustained buying to even reach 1%, 2%, or 3%.
Since those stock-panic lows the SPX has skyrocketed 44.5% higher at best as of this week, which is just 4.5% under mid-Februaryís record peak. Yet gold investment demand remained strong even during this huge rebound rally, which is acting exactly like a monster bear-market rally. The driver fueling this gigantic surge is a major reason investors are still flocking to gold despite the stock euphoria, epic Fed money printing.
Federal Reserve officials panicked in mid-March as the stock markets plummeted. They feared the powerful negative wealth effect from cratering markets would plunge the US into a full-on depression. Thus they frantically unleashed a radically-unprecedented deluge of freshly-conjured money. From mid-March to early June, the Fedís balance sheet skyrocketed an insane 66.2% or $2,853.3b higher in just 12 weeks!
This is far beyond anything ever witnessed in US history, as close to hyper-inflation as the Fed has ever dared get. This vast flood of new fiat dollars is being directly injected into the US economy via the huge stimulus bills Congress passed. The original CARES Act alone that became law in late March weighed in at $2,125b! This flood of money is competing for shrinking pools of goods and services, bidding up prices.
Even if the stock panic hadnít happened, thereís probably never been a more important time to invest in gold than when the Fedís printing presses are spinning out of control. 2/3rds more dollars evoked out of thin air in just 2.8 months are going to have a colossal inflationary impact in coming years. That mind-boggling and exceedingly-risky monetary inflation is a major driver behind investors shifting into gold.
So gold investment demand is likely to remain strong on balance even during goldís summer doldrums, normally the weakest time of the year for gold demand. Gold tends to drift in Junes, Julies, and Augusts as they usually donít have sufficient catalysts to drive outsized demand. But boy summer 2020 is sure a huge exception to that rule! Gold investment was strong last summer too after goldís bull-market breakout.
In late June 2019, gold finally achieved its first new bull-market high in several years. That drummed up investor interest, resulting in gold surging 16.7% between the ends of May and August. Like usual that was fueled by big capital inflows into GLDís shares, this ETF enjoyed a big 18.2% or 135.1t holdings build last summer! That again showed gold investment demand can be strong in summers with a solid catalyst.
Given the COVID-19 stock panicís devastating psychological impact, the resulting far-beyond-extreme record Fed money printing, and the strong momentum in gold and gold investment, odds are this summer will again buck the normal weak seasonals. And if these Fed-goosed stock markets roll over hard as they ought to given the horrendous economic data and corporate earnings, gold will quickly grow way more popular.
Interestingly the main beneficiary of gold investment demand isnít the metal itself, but the stocks of its miners. Just last week I wrote an essay explaining how their post-stock-panic upleg was still healthy, which traders were increasingly doubting due to a correction-grade selloff. Gold stocks have bounced back sharply since, as is evident in their leading GDX VanEck Vectors Gold Miners ETF in this updated chart.
While gold has rallied 18.7% at best out of its deep stock-panic lows, the major gold stocks have dwarfed that. At best GDX skyrocketed 95.8% higher from mid-March to mid-May! That makes for awesome 5.1x upside leverage to gold. And as I explained in my essay last week, the gold stocks still have lots of room to run technically and fundamentally. Fully 2/3rds of that big post-panic upleg was just a mean-reversion rebound.
While gold stocks bear too many additional risks to usurp goldís ultimate-portfolio-diversifier crown, they are great to own when gold is powering higher on strong investment demand. The major gold stocks of GDX more than quadrupled after that last stock panic in late 2008, soaring 307.0% higher over the next 2.9 years. So if you expect strong gold investment demand to continue in coming years, own gold stocks!
Gold and its miners also power higher during stock-market bears when everything else is burning. Gold stocks arenít a replacement for prudently maintaining that 10%-to-20% gold portfolio allocation. But they are a great place to park additional capital during extended episodes of weakening stock markets. The major gold stocks tend to amplify goldís upside by 2x to 3x, building wealth instead of just preserving it in cash.
At Zeal we started aggressively buying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows. Weíve been layering into new positions ever since, with unrealized gains already growing huge. Today our trading books are full of these fundamentally-thriving gold and silver miners that arenít done running yet.
To profitably trade high-potential gold stocks, you need to stay informed about the broader market cycles that drive gold. Our newsletters are a great way, easy to read and affordable. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain whatís going on in the markets, why, and how to trade them with specific stocks. Subscribe today and take advantage of our 20%-off sale! Seize this gold-stock consolidation to mirror our many winning trades before this major upleg runs again.
The bottom line is gold investment demand remains strong. Ever since the stock panic, American stock investors have continued shifting capital into GLD shares on balance. GLDís holdings have long proven the best daily proxy for global gold investment demand. Investors are returning to gold with a vengeance after Marchís stock panic violently reminded them that stock-market cycles still exist despite Fed money printing.
And that has gone ballistic since the stock panic, with the panicking Fed ramping dollar supplies by 2/3rds in a few months! This biggest and most-extreme monetary inflation in US history by far makes investing in gold more essential than ever. So gold investment demand is likely to remain strong in coming months, and soar as these lofty Fed-goosed stock markets roll over. That portends massive additional gold-stock gains.
Adam Hamilton, CPA June 12, 2020 Subscribe at www.zealllc.com/subscribe.htm