Gold
investors have vanished, at least American stock-market ones!
Despite gold’s strong upleg since late September, identifiable
investment demand through major gold ETFs has been all but
nonexistent. That lack of investment-capital inflows has certainly
retarded gold’s secular bull. But with unsustainable unusual
factors driving this anomalous disconnect, gold investment demand
should start normalizing soon.
The
best-available global gold investment data is only published
quarterly by the World Gold Council in its fantastic Gold Demand
Trends reports. The latest covering Q2’23 was just released this
week, revealing anemic gold investment demand last quarter. The
WGC’s crack analysts reported that ran 256.1 metric tons, surging
19.8% year-over-year. But that is split into two subcategories,
physical bars and coins and ETFs.
Worldwide bar-and-coin demand in Q2 only climbed 6.2% YoY to
277.5t. That looked pretty weak during a quarter where gold prices
surged 5.6% YoY to a new all-time-record average high of
$1,978! Investors love chasing upside momentum, but oddly they’ve
largely ignored gold’s. From late September to early May gold’s
latest upleg powered a strong 26.3% higher to $2,050, challenging an
old record nominal high.
That
was early August 2020’s $2,062, yet investors still yawned. Global
gold-ETF investment demand was even poorer last quarter, with those
vehicles seeing 21.3t of draws. Declining bullion holdings mean
investors are pulling capital out of gold ETFs on balance,
differentially selling their shares compared to gold. The
comparable Q2’22 was worse, suffering 47.4t of gold-ETF draws.
Investors are apathetic on gold.
During the first half of 2022, gold slipped 1.3% yet total global
investment demand per the WGC weighed in at 772.2t. Gold fared far
better in H1’23, surging 5.2% which should’ve attracted in
momentum-chasing investors. Yet worldwide investment demand
still plunged 31.1% YoY to 532.0t! The WGC guys blamed this on
“an absence of positive catalysts, particularly in light of a
resilient US economy and strong equity markets.”
That
makes sense, as the benchmark US S&P 500 stock index has blasted
28.3% higher from its bear-market low in mid-October to late
July! It has recovered to within just 4.3% of early January 2022’s
all-time-record peak. That powerful stock bull was fueled by
March’s bank failures not spreading, then the
artificial-intelligence mania, and lately the looming end of the
Fed’s monster 525-basis-point rate-hike cycle.
When
stock markets are surging and greed running rampant, investors grow
increasingly complacent. They forget the wisdom of prudently
diversifying their stock-heavy portfolios with some counter-moving
gold. For centuries if not millennia, there was a universal
standard of allocating 5% to 10% of investment capital to gold. But
that has dwindled to effectively zero for American stock
investors according to one proxy!
The
giant American GLD SPDR Gold Shares and IAU iShares Gold Trust are
the world’s largest and dominant gold ETFs. Together at the end of
June they commanded a massive 1,370.6t of gold-bullion holdings.
That accounted for fully 40.0% of all the gold held by all
the world’s physically-backed gold ETFs! Third place is a UK gold
ETF merely weighing in at 7.0%, GLD and IAU are in a league of their
own.
Those GLD and IAU holdings exiting Q2 were worth $84.2b. That’s a
big number, but utterly minuscule compared to the collective market
capitalization of all elite S&P 500 stocks running $39,032.8b. That
implies American stock investors are running trivial gold
allocations around just 0.2%! They don’t want it in their
portfolios, gold has been left for dead. But abandoning this
ultimate portfolio diversifier is really irrational.
While the US stock markets have enjoyed a strong bull run, that has
left them in a really-risky place here. Stocks are dangerously
overvalued, with those S&P 500 companies exiting July averaging
trailing-twelve-month price-to-earnings ratios of 30.5x! That is
well into formal stock-bubble territory starting at 28x, or
twice the last century-and-a-half’s fair-value at 14x. Stocks are
super-expensive, especially market darlings.
The
poster child for this artificial-intelligence mania is graphics-chip
designer NVIDIA, certainly a great company. I’ve bought many NVIDIA
GPUs over the decades in work and gaming computers, they are awesome
products. Since those beefy processors are ideal for AI, NVDA stock
skyrocketed 323.0% from mid-October to mid-July! Yet that
incredible run dragged its TTM P/E up to an unsustainable and absurd
248.7x!
While extreme herd sentiment can temporarily disconnect stock prices
from underlying corporate profits, eventually valuations have to
reasonably reflect those actual fundamentals. At NVIDIA’s current
earnings levels, it would take investors about 250 years for
it to merely earn back the stock price they are paying! That’s
crazy, and all the most-popular mega-cap stocks are also now trading
at unsustainable bubble valuations.
Apple’s TTM P/E at the end of July ran 33.6x, Microsoft’s 37.1x,
Alphabet’s 30.5x, Amazon’s 318.6x, Tesla’s 87.5x, and Meta’s 42.7x.
These massive companies are now known as the Magnificent Seven
stocks, and account for 28.2% of the S&P 500’s entire market cap!
Together their weighted-average P/E is running a
ludicrously-extreme 93.8x earnings. Their lofty stock prices
are only supported by herd euphoria.
The
S&P 500 is seriously overbought too, stretching as high as 12.9%
above its baseline 200-day moving average in mid-July. That means a
sizable-to-large selloff is overdue to rebalance both technicals and
sentiment. It would have to total 11% just to return to that
200dma, and could snowball a heck of a lot larger given these insane
valuations. These lofty stock markets are an accident waiting to
happen way up here.
This
inevitable mean-reverting stock-market selloff arriving then
intensifying will help rekindle investors’ interest in gold. As the
S&P 500 drawdown passes 5% then 10% and almost certainly well
beyond, they will remember the wisdom of diversifying their
portfolios. Investors returning to gold will work wonders for this
upleg, fueling stronger upside momentum which other investors will
chase. It’s only a matter of time.
Interestingly GLD+IAU holdings have long proven the best daily
high-resolution proxy for that quarterly global gold
investment-demand data reported by the World Gold Council. This
chart superimposes them over gold prices and technicals over the
past several years or so. Note before late 2022, gold was highly
correlated with these major ETFs’ gold bullion. Now American stock
investors’ demand has completely decoupled!
Again gold powered 26.3% higher at best over 7.2 months into early
May, its biggest upleg by far in the last several years. Yet
incredibly GLD+IAU holdings actually fell 3.3% or 47.5 metric
tons over this span! Gold investors have vanished, at least the
American stock-market ones. That left all the heavy lifting that
fueled this strong gold upleg to speculators buying gold futures. I
last analyzed that in a
mid-June essay.
A
major gold upleg where dominant-gold-ETF holdings don’t materially
participate is unheard of! Gold’s previous much-smaller 18.9% upleg
crested in early March 2022, soon after Russian invaded Ukraine and
right before the Fed launched its monster rate-hike cycle. During
that exact span, GLD+IAU holdings enjoyed a 5.5% or 81.4t build.
Then gold plunged as the US dollar
soared parabolic
on those huge rate hikes.
From
early March to late September last year, the benchmark US Dollar
Index skyrocketed up 16.7% to hit an extreme 20.4-year secular
peak! That unleashed enormous gold-futures selling that
clobbered the yellow metal 20.9% lower. But that serious gold
selloff was exacerbated by American stock investors, who sold enough
GLD and IAU shares to force their holdings a big 9.0% or 140.9t
lower during that same span.
They
haven’t recovered since, first slumping to a deep 3.0-year low
last seen just emerging from March 2020’s brutal pandemic-lockdown
stock panic! Then investors nibbled some as gold’s upleg surged
again into early May, but that overall GLD+IAU build was small.
Even that fizzled and reversed as gold rolled over into a
healthy mid-upleg
pullback later in May and June. Investors really want nothing
to do with gold.
This
is an exceedingly-anomalous situation likely mostly driven by these
euphoric stock markets. Gold’s last comparable uplegs to today’s
both peaked in 2020, at gigantic 42.7% and 40.0% gains! American
stock investors flooding into GLD and IAU shares to chase gold’s
upside momentum were the main drivers. GLD+IAU holdings soared a
huge 30.4% or 314.2t in the former then 35.3% or 460.5t during the
latter!
Surging investment demand is normal
during major gold uplegs, fueling and accelerating them. Yet at
best in gold’s current strong upleg, GLD+IAU holdings merely climbed
a modest 4.3% or 58.2t between mid-March to late May! Gold
investors have vanished, they are missing in action. They have been
so darned distracted by this latest stock-market bubble that they’ve
mostly ignored gold’s excellent recent gains.
Can
this wildly-anomalous situation persist for long? Maybe these
euphoric bubble-valued stock markets can keep on powering higher
indefinitely. Maybe this AI mania hasn’t yet sucked in
all-available capital susceptible to the hype. Maybe NVIDIA can
shoot north of 300x earnings. Maybe the Magnificent Seven can see
their weighted-average TTM P/Es forge higher over 100x. But markets
truly abhor extremes.
Past
stock-market bubbles peaked right as everyone was totally convinced
valuations no longer mattered and those strong surges could continue
indefinitely. Sooner or later even the most-loved universally-held
market-darling stocks run out of new buyers, because everyone is
already all-in. That leaves only sellers, so euphoric stock markets
roll over into serious selloffs including 10%+ corrections and 20%+
new bears.
Often catalysts trigger these major trend reversals, and there are
plenty of potential ones out there even with this monster
Fed-rate-hike cycle ending. Its threat to corporate profits is
probably the most-ominous one. The Fed hiked an astounding 525
basis points off zero in just 16.3 months, leaving its
federal-funds rate way up at a 22.4-year high of 5.38%! That forced
all interest rates across the economy proportionally higher.
The
resulting far-higher debt-servicing costs are really cutting
into Americans’ purchasing power. People are also way less likely
to borrow more money to finance consumption, and that accounts for
over two-thirds of all US economic activity. On top of that, this
raging inflation unleashed by the Fed’s colossal
post-pandemic-stock-panic money printing is further eroding
Americans’ abilities to continue buying stuff.
Way
more income is being gobbled up by much-higher prices for life’s
necessities including food, shelter, energy, insurance, and medical
expenses. That leaves way less for discretionary purchases, which
are most of the products the big S&P 500 companies sell. When
people have to decide between buying new NVIDIA graphics cards or
Apple iPhones or keeping food on the table for their families,
there’s no contest.
Lower corporate sales as people are forced to pull in their horns
will disproportionally pinch corporate profits, leaving stocks
even more overvalued. That will be further exacerbated by the
US economy falling into a recession as these extreme Fed rate hikes’
impacts deepen. That was probably Fed officials’ goal all along,
force a recession to slow consumer demand in an attempt to reduce
inflationary price pressures.
Interestingly Fed staff economists recently predicted one starting
in Q4’23 into Q1’24. The minutes from the FOMC’s mid-June meeting
declared tightening “would lead to a mild recession starting later
this year”. “Real GDP was projected to decelerate in the current
quarter and the next one before declining modestly in both the
fourth quarter of this year and first quarter of next year.” Can a
stock bubble survive a recession?
Probably not. And once these dangerously-overvalued
seriously-overbought stock markets roll over long enough and far
enough to spook euphoric investors, their shadow eclipsing gold will
start passing. Gold stabilizes stock-heavy portfolios in major
selloffs after euphoric surges. From late November 2021 to
mid-October 2022, NVIDIA’s stock cratered 66.4%! The
high-fliers leading stock bubbles inevitably get crushed.
It’s
never easy being contrarian, betting against the thundering herd.
But market extremes never last long historically. Stock bubbles
inevitably pop, and anomalies like virtually-zero gold investment
reverse then mean revert then overshoot in the opposite direction.
These extreme stock markets are overdue to suffer a major selloff,
and gold is overdue to see investment capital inflows return to
chase its upside momentum.
The
American stock investors alone who deploy in gold via GLD and IAU
shares have massive room to buy. This week GLD+IAU holdings were
running at just 1,352.3 metric tons, not far above those recent
stock-panic-grade lows. In October 2020 soon after the last time
gold regained favor among investors, they hit 1,800.5t. That leaves
room for massive differential GLD-and-IAU-share buying
to the tune of a 450t build!
And
those capital inflows would still be quite conservative, as the
Fed’s balance sheet underlying the US money supply was considerably
smaller that last time GLD+IAU holdings hit 1,800t. And during the
year leading into that, monthly headline CPI inflation merely
averaged small 1.4% YoY increases. But in these last twelve months,
that has exploded to a scary +6.3% YoY average! This is a
far-better environment for gold.
It
has been the
ultimate inflation hedge for centuries, as the global mined gold
supply can only grow on the order of 1% annually due to natural
mining constraints. Yet the Fed’s balance sheet remains a
terrifying 98% above February 2020 levels prior to the extreme
money-printing binge since. There are now vastly more US dollars,
euros, yen, pounds, and other currencies available to chase
relatively much less gold!
All
investors need 5% to 10% portfolio allocations to gold, especially
during stock-market bubbles where gold is overlooked and out of
favor. Successful investing demands first buying low before later
selling high, not the other way around. The biggest beneficiaries
of the higher gold prices coming will be gold miners’ stocks. Their
earnings and thus eventually stock prices really amplify underlying
gold-price trends.
Despite this week’s irrational fear-driven gold-stock selloff, both
the miners and their metal remain in their upleg uptrends.
So this looks like a good opportunity to add beaten-down gold-stock
positions at bargain prices. We refilled our newsletter trading
books with 20 new trades in excellent smaller
mid-tier and
junior gold miners over several weeks into early July. They
should leverage gold’s gains much more than majors.
Successful trading demands always staying informed on markets, to
understand opportunities as they arise. We can help! For decades
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The
bottom line is gold investors have vanished, American stock
investors in particular. Enamored with this AI-mania stock bubble,
they’ve forgotten the timeless wisdom of prudently diversifying
their stock-heavy portfolios with gold. Thus gold’s latest strong
upleg has powered higher with very-little identifiable investment
buying. Without those essential capital inflows, it is nowhere near
as big as it should’ve been.
But
market extremes never last long, stock bubbles inevitably pop and
roll over into serious selloffs. This one will prove no different
given today’s crazy valuations. That mounting mean-reversion
downside will dispel investors’ myopia in overlooking gold.
Investment capital inflows will return as some investors start
rebuilding gold allocations from virtually nothing. That will
accelerate gold’s strong upleg to new record highs. |