The flagship GLD gold ETF
has suffered a radically unprecedented mass exodus this year.The
capital fleeing this single vehicle was the primary reason gold plunged so
dramatically in 2013's first half.But just this
week, money started flowing back into GLD for the first time in months.This likely marks the dawn of the GLD exodus's
reversal, which is wildly bullish for gold.Falling
stock markets will play a critical role.
The GLD gold ETF is now formally called SPDR Gold Shares.Rising from modest beginnings nearly 9 years ago,
it has grown into a dominant force in the global gold markets.This
is because GLD acts as a conduit for the vast pools of US stock-market
capital to easily and quickly flow into and out of gold bullion.These
capital flows can greatly affect overall gold demand over short periods of
time, buffeting gold's price.
If GLD operated like a
closed-end mutual fund, issuing a fixed number of shares one time at its IPO,
this wouldn't be the case.GLD would have zero
impact on the gold price after its initial bullion purchase.But
GLD isn't structured this way, its primary mission is to track the gold price.And
there is only one way to accomplish this.Both
excess supply and demand of GLD shares have to be directly shunted
into gold.
When stock traders get
excited about gold, they buy GLD shares at a faster rate than gold itself is
being bought.Thus GLD's price rises faster than
gold's, and it threatens to decouple to the upside and fail its mission.In order to prevent this and bring GLD's price
back in line with gold's, this ETF's custodians have no choice but to meet
this excess share demand.So they sell new GLD
shares into the market.
Selling new GLD shares
naturally raises cash.And the GLD custodians
immediately plow these new funds into physical gold bullion held in trust for
its shareholders in its London vaults.This process
effectively shunts excess GLD share demand into gold itself, amplifying the
underlying gold rally.So when stock traders are
exerting differential buying pressure on GLD shares, it is very bullish for
gold.
Ever since a gold ETF was
conceptualized years before GLD was actually launched, both
its advocates and opponents knew this tracking mission was a double-edged sword.Stock traders wouldn't always buy ETF shares faster
than gold itself was being bought.GLD would also
face differential selling pressure from time to time, when its shares
were being dumped faster than gold itself was being sold.
This reverses the
bullion-holding process, pulling stock-market capital out of gold or
effectively shunting stock-market GLD selling into gold.When
traders sell GLD faster than gold is being sold, there is excess supply of
GLD shares.So its price threatens to decouple to
the downside and fail its tracking mission.In order
to avert this, GLD's custodians have to quickly absorb any excess supply of
GLD shares offered.
They raise the cash to
buy back these shares by selling some of the gold bullion out of their vaults.This of course increases the selling pressure on
gold itself.So just like GLD differential buying
pressure can amplify gold uplegs, GLD differential
selling pressure can amplify gold corrections.Thankfully
for gold bulls, we didn't have to contend with a massive differential GLD
selloff until this year.Boy was it miserable!
This first chart looks at
the total GLD bullion holdings in metric tons superimposed over the gold price.GLD has always been extraordinarily transparent, publishing
its total bullion holdings daily right down to the long list of
serial-numbered individual gold bars.GLD's holdings offer a fantastic window into
stock-trader gold sentiment, showing when American stock-market capital is
flowing into or out of gold.
For fully 8 years
after its inception, which conspiracy theorists went apoplectic over, GLD was
hugely beneficial for the secular gold bull.Stock-market
investors and speculators alike bought GLD shares faster than gold was being
bought, their capital literally flowing into this ETF's underlying gold
bullion as its custodians kept issuing new shares to maintain price tracking.GLD has been a great boon for gold!
In any bull market, its
existing investors want as much capital as possible to flow in and drive up
the asset prices they are betting on. The more the merrier, the more traders
are bidding on an asset the higher its price ultimately goes.GLD
provided a wonderfully easy and efficient (very low transaction costs) way
for stock-market investors and speculators to participate in the secular gold
bull.And participate they did.
There were naturally
bouts of differential GLD selling pressure from time to time, as sentiment
perpetually flows and ebbs.Sometimes stock traders
waxed bearish on gold and sold their GLD shares faster than the metal itself
was being sold.So GLD's holdings dropped as its
custodians sold gold bullion to absorb this excess supply of shares.For lack of a better term, I call these episodes
GLD holdings corrections.
And for the most part
they were relatively mild.All of these significant
GLD holdings corrections of its entire lifespan are noted in the chart above.The blue number shows the percentage drop of GLD's
holdings, the yellow number the tonnage drop, the red number what gold prices
did over that span, and the white number how long each correction took in months.GLD holdings actually proved quite
"sticky".
This ETF would see big
differential buying pressure in gold uplegs,
forcing its custodians to shunt this new stock-trader capital directly into
gold bullion.But then when the inevitable gold
corrections arrived, the differential selling of GLD shares was relatively minor.Typical GLD holdings corrections ran from 4% to 7%
of its holdings, and the absolute amounts of gold bullion sold weren't too
great for the markets to absorb.
There were occasional
exceptions of course.The biggest were during 2008's
once-in-a-lifetime stock panic, which also crushed
gold through unprecedented US-dollar safe-haven buying.GLD's holdings plunged two separate
times, by 12.6% and 13.0%.And gold took big hits over these spans, down 13.3%
and 22.0%.This was partially because 83.4t and 91.6t of GLD's bullion was
sold back into the gold markets.
But both GLD's holdings
and the gold price quickly recovered from the stock-panic carnage in early
2009, when major hedge funds flooded into this ETF to take massive
stakes in gold.There was one more large GLD
holdings correction starting in mid-2010, and it saw enough differential
selling pressure to force GLD's custodians to dump 9.8% of their bullion or
129.1t.That was the most gold it had ever had to sell.
But provocatively gold's
price actually surged 20.6% higher over this record period of heavy GLD-share
differential selling pressure!Why?Time.That
biggest absolute decline in GLD's bullion held in trust for shareholders to
that point took 10.6 months to unfold.So there was
plenty of time for GLD's bullion sales to be absorbed by normal gold-market
demand elsewhere.The duration of holdings
corrections is critical.
GLD's holdings reached an
initial record high of 1320.4 metric tons of gold bullion in June 2010.Around
that time, I was very blessed to enjoy a private lunch with GLD's primary architect.He was rightfully quite proud that his baby had
facilitated way over 1000t of gold investment demand that likely wouldn't
have existed without GLD.Large stock traders
are just not interested in traditional gold-coin investing.
It is too inefficient,
with transaction costs in terms of both time and money way too high.A hedge fund that wants sizable gold-market exposure
is not going to visit 100+ coin stores to find enough gold bullion to
purchase, and then pay enormous premiums of 5%+.GLD revolutionized gold
investing for stock traders.There is no doubt the
vast majority of stock-market gold investment wouldn't have happened without
it.
After the summer of 2010,
GLD's holdings consolidated high for the next couple of years with
gold prices.There were some periodic draws, but
these holdings corrections were minor.Finally in
September 2012 (QE3's launch), GLD's holdings started marching
up to new record highs again.By early December last
year, merely a little over 8 months ago, they had climbed to a new all-time
record high of 1353.3 tonnes.
Now on that very day, the
gold price was still down 10.1% fully 15.6 months after its August 2011
secular-bull-to-date high.At worst in gold's
massive correction out of very-overbought conditions, gold had fallen 18.8% by May
2012.Yet GLD's holdings remained high and stable throughout all of
this gold carnage.GLD looked to be held by strong
hands, long-term investors who understood gold's bullish fundamentals.
There are some analysts
today who claim the GLD liquidation experienced in 2013 was predictable.I call total bullshit on that.Up
until February 2013, for GLD's entire existence it had never witnessed
any bouts of serious and sustained differential selling pressure other than
2008's stock panic.And GLD's holdings recovered
soon after that crazy event on strong differential buying.What
2013 saw was impossible to foretell.
The tenth major holdings
correction of GLD's life slowly began in late December, and snowballed from there.In the 8 months since, its holdings have plunged by
32.8%!Even during the stock panic, the most
frightening market event most of us alive today will ever witness, GLD's
holdings only fell by about 1/8th.Yet this year, it has shed an astounding 1/3rd
of its total gold bullion.This is a staggering
444.0 metric tons!
In absolute terms, this
was over 3.4x as much bullion as GLD's custodians were forced to sell in its
previous biggest correction!It
was 5.3x and 4.8x as big as the pair of stock-panic holdings corrections.According to the World Gold Council, total
global gold investment demand in 2012 was 1525.8t.So seeing enough
differential selling pressure to force GLD's custodians to dump 29% of that
was crazy.
This radically
unprecedented mass exodus from GLD shares was beyond imagination, so far
outside the realms of precedent set in the 8 years of trading before it.I defy anyone to find a reputable gold analyst (not a
broken-record perma-bear) that was on the record
forecasting such an extreme event back in late 2012.GLD had never
experienced anything remotely like this epic 2013 holdings correction before.
So what the heck drove it?I am all but certain the
answer is the levitating US stock markets.As far back as February, I was
observing and writing about the new and incredibly high
inverse correlation between the gold price and the mighty S&P 500
benchmark stock index (SPX).The levitating stock markets seduced traders into
believing gold was dead and general stocks would rise forever, so they dumped
GLD.
This next chart digs into
this thesis, and is pretty compelling.It looks at
GLD's holdings over the past year superimposed on the SPX.GLD's draws
(differential selling pressure) generally accelerated when the SPX was
strong, and then moderated when it was weak.If this
causal chain is indeed correct, the long-overdue stock-market selloff is likely to reverse capital
flows back into GLD.This
is wildly bullish for gold!
Late last year, the gold
market and GLD demand were operating normally based on many years of
secular-bull precedent.Despite the stock markets
being high in their nearly-4-year-old mid-secular-bear cyclical bull, capital was gradually
flowing into gold.Stock traders were steadily
buying GLD, driving its holdings up to a new record high in early December.But then an extraordinary series of events came
to pass.
The SPX had stalled out
in early April 2012, ready to roll over into its overdue cyclical bear.For over 5 months the SPX
couldn't manage to claw its way to a single new cyclical-bull high, until September
when first the ECB launched its own QE and then the Fed birthed its
unprecedented open-ended third debt-monetization campaign.The
Fed went on to expand QE3 in mid-December to include US Treasury buying.
Stock traders saw the Fed
single-handedly reignite the tired cyclical bull, and knew Bernanke had their
backs.The brutal fiscal-cliff tax hikes looming
scared traders in late 2012, but when a deal was struck to avert the worst of
them they started buying stocks.The SPX began levitating
to a long series of new cyclical-bull highs in January.As
bullishness ballooned, GLD owners started gradually selling to move capital
into stocks.
This additional bullion
selling began to weigh on gold, and it suffered a capitulation in February.Even
then it was readily apparent the levitating SPX was a major factor, as I
wrote at the time.That further spooked GLD
shareholders, who ended up selling so much faster than gold was falling that
this ETF had to liquidate 5.5% of its gold bullion (73.6t) in February alone
just to buy back all the excess shares offered.
Though gold prices
stabilized in March, averaging $1593, the differential GLD selling continued.Why?The SPX continued to surge dramatically.Gold is and always has been an alternative
investment, so when conventional general stocks are thriving interest wanes.Day after day on CNBC and the rest of the financial
media, the levitating stocks were euphorically extolled while gold was
increasingly ridiculed.
Still, GLD's holdings
only fell by 2.6% or 33.2t in March as sentiment steadied.But
gold started to fall again in early April, partially on GLD selling.Soon it broke below its critical multi-year
support at $1550, spawning an ultra-rare forced liquidation of long futures contracts.This triggered the sharpest gold plunge of our
lifetimes, it looked like a gold panic.While GLD selling didn't drive this, it
accelerated dramatically afterwards.
As GLD shareholders including
elite hedge funds dumped it aggressively after that catastrophic 13.8%
2-day gold plunge, the SPX soon started surging again.Ironically
it had pulled back briefly on the fear that plummeting gold had wider
implications. The SPX surged dramatically in April to even more new
cyclical-bull highs, and GLD ultimately suffered an outlying-record 11.7%
draw that month of a staggering 142.7t!
As the SPX inexplicably
continued levitating in May on pure euphoria, hitting 11 new record closes in
14 trading days, the differential GLD selling pressure continued.Everyone
thought gold was dead, the cool place to be was general stocks.These
big GLD draws didn't slow until late May when the SPX finally started
pulling back on a Fed QE3-tapering scare.Look
what happened to GLD draws during that pullback.
I shaded SPX pullbacks in
red above.The differential GLD selling pressure
slowed dramatically as the general stock markets retreated.The
capital rotation out of GLD shares into general stocks stalled when the SPX
started falling.It didn't start again in earnest
until a third day of gold-futures forced liquidations was spawned by more Ben
Bernanke QE3-tapering comments.That reignited festering
gold fears.
Soon after that, the SPX
started surging again in July despite a mediocre-at-best Q2 earnings season.As the SPX climbed to new nominal record highs, the differential GLD selling
pressure continued.Despite rampant general-stock
euphoria though, the rate of GLD selling was slowing.I
suspect most of the weak hands had already sold.A
larger fraction of the remaining GLD owners are likely strong-handed
investors.
Remember how sticky GLD's
holdings were in the 8 years before 2013?Long-term
investors, predominately institutions, were using this ETF for essential portfolio
diversification into gold.They had no reason to
sell the metal, and ignored its periodic corrections.Odds
are very high that the great majority of GLD's shareholders today fit that
normal profile, that the hot money has already been squeezed out.
Then as the SPX started
selling off again a couple weeks ago, the GLD draws again slowed and then
stopped entirely.We
are seeing the same phenomenon that happened during the SPX's last pullback.The capital rotation out of GLD shares into
general stocks looks far less attractive when the stock markets aren't
levitating day after day after day.2013's GLD mass exodus was driven by
levitating stock markets!
So when the SPX
inevitably reverses, which it is again way overdue for, odds are the capital flows out of GLD into
general stocks will also reverse.Add on all the other near-term bullish gold
drivers like its emerging futures-driven short squeeze, and rallying gold prices are going to look
far more attractive than falling stock prices.And
indeed we are already starting to see GLD differential buying pressure
reemerge!
Both last Friday and this
Wednesday, GLD experienced enough differential buying pressure to necessitate
builds of 0.2% each day.These are modest, but they
are still noteworthy.It is actually the first time
in all of 2013 (actually since this massive holdings correction started in
early December) that GLD has enjoyed two builds in less than a single week.The GLD exodus reversal looks to be starting!
As of the GLD holdings
low the day before that first recent build, 2013 had seen 152 trading days.In a whopping 99 of these, nearly 2/3rds of all of
them this year, GLD suffered draws.It had only seen
7 days with enough differential buying pressure to drive holdings builds in
all of 2013 to that point!So
to see a cluster in the past week is a major change.I suspect the reversal has begun
and will soon accelerate.
If you are interested in
precious metals at all, you have to stay abreast of these GLD developments.If the radically unprecedented GLD bullion
selloffs that crushed gold in the first half of this year turn into GLD
buying, the entire precious-metals complex is going to rocket higher.Just this week much new data came out illuminating
the GLD holdings correction during Q2 and how it affected global gold demand.
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The bottom line is the incredible
differential selling pressure GLD suffered in 2013 was radically unprecedented.Nothing even remotely close had ever
happened before, its holdings were actually very sticky before this anomaly.It was spawned by the surreal stock-market
levitation, which seduced capital out of GLD to chase general stocks.Whenever the SPX weakens, this capital rotation
slows dramatically.
With the SPX starting to sell off
again, GLD is already seeing signs of a nascent reversal.As
gold climbs for other reasons and general stocks fall, capital is going to
come flooding back into GLD.This differential
buying pressure will be shunted into underlying gold bullion, amplifying
gold's upleg.Stock traders still need to buy back
437.6t worth of GLD shares to unwind 2013's anomaly, which is wildly bullish
for gold!
Adam Hamilton
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