The mighty GLD gold ETF’s bullion holdings have remained stable in 2014, an impressive feat. Last year they suffered an epic outlying record plummet as the Fed’s stock-market levitation sucked capital out of alternative investments. This year’s resiliency in the face of the ongoing stock-market melt-up almost certainly means the bottom is in. GLD’s holdings are set to surge as weaker stock markets entice traders back.
The SPDR Gold Shares gold ETF, GLD, is a juggernaut in the gold realm. Now approaching its tenth birthday, it has grown into the world’s flagship and massively-dominant gold ETF. GLD’s impact on the global gold price can be so supreme and overpowering at times that all precious-metals investors and speculators simply have to follow it. Last year was a key case in point, where GLD trading controlled gold.
According to the World Gold Council’s latest estimate, global gold demand fell 514.7 metric tons in 2013, or 11.2%. That was enough to blast gold down 27.9% to its worst annual performance in nearly a third of a century. The problem wasn’t traditional bar-and-coin investment, which soared 31.1% higher last year to 1780.6t. Gold plunged solely because global ETF demand plummeted to negative 879.8t in 2013.
There were gargantuan liquidations of gold-ETF shares worldwide, as traders abandoned gold to chase levitating global stock markets spawned by the Fed’s implied backstopping of US equities. So American traders dumped GLD shares at a staggering pace, forcing its holdings down a radically-unprecedented 552.6t or 40.9% last year! This GLD bullion dumping alone exceeded the global drop in gold demand!
The dominant story of 2013’s downside gold anomaly was extreme gold-ETF-share differential selling, forcing their custodians to spew gold bullion faster than it could be absorbed elsewhere. And over 5/8ths of that total worldwide supply deluge came from GLD alone! There is zero doubt that without the extreme GLD-share selling, gold wouldn’t have plummeted last year. In fact, it almost certainly would have rallied.
GLD has grown so important for global gold prices because it acts as a conduit for the vast pools of US stock-market capital to slosh into and out of gold bullion. GLD tracks the gold price, so traders buy it for instant and cheap gold-price exposure. This flagship gold ETF is the easiest and most-efficient (lowest-cost) way to trade gold. But GLD-share supply and demand rarely match gold’s own supply and demand.
So in order to keep GLD tightly tracking gold, its custodians have to equalize excess GLD-share supply and demand directly into the global physical gold market. When GLD shares are being bought at a faster rate than gold itself is being bid higher, GLD threatens to decouple from gold to the upside. So its custodians issue new shares to offset the excess demand, and use the proceeds to buy more gold bullion.
But this capital link between the stock markets and gold works both ways. When American traders sell GLD shares faster than gold is being sold, like in 2013, this ETF’s price will soon break away to the downside and fail its tracking mission. So GLD’s custodians have to absorb that excess supply to keep GLD mirroring gold. They buy back all excess shares offered, raising the necessary cash by selling gold bullion.
Thus GLD’s gold-bullion holdings, which are published daily in great detail down to individual gold-bar serial numbers and weights, reveal whether stock-market capital is flowing into or out of gold bullion via this ETF. When they rise, stock capital is flowing into gold. When they fall, it is flowing out. And 2013’s extreme outflows have long since vanished, despite serious headwinds still battering gold this year.
This first chart superimposes GLD’s daily holdings in metric tons over the benchmark US S&P 500 stock index (SPX) over the past year-and-a-half or so of the Fed’s surreal levitation. After plummeting last year and crushing gold, this dominant ETF’s gold bullion held in trust for its shareholders has remained stable for all of 2014 so far. This is a very bullish portent for gold heading into its new strong season.
This chart is the key to understanding why gold plummeted in 2013. American stock traders dumped GLD shares at such extreme rates that this ETF’s custodians had to liquidate vast amounts of physical gold bullion to raise the cash to buy back the deluge of excess GLD-share supply offered. Once again this gold that GLD alone was forced to sell exceeded last year’s total drop in worldwide gold demand!
The monthly draws in GLD’s holdings are noted above, and they were relentless and sometimes utterly enormous. April 2013, when gold plummeted in an ultra-rare panic-like event, was the pinnacle. GLD shed over 1/9th of its entire gold-bullion holdings that month alone to absorb the extreme differential GLD-share selling! That was flanked by other monthly draws that were GLD’s next largest ever witnessed.
The drivers of this epic outlying record GLD-share selling are very important to understand, and have major ramifications going forward. Of course GLD was being abandoned because the gold price was falling so precipitously, which created a brutal negative feedback loop. The lower gold went, the more stock traders fled GLD, and the more the resulting ETF gold-bullion selling hammered gold even lower.
But this powerful urge to escape from gold’s downward spiral was alternately accelerated and retarded by the performance of the US stock markets. When the SPX was strong, GLD was dumped at faster rates as traders chased the flying stocks. Their euphoria temporarily blinded them to the ages-old wisdom of prudent portfolio diversification, a role that gold has always proved exceptionally effective at.
But when the SPX was weak, the rate of differential GLD-share selling slowed greatly, stopped, or even reversed! That’s when American stock traders briefly remembered how foolish it is to put all their eggs in one general-stocks basket. The light-red shaded areas above highlight the larger pullbacks of the Fed’s stock-market levitation. Note the very-different behavior of GLD’s holdings during those SPX retreats.
When the SPX surged, GLD’s holdings often plunged. But whenever material bouts of selling hit the SPX, the differential GLD-share selling all but vanished. Alternative investments are the most attractive when the headline stock indexes falter, that’s when investors realize they need them. But they are often ignored as stock markets rally. When everything is climbing, traders don’t bother looking for alternatives.
This GLD-share trading behavior that dominated the global gold market last year has huge implications this year. Gold has always had a strong inverse correlation with the stock markets, which is what makes it such an amazing investment during general stocks’ 17-year secular bears. Even as of this week, with gold still despised and general stocks adored, gold is up 359% since March 2000 compared to the SPX’s paltry 26%!
And incredibly in 2014, the Fed-driven stock-market levitation has continued. This uber-dovish Fed has continued to effectively backstop stock prices, feeding dangerous euphoria by signaling to traders that it is ready to print even more money if the stock markets sell off. This has led most traders to believe the Fed can ward off downside risk, so they continue to buy aggressively while ignoring the extreme overvaluations.
After rocketing 29.6% higher last year, the SPX was up another red-hot 7.6% this year as of its latest nominal record high in late July. And because these melting-up stock markets sucked vast amounts of capital out of gold last year, you’d think GLD’s holdings would keep plunging this year. But they sure haven’t. As of this week, GLD’s holdings are merely down a trivial 0.1% year-to-date. That’s dead flat!
After a minor bounce last August during a sharp SPX pullback, GLD’s holdings finally bottomed in a decisive way in mid-January 2014. They had plummeted a mind-boggling 42.6%, spewing 576.5t of gold supply into the global markets, since their all-time record high of early December 2012! This was so far beyond the realm of precedent that I still contend such an outlying event was impossible to predict.
GLD’s early-2014 bottoming coincided with another sharp SPX pullback, which makes sense. But thanks to Janet Yellen’s uber-dovishness, once again the stock markets’ normal and healthy sentiment-rebalancing process of correcting was short-circuited. But as the SPX started surging again heading into spring, GLD’s holdings didn’t start dropping. They actually continued growing, a sequential build.
In February and March, GLD’s holdings climbed 10.5t and 9.4t. This was their first 2-month build streak in 14 months, stock traders were finally buying GLD shares again faster than gold was being bid up. Then April’s 25.1t draw on weak gold and more SPX nominal records wiped out this progress, and GLD’s holdings slumped to a new low in late May. But it was secondary, just 1.6% under January’s initial bottom.
GLD’s holdings stabilized in May and the builds started up again in June and July. While the amount of differential buying pressure on GLD shares was modest, this was still very impressive. Not only was it in the midst of gold’s weakest season of the year, but the SPX was once again surging to even more extreme record highs. Gold’s summer doldrums plus stock euphoria was the perfect recipe for heavy GLD selling.
But it didn’t happen, stock traders have been slowly accumulating GLD shares instead of fleeing from them like last year. This means GLD selling exhaustion was almost certainly reached, and therefore the holdings bottom seen, earlier this year. The remaining GLD shareholders are likely strong hands, with no desire to exit their gold exposure which provides essential portfolio diversification. That makes lots of sense.
GLD’s holdings have averaged just under 800 metric tons this year, right where they ended 2013. The very first time GLD’s holdings surpassed 800t was back in January 2009 just after that once-in-a-lifetime stock panic. And back then, gold was only trading around $850. So theoretically ignoring churn, the great majority of the remaining GLD investors today are still likely sitting on major unrealized profits in gold.
If the very same Fed-driven stock-market levitation that sparked epic record GLD-share selling in 2013 has had virtually zero impact this year, what does that mean for gold going forward? I suspect the newfound stability in GLD’s holdings is evidence they are set to surge again. GLD ownership remains overdue for a massive mean reversion higher after 2013’s extreme selling anomaly, a super-bullish omen.
Near its latest nominal record late last month, the mighty S&P 500 component stocks had a collective market capitalization of $18,617b. Meanwhile GLD’s market cap, the value of its gold-bullion holdings, was sitting at just over $33b. Thus if the elite S&P 500 stocks are representative of American investors’ stock portfolios, they have less than 0.2% allocated to gold with GLD! That is extremely low historically.
Many battle-hardened and wise investment advisors believe a 5% portfolio allocation to gold is always important to maintain, because gold tends to move inversely to the stock markets. 0.2% is way too low, a reflection of the irrational extreme antipathy towards gold and extreme adoration towards general stocks that 2013’s anomalies bred. As the very-toppy stock markets inevitably sell off, gold will slowly return to favor.
As that happens, stock investors and speculators will feel an increasing need to up their gold exposure. The great majority will do so with GLD, since it is so cheap and easy to trade. As the vast pools of stock-market capital start migrating back into this flagship gold ETF, its custodians will be forced to issue new share supply to meet this excess demand. And all the money raised will be immediately plowed into gold bullion.
So GLD’s holdings will rise again, mean reverting out of early 2014’s extreme lows. Just as differential GLD-share selling crushed gold last year, differential GLD-share buying will greatly accelerate its next upleg. 2009 is a great example. That year a relatively small fraction of elite hedge-fund managers aggressively bought GLD shares. This pushed its holdings 45.3% higher that year, catapulting gold up 24.3%.
And stock capital returning to GLD merely to regain a trivial modicum of portfolio diversification will be marginal gold buying on top of gold’s strong season and American speculators buying gold futures to mean revert their own positions out of 2013’s extremes. Differential GLD buying pressure will supercharge gold’s next upleg, since it is in addition to all the other fundamental investment demand pushing gold higher.
This last chart looks at GLD’s physical gold-bullion holdings compared to the gold price. It highlights the radical change in the way stock traders are treating GLD shares this year compared to last year. Without the extreme differential GLD-share selling that drove the entire drop in global gold demand last year, the yellow metal is advancing again despite the stiff ongoing headwinds from the Fed’s stock-market levitation.
Gold’s woes really started in February 2013 when a crafty bear raid during the week-long Asian market holiday celebrating Lunar New Year ignited a gold capitulation. That soon cascaded, with gold plummeting initially when critical support failed and later when Ben Bernanke began talking about the Fed starting to reduce its QE3 bond monetizations. All this caused gold to plummet between last January and June.
During that time span, this metal dropped 29.1%. This was largely driven by American stock traders selling GLD shares so fast that this ETF had to liquidate 27.4% of its holdings, or 366.4t, to buy back all those excess shares offered. During that once-in-a-lifetime extreme gold anomaly, the SPX rallied by 8.1% thanks to the Fed’s implied backstop. 2013’s first half was an unprecedented disaster for gold.
Thus gold sentiment last summer was the worst it’s been in decades, with everyone loathing the metal and forecasting an imminent plunge deep under $1000. Except me, I thought it was a huge buying opportunity because a massive short squeeze in gold futures was brewing. And that proved correct, gold rallied dramatically out of its late-June-2013 lows to defy the overwhelmingly bearish sentiment.
But soon the SPX melt-up started weighing on gold again, as American stock traders dumped still more GLD shares. Thus gold slumped to a secondary low in mid-December. Between its ugly June and December lows, it merely lost 0.8% despite another 16.6% GLD holdings liquidation of 160.8t! Global physical demand could finally absorb the GLD bullion selling that had overwhelmed it during 2013’s first half.
And that was despite the SPX surging another 12.2% higher. And since that decisive December gold low, the differential GLD selling pressure has evaporated. As of this week GLD’s holdings were only down 1.4% since then, a trivial 11.1t. That was despite the SPX climbing 6.1% thanks to the Yellen Fed’s extraordinarily-reckless dovishness. Without those fierce GLD-liquidation headwinds, gold climbed an impressive 9.8%.
If gold can perform that well in 2014’s first half, just imagine how awesome it’s going to look the rest of this year. As the overvalued and overextended stock markets inevitably roll over, American stock traders are going to return to GLD and force its holdings higher. And this additional gold investment demand will be on top of futures buying and the usual major fundamental drivers during gold’s new strong season!
With GLD’s holdings set to surge again in a massive mean reversion, investors and speculators should be throwing heavily long the entire precious-metals sector. As gold’s new upleg accelerates and the resulting bullish sentiment starts feeding on itself, silver and the stocks of the precious-metals miners will amplify the yellow metal’s gains. The undervalued elite gold and silver stocks should at least quadruple!
The bottom line is GLD’s holdings are set to surge again. After plummeting last year in an extreme once-in-a-lifetime orgy of selling, GLD’s holdings have been stable this year. That’s despite the fierce headwinds of the levitating stock markets continuing to howl, and the recent gold sentiment wasteland of the summer doldrums. As these lofty stock markets inevitably sell off, stock traders will return to GLD.
Their necessary GLD-share buying to re-diversify unbalanced stock portfolios will add big marginal gold investment demand. This is on top of the usual fundamentally-driven seasonal strength starting now. And GLD’s holdings remain so anomalously low that a mean reversion to normal levels will require this ETF to buy many hundreds of tonnes of gold bullion. That will work to supercharge gold’s next upleg.