GLD, IAU Big Gold ETF Buying MIA / Commodities / Gold & Silver 2020

The big gold-ETF buyingthat catapulted gold higher into early August has gone missing in action.  That’s why gold stalled out since, driftingsideways flirting with a correction.  To continuepowering higher, gold needs these major stock-market-capital inflows via exchange-tradedfunds to resume.  The near-term fortunesfor the precious-metals complex are heavily dependent on how American tradersposition in gold ETFs.

For better or worse,exchange-traded funds are increasingly dominating gold’s price trends.  Their relative importance has been mountingfor years, and cannot be overstated.  Majorgold ETFs are becoming the global gold market. Despite lingering concerns about gold ETFs’ physical bullion holdings,speculators and investors keep flocking to them.  They are the easiest way to get goldportfolio exposure, quick and cheap.

The World Gold Council’slatest quarterly fundamental data on global gold supply and demand yet againrevealed gold ETFs’ dominance.  The WGC’sQ2’20 Gold Demand Trends report showed global demand being gobbled up by gold ETFslike Pac-Man!  Gold surged 12.9% in Q2, whichenjoyed one of the most-bullish psychological backdrops ever.  A worldwide pandemic raged, which had just spawneda stock panic.

Last quarteruncertainty and worry were off the charts, as governments’ draconian national lockdownsto slow the spread of COVID-19 deeply scarred economies.  You’d think gold demand would explode in thatkind of extreme anomalous environment, right? According to the WGC, which gathers the best-available data on gold’sfundamentals, Q2 global demand was actually weak.  It fell 10.7% YoY to 1015.7 metrictons!

Every major demandcategory collapsed except for gold ETFs. Jewelry demand, which is normally about half of the world total, crashed52.5% YoY to 251.5t!  Even traditionalinvestment demand for physical bars and coins plummeted 32.0% YoY to148.8t.  Central-bank demand cratered50.5% YoY to 114.7t.  And technologydemand plunged 17.5% YoY to 66.6t.  Makeno mistake, Q2 gold demand was a total disaster.

Added together thesemajor demand categories imploded a mind-boggling 45.2% YoY to 581.6t!  After accounting for 93% of total gold demandin Q2’19, they caved to just 57% in Q2’20. The sole bright spot in worldwide gold demand last quarter was gold-ETFbuying.  Stock traders’ demand forgold-ETF shares was so extreme that the physical gold bullion these ETFs had tobuy skyrocketed 470.5% YoY to 434.1t!

Those towering gold-ETF-demandlevels shattered the previous record high of 341.1t in Q1’16.  There’s no doubt gold prices would’vefallen hard last quarter if it wasn’t for that epic gold-ETF-share demand.  And two American gold-ETF giants utterly dominateworldwide gold-ETF demand, the GLD SPDR Gold Shares and IAU iShares Gold Trust.  Following their holdings is essential forgaming gold trends today.

Every quarter the WGCranks the world’s biggest physically-backed gold ETFs by their bullionholdings.  At the end of Q2, GLD and IAUcommanded 32.5% and 12.6% of all the gold held by all the world’s gold ETFs!  Their next-largest competitor trading in theUK is a distant third at just 6.3%.  AndGLD’s and IAU’s combined 45.1% world share actually understates their importance,because they are so actively traded.

From Q1’20 to Q2’20,total global gold-ETF holdings surged 13.7% sequentially to 3620.7 metric tonsof physical gold bullion.  That was a record435.9t quarterly build.  But the Q2builds in GLD and IAU really outpaced the world total, seeing their holdingssoar 21.9% or 211.9t and 16.6% or 64.9t. That massive 276.8t total from these two American behemoths was almost64% of the entire global build in gold ETFs!

So gold demand and thusgold prices would’ve collapsed if not crashed last quarter if not for epic gold-ETFdemand, and together GLD and IAU accounted for nearly 2/3rds of that.  So everyone interested in the price trends ofgold, silver, and their miners’ stocks have to closely watch GLD and IAU.  The precious metals can’t materially rally withoutmajor inflows of stock-market capital into these increasingly-dominant ETFs.

The gold-ETF dynamicsbehind this are simple yet not widely understood.  The mission of gold ETFs is to track theunderlying gold price.  But the supply ofand demand for gold-ETF shares is independent of gold’s own.  So when gold-ETF-share buying or sellingoutpaces or lags that in gold, ETF-share prices will decouple from gold’s andfail their tracking missions.  There’s justone way to maintain that critical link.

Excess supply or demandof gold-ETF shares has to be directly shunted into underlying physicalgold, on a near-real-time basis.  Thatequalizes supply-demand differentials, synchronizing gold-ETF-share prices withgold’s.  When ETF-share buying exceeds gold’s,share prices threaten to decouple from gold to the upside.  Gold-ETF managers avert this by issuing enoughnew shares to offset that differential demand.

They immediately plowthe capital raised from selling those shares into buying more physical gold bullion.  So when gold ETFs’ holdings are rising,stock-market capital is flowing into gold.  Naturally that normally helps lift its price.  The opposite is true when gold-ETF shares arebeing sold faster than gold, which soon breaks gold ETFs’ gold-price mirroringto the downside.  Again gold-ETF managershave to act to prevent this.

They sell enough goldbullion to raise sufficient money to buy back the excess gold-ETF-sharesupply.  Thus when gold ETFs’ holdingsare falling, stock-market capital is flowing back out of gold.  Since GLD and IAU both report their physical-gold-bullionholdings daily, tracking their trends reveals whether American stocktraders are buying or selling gold via these dominant ETFs.  That’s the key to gold’s fortunes.

As this first chartshows, differential GLD and IAU buying has gone missing in action since goldpeaked in early August.  The gold price inred is rendered under GLD’s and IAU’s total daily holdings shown in dark blue,GLD’s daily holdings in light blue, and IAU’s daily holdings in yellow.  Since IAU’s holdings are considerably smallerthan GLD’s at 515.2t this week, they aren’t visible with this chart’s lowerbound at 700t.

Since gold’s dazzlingall-time-record high of $2062 on August 6th, it has drifted sideways tolower.  At worst gold initially plunged7.5% in a sharp correction.  But thatquickly stabilized into the trading range gold has been stuck in for the past 5weeks, a high consolidation.  Not surprisinglygiven GLD’s and IAU’s dominance over gold prices, their total holdings peakedat a record 1765.0t that same day gold crested.

Gold stalled out whenAmerican stock traders stopped aggressively buying gold-ETF shares.  And if they start materially selling, gold willcertainly fall into a 10%+ correction.  Sofar the differential gold-ETF-share selling has been trivial, with thesecombined GLD and IAU holdings only slumping 0.9% at worst to 1749.2t in mid-August.  Interestingly they gradually recovered since toa new record high of 1768.1t this week.

That masks a growingbifurcation in demand for GLD and IAU shares. As of the data cutoff for this essay at Wednesday’s close, GLD’sholdings are still down 1.2% from early August’s 7.4-year secular high.  As the pioneering gold ETF launched way backin November 2004, GLD’s first-mover advantage has made it much morepopular.  In the middle of this week, GLD’sholdings commanded 71% of the GLD-plus-IAU total.

Lesser-hyped IAU wasn’tborn much later, starting in January 2005. But it languished deep in GLD’s long shadow for much of its existence.  When this secular gold bull’s first upleg toppedin July 2016, GLD had holdings running 4.6x as large as IAU’s.  But IAU has enjoyed superior growth since,compressing this ratio to just 2.4x this Wednesday.  Since gold’s recent early-August peak, IAU’sholdings actually climbed 3.7%!

IAU is catching up withGLD because of a major selling point really appealing to institutional investors,a lower expense ratio.  GLD’s managershave always charged 0.4% of that ETF’s assets annually to pay all the billsnecessary to keep it running and earn profits. That includes salaries of the people as well as all the costs of physicallymoving and storing gold bullion.  But IAUsignificantly undercut that charging only 0.25%.

IAU’s 15-basis-point-lowerexpense ratio doesn’t sound like much, but saving 37.5% on yearly gold-ETF feesis important to professional money managers running tens of billions ofdollars.  That realm is so hyper-competitivethat they have to squeeze out returns wherever they can.  They increasingly seem to be preferring IAUover GLD, driving the former’s holdings relentlessly higher with lessvolatility than the latter.

Given the chronicunderinvestment in gold by institutional investors, which collectively have under1% of their capital in this ultimate portfolio diversifier, IAU might not seeheavy differential selling when gold corrects. But GLD certainly will, as it is much more popular with speculators andretail traders.  If they start dumpinggold-ETF shares faster than gold is being sold, that will almost certainly forcea bigger gold selloff.

This secular gold bullhas suffered three previous corrections, 17.3% into late 2016, 13.6% intomid-2018, and 12.1% into March 2020’s pandemic stock panic.  American stock traders’ selling both helped fueland exacerbated all these corrections, with the combined GLD and IAU holdingsfalling 13.1% or 156.7t, 6.3% or 69.5t, and 3.3% or 44.5t.  It doesn’t take much gold-ETF differentialselling to push gold sharply lower.

Potential catalystsabound that could spook the legions of speculators that flooded into gold-ETFshares in late July and early August forcing gold parabolic.  The euphoric US stock markets could keeprallying on extreme Fed money printing, retarding gold investment demand.  The deeply-oversold US dollar could surge,driven by the overbought euro falling. That would motivate gold-futures speculators to dump gold.

The US-presidential-electionoutcome could affect gold sentiment.  Trump’ssurprise victory four years ago unleashed heavy gold selling as stock marketssoared on tax-cut hopes.  The hot-moneyRobinhood crowd that loves chasing momentum may simply lose interest with goldstalled for over a month now.  The herdof millennial traders is chasing big and fast gains, and is quick to move on tothe next surging thing.

This gold bull’s precedentshows that once heavy differential gold-ETF-share buying flags, it generallypresages coming differential selling. Traders who greedily rush into gold-ETF shares at relatively-high priceswhen euphoria runs rampant late in major gold uplegs rapidly suffer seriouslosses when gold subsequently corrects. These weak hands frantically dump their gold-ETF shares, amplifying gold’sselloffs.

But even if those late-to-the-partyspeculators hold, gold’s next major upleg can’t start marching higher.  This bull’s precedent clearly proves goldnow needs big stock-market-capital inflows via the dominant gold ETFs to fuelsustained gains!  This gold bull’s four majoruplegs have seen 29.9% gains into mid-2016, 20.4% into early 2018, 42.7% intoearly 2020 before the stock panic, and 40.0% in just 4.6 months since that.

Heavy differentialdemand for gold-ETF shares overwhelmingly drove this bull’s threelargest uplegs, and contributed to the fourth. Sequentially they saw big combined GLD and IAU holdings builds of 52.1%or 409.3t, 6.3% or 65.6t, 30.4% or 314.2t, and 35.3% or 460.5t!  Gold isn’t heading materially higher againuntil American stock traders resume buying gold-ETF shares much faster thangold itself is being bought.

And that seems really unlikelyso soon after gold shot parabolic to extraordinarily-overboughtlevels in early August.  That overboughtnessand the resulting greedy, euphoric sentiment needs to be worked off in a normaland healthy correction before gold’s next upleg can start running.  That will require a major 10%+ gold selloff,and maybe even a deeper 200dma approach. Gold isn’t out of the woods yet by any means.

The big gold-ETF buyingthat catapulted gold higher before and after March’s stock panic missing inaction is also the reason gold-stock prices have stalled too.  This next chart is updated from my essay lastweek explaining why the gold stocks remain in correction mode.  Since their earnings greatly leverage goldprices, their stock prices tend to mirror and amplify gold’s.  They haven’t made any headway since early August.

The GDX VanEck VectorsGold Miners ETF is the most-popular gold-stock index and trading vehicle.  Like usual, GDX’s price action so far thisyear looks just like gold’s but at a larger magnitude.  Because of their total dependence onprevailing gold prices, gold stocks need differential gold-ETF-share buying justas much as gold does.  Their massivepost-panic upleg failed right when gold’s did on flagging gold-ETF buying.

Gold-stock speculatorsand investors definitely need to closely follow GLD’s and IAU’s holdings, sincethey so powerfully drive gold price trends. As goes gold, so go the gold stocks! Whether GDX continues consolidating high, rolls over into a majorcorrection, or resumes grinding higher totally depends on what American stocktraders do with GLD and IAU.  Theircapital flows drive the entire precious-metals complex.

And I suspect big differential gold-ETF-share selling is more likely in the near-term than a resumptionof the huge buying into early August.  Goldsurged too far too fast to be sustainable, hitting extraordinary levels ofoverboughtness.  Momentum-chasingmillennial traders seemed to lead that charge, as reported insince-discontinued positioning data from their favorite brokerage Robinhoodwhich pioneered free stock trading.

Millennials were hit disproportionatelyhard by the widespread government lockdowns last spring as this pandemic mounted.  A big fraction of them worked in the serviceindustries, which ground to a halt.  Sothey were stuck at home with nothing to do, collecting fat unemployment checks greatlyboosted by huge pandemic stimulus spending. So many used that financial windfall to fund their first-ever forays into stock trading.

Robinhood accountopenings skyrocketed, and young traders enjoyed big and fast gains with thestock markets soaring on extreme Fed money printing.  In just 3.0 months into early June, the Fed’sbalance sheet skyrocketed an astonishing 66.3% or $2.9t higher!  Millennial traders rushed to pile in to thebig winners, chasing their upside momentum. They found gold in mid-July, which helped force it parabolic.

Gold’s post-panic uplegwas normal and sustainable before that, climbing higher in a soliduptrend.  But over the next several weeksinto early August, gold soared a blistering 14.9% higher.  That stretched it way up to 1.260x its200dma, bull-slaying levels of overboughtness that killed its lastsecular bull!  GLD’s and IAU’s holdings rocketedup 5.1% or 61.1t and 6.5% or 30.2t during that span, which is what forced goldhigher.

And Robinhoodpositioning data showed millennial traders led the way.  In those same few weeks, the total number ofRobinhood users owning GLD skyrocketed 58% higher!  Their IAU ownership soared 33%.  And it wasn’t just those younger traders floodingin.  The reason Robinhood doesn’t chargeusers for stock trading is it instead sells their real-time order-flow data tohigh-frequency-trading firms, which front run it.

So when millennialRobinhood traders were stampeding into gold via GLD and IAU, orders of magnitudemore capital was rushing in from hedge funds milliseconds before thosetrades!  That Robinhood data, from young newtraders blindly chasing any momentum, was the tail wagging the vastly-largerhedge-fund dog.  And once those millennialsmoved on from gold in early August, so did the hedge funds front running them.

Until that millennialand more-broadly retail-trader zeal for gold returns, it is hard to imagine bigdifferential gold-ETF-share demand spinning up again.  And without that, gold is dead in the water for now.  If the Robinhooders and all theprofessional capital aping them start dumping GLD and IAU en masse, gold andthus the gold stocks will fall into much-deeper corrections.  That is a real risk given gold’s flaggingmomentum.

Under heavy fire forthe extreme speculative risks its young and naive users were taking, Robinhood ceasedpublishing its users’ collective positioning data soon after gold peaked!  It is probably still selling it to hedgefunds privately, but outside of those rarefied circles no one knows what theRobinhooders have done with their gold-ETF holdings.  If they haven’t exited yet, big differentialgold-ETF-share selling is still coming.

So it seems prudent tobe wary of gold here, at least until early August’s epic overboughtness ismostly worked off.  Again gold skyrocketedto 1.260x its 200dma at peak, and so far the lowest it has retreated is stillway up at 1.143x its 200dma earlier this week. Incredibly that is still above the extremely-overbought upperresistance of gold’srelative trading range!  Big gold-ETF-shareselling is way more likely than big buying.

All bull markets naturallyflow then ebb, taking two steps forward before retreating one step back.  Their price action gradually meanders around uptrends.  This normal upleg-correction pattern keepssentiment balanced, extending bull markets’ longevity.  And it is a huge boon for traders, offering excellentmid-bull opportunities to buy relatively low before later selling relativelyhigh.  That greatly expands bulls’ potentialgains!

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The bottom line is thebig gold-ETF buying that catapulted this metal higher into early August has gonemissing in action since then.  The majorgold ETFs’ holdings have stalled out, explaining gold’s flagging momentum.  With the global gold market increasinglydominated by GLD and IAU, gold can’t advance without American stock traders shiftingbig capital into gold through these conduits. But their buying has vanished.

This gold bull’s precedent shows differential gold-ETF-share selling usuallyfollows soon after big and fast holdings builds exhaust themselves.  Compounding these risks after gold’s recentparabolic upleg are the young traders who heavily drove it.  Their modus operandi is chasing upside momentum,and once that fails they are quick to abandon trades.  They may still need to exit their frenziedly-acquiredgold-ETF shares.

Adam Hamilton, CPA

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