Gold's Demand Comeback / Commodities / Gold & Silver 2024

This gold bull’s latestupleg has proven mighty, surging to many new nominal record highs.  Amazingly gold’s massive gains have accrueddespite no demand from one of its primary drivers.  That’s differential gold-ETF-share buying byAmerican stock investors.  Enthralled bythe AI stock bubble, those guys have been missing-in-action.  When they finally return, gold’s demandcomeback will supercharge its gains.

The great majority ofgold’s price trends have long been driven by speculators’ gold-futures tradingand/or investors’ gold-ETF-share trading. I’ve analyzed this extensively in recent decades, discussing the latesttrends of both primary drivers in countlessessays and subscription newsletters. Understanding what both groups of gold-dominating traders are doing isessential for profitably gaming gold’s upleg-correction cycles.

Born in early October2023, today’s gold upleg has blasted up 38.7% at best over 10.8 monthsnow!  In early December, gold achievedits first nominal recordclose in 3.3 years.  Since then 28more records have been written into the books, an incredible run by anystandards!  Gold’s upleg is now on theverge of powering up 40%+ into monster status. Remarkably this has happened with one hand tied behind its back.

The leveragedgold-futures speculators who often bully around gold prices have certainly donetheir part.  During this upleg they’veadded an enormous 143.7k long contracts, while buying to cover an also-huge82.4k short ones.  That adds up to theequivalent of 703.2 metric tons of gold, a colossal amount!  But such gargantuan buying has pretty muchexhausted specs’ probable buying firepower for this gold upleg.

Total spec longs havesoared way up near their secular resistance, while total spec shorts havecollapsed under their own secular support! While digging into gold futures is outside the scope of this essay,every week I analyze specs’ latest-reported trading, positioning, and itsimplications for gold’s outlook in our popular weekly newsletter.  While specs could do a frenzied spurt of longbuying, it wouldn’t last long from here.

Big spec gold-futuresbuying is a potent gold driver, with futures’ extreme leverage giving themoutsized impacts on gold prices.  Butalone that typically fuels 20%-to-25% gold uplegs at best.  While good and very profitable to trade withgold stocks, futures-driven uplegs don’t grow to mighty 30%+ gains or 40%+monster ones.  The finite pool of capitaldeployed in gold futures is expended before gold uplegs get huge.

The largest uplegs requirebig investment demand, which dwarfs gold-futures buying.  For many years that has been most apparent inthe combined holdings of the leading GLD and IAU gold ETFs.  Exiting Q2, they alone commanded fully 38.9%of all the gold bullion held by all the world’s physically-backed goldETFs!  Ranking distant third is a Britishgold ETF with merely 6.6% of those global bullion holdings.

GLD and IAU have longbeen gold-demand juggernauts.  Everyquarter the World Gold Council publishes the best-available global goldfundamental supply-and-demand data.  In asizable fraction of all quarters in the last decade-plus, changes in GLD+IAUholdings have mostly explained gold’s price trends during those spans.  Sometimes capital inflows or outflows intoGLD and IAU prove gold’s biggest demand swings!

This ironcladrelationship exists because physically-backed gold ETFs act as conduits for the vast pools of stock-market capital to slosh into and out of gold.  Gold-ETF shares can’t mirror their underlyingmetal’s price action and accomplish their mission unless their own excesssupply and demand is shunted directly into gold itself.  If that doesn’t happen, gold-ETF-share priceswill quickly decouple from gold’s own price action.

The mechanism issimple.  When gold-ETF shares are beingbought faster than gold itself, their prices threaten to surge faster thangold’s.  So gold-ETF managers need to forcethat excess demand into gold.  They do thatby issuing sufficient new gold-ETF shares to fully offset any demand overage,then use the proceeds to immediately buy more gold bullion for theirvaults.  Of course the opposite is alsotrue.

When gold-ETF sharesare being sold faster than gold, their prices risk disconnecting to thedownside.  To avoid failing theirgold-price-tracking mission, gold-ETF managers buy back sufficient gold-ETF sharesto totally sop up any excess supply. They raise the funds to do that by selling some of their ETFs’ goldbullion.  Rising gold-ETF holdings reveal stock-market capital flowing into gold, and falling draining back out.

This chart superimposesGLD+IAU holdings in blue over gold prices in red.  Astoundingly gold’s latest near-monster upleghas blasted higher despite zero differential GLD+IAU-share buying!  A year ago I wouldn’t have believed that waseven possible, yet here we are.  Today’smighty gold upleg is truly remarkable for growing so big while distractedAmerican stock investors all but completely ignored it!

Unbelievably andexceedingly-anomalously, GLD+IAU holdings have actually fallen rathersharply on balance during this mighty upleg’s lifespan!  These dominant gold ETFs’ physical bullionnormally tends to closely track gold’s uplegs and corrections, as evident herefrom 2020 to late 2023.  Americaninvestors buy GLD and IAU shares to ride gold uplegs when they’re underway,their added demand boosting gold’s gains.

While the extreme risksinherent in leveraged gold-futures trading force myopic ultra-short-term timehorizons for those guys, investors are much-more-casual gold observers.  They grow bullish after gold has alreadyrallied considerably, and bearish once it rolls over and decisivelycorrects.  So peaks and troughs inGLD+IAU holdings tend to lag upleg toppings and correction bottomings ingold, as this chart shows.

Back in October soonafter this gold upleg was born, GLD+IAU holdings were behaving normally.  They carved a deep 3.8-year secular low, thenstarted recovering with gold.  But just amonth later, American stock investors’ inflows into gold via GLD and IAU sharesstalled.  Despite gold’s young uplegsurging a big 10.2% higher in just several weeks, investors quickly abandonedit.  With hindsight, the reason is clear.

In late October, theflagship US S&P 500 stock index had rolled over into formal correctionterritory with a 10.3% loss in 2.9 months. That selling probably should’ve continued, as the SPX left that monthstill trading at a lofty 26.3x trailing-twelve-month price-to-earningsratio.  It had soared way up to 30.5x inlate July, well into dangerous bubble territory.  A necessary valuation mean reversion lookedto be underway.

While a brief oversoldbounce was due, it exploded when the Fed came into play.  After hiking 11 times over 16.3 months for anextreme 525-basis-point hiking cycle, the FOMC and Fed chair came across asdovish implying the Fed was done hiking. So stock markets took off like a rocket, soon morphing into the AI stockbubble led by market-darling AI-chipmaker NVIDIA.  The SPX soared an amazing 16.2% by lateDecember!

That quicklyovershadowed gold, despite it achieving that first record close in 3.3years.  Gold has always been analternative investment, an essential portfolio diversifier that tends torally when stock markets weaken.  So whenthe SPX is surging towards its own record highs generating universal euphoria,gold is soon forgotten.  For all itsunique benefits, gold will never be as sexy as the hottest mega-cap techstocks.

In Q1’24 the S&P500 surged another 10.2% higher, achieving 22 record closes and blasting above5,000 for the first time ever!  Despitethe SPX components’ average P/Es also surging way back up to 31.0x, investorswere captivated by the promises of AI. NVIDIA’s stock was a moonshot, skyrocketing 82.5% that quarteralone!  While gold was no slouch in Q1also surging 7.6%, it couldn’t compete with AI mindshare.

So American stockinvestors dumped a good chunk of even their meager existing allocations in GLDand IAU.  Their holdings fell 4.7% in Q1,or 60.4t!  That forced them to a deep4.5-year secular low, which was an extreme anomaly with gold powering to 10new record closes in March alone.  Sincethen these leading gold ETFs’ holdings have mostly ground sideways, reflectingAmerican stock investors’ serious apathy.

Yet gold continuedforging higher on balance anyway, again extending its upleg to a mighty 38.7%at best in late August.  Astonishinglyduring that exact span, GLD+IAU holdings actually fell 4.4% or 55.8t!  Such a disconnect is wildly unprecedented inthe entire modern gold-ETF era.  The SPXsoaring a similar 37.6% on AI hype between late October to mid-July was thereason, stealing all the limelight from everything else.

That certainly includedgold, which was overlooked and ignored. Nothing could compete with NVIDIA’s parabolic 236.2% stock gains at bestwithin that span!  While gold’s many newrecords have won it plenty of financial-media coverage this year, investorsdidn’t care with their mega-cap-tech-dominated portfolios performing sowell.  The wisdom of prudentdiversification is forgotten in surging, lofty, and euphoric markets.

The fact gold couldstill enjoy a near-monster upleg not only without any differentialgold-ETF-share buying but despite active selling is remarkable!  That’s a testament to amazing underlyingstrength in gold demand, which wasn’t just from gold-futures speculators.  The last couple quarterly reports on globalgold fundamentals from the World Gold Council have confirmed big buying fromChinese investors and central banks!

I’ve analyzed these indepth in our subscription newsletters, including our latest monthly justpublished.  Without those atypical demandsources, today’s gold upleg likely wouldn’t have grown much bigger than 20% to25% on spec gold-futures buying alone. By all indications, that major Chinese and central-bank gold buying willprobably continue.  China’s economy andstock markets are struggling while yuan gold is surging.

Investors all over theworld love chasing winners.  And without-of-control US-government spending still ramping the mind-boggling US debt whileTreasury interest expenses soar, the US dollar’s fundamental outlook isdismally-bearish.  So global centralbanks need to continue paring their dollar-heavy reserve holdings, andnothing beats gold for weathering globally-rampant fiat-currency inflation anddebasement.

Ironically Americanstock investors ignoring gold’s mighty upleg is the single-most bullishargument for it powering much higher! Euphoric stock-bubble toppings are always short-lived, soon burstingthen rolling over in busts.  That processmay have already started, with the SPX plunging 8.5% between mid-July to earlyAugust.  While it has bounced back since,the AI market darlings driving the greed aren’t faring as well.

NVDA plunged 27.0% atworst from mid-June to early August, and was still down 21.7% midweek!  If decisive new highs aren’tseen soon in the US stock markets or NVIDIA, investors’ worries willmount.  Some will sell driving mega-captechs and stock markets lower, spawning wider anxiety and selling.  Sooner or later the SPX will have fallen farenough to dispel euphoria and convince traders this bubble has popped.

Some will look todiversify, and remember gold.  Even if atiny fraction of stock-market capital migrates into gold, that will drive its pricemuch higher.  The value of GLD+IAUholdings relative to the S&P 500’s total market capitalization is a greatproxy for American stock investors’ gold investment.  Exiting August, that literally ran under0.2%!  That’s not a typo, 2/10ths ofone percent!  Gold investment may as wellbe zero.

All the gold bullionheld by GLD and IAU is worth less than $99b. What happens to gold prices if $50b, or $100b, or $200b of stock-marketcapital flows in?  That’s pocket changefor stock markets, a rounding error. This Tuesday alone NVIDIA’s stock plunged 9.5%, wiping away astock-market-record $279b in market cap! American stock investors face ugly mega-cap-tech losses with virtuallyno gold holdings.

I wrote an essay inearly August looking at bigUS stocks’ latest fundamentals after Q2 earnings reports.  It explained why a bear market isoverdue.  The last SPX bear provedrelatively-mild, with 25.4% losses from early January 2022 to mid-October thatyear.  Surrounding that span, the belovedMagnificent 7 mega-cap techs including NVIDIA averaged brutal 54.6% losses morethan doubling the stock markets’!

As market-leader lossesmount again, gold will be remembered. Interestingly today’s gold upleg devoid of American-stock-investordemand is the biggest by far since a pair of 40%+ monsters both cresting in2020.  Those were also the lastrecord-achieving ones.  New records fuel virtuous circles of increasingand increasingly-bullish financial-media coverage, which entices in more newtraders amplifying the gains.

Four-to-five years agogold soared 42.7% and 40.0% on enormous differential gold-ETF-share buying byAmerican stock investors.  Their aggressivechasing of mounting gold gains and records catapulted GLD+IAU holdings up 30.4%or 314.2t during that first upleg, and then an epic 35.3% or 460.5t higher inthe second!  Those average out toenormous 387.4t builds, which overwhelmingly fueled those monster uplegs.

With today’s gold uplegalready up 39%, what happens when American stock investors inevitablyreturn?  Their gold demand will make acomeback as the AI bubble’s euphoric pall dissipates, that’s almostcertain.  What if GLD+IAU holdings swingfrom their -50t so far in this upleg to +400t or more as investors rush tochase gold and diversify their mega-cap-tech-dominated portfolios?  Gold will power a heck of a lot higher!

Since we’ve neverbefore seen a monster gold upleg in this modern gold-ETF era that wasn’t fueledby big differential gold-ETF-share buying, no one has any idea how big gold’sgains could grow.  But if $100b+ ofAmerican stock-market capital sloshes back into gold, its upside from here willbe major.  The last time gold grewpopular was summer 2020, when American stock investors catapulted it up 18.3%in seven weeks.

Similar gains frommidweek would push gold over $2,950, which would generate endless bullishpress.  But American stock investorswould need many months if not years to reestablish even trivial 1% goldallocations, so gold’s bull-market gains should grow much larger.  The biggest beneficiaries of much-higher goldprices remain the gold miners’ stocks, especially smaller fundamentally-superiormid-tiers and juniors.

In Q2 gold averaged arecord $2,337, fueling the fattestand richest profits gold miners have ever earned!  Over the last four quarters, the GDXJ-top-25mid-tiers have seen unit earnings skyrocket 106%, 126%, 63%, and 66% YoY!  And Q3 is going to be awesome too, with goldalready averaging $2,436 quarter-to-date. Still largely-unloved and deeply-undervalued, the gold stocks haveenormous upside potential with gold.

So if you’ve beensleeping on this sector, you need to do your homework and get deployed.  Even modest portfolio allocations on theorder of 5% in gold and 20% in great gold stocks will work wonders for futuregains.  This AI stock bubble’s days arenumbered, and gold regaining visibility in its aftermath should eventually makegold stocks one of the hottest sectors. Smaller gold miners could easily double to quadruple.

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The bottom line is American stock investors’ gold demand willalmost certainly make a comeback.  Theyhave totally ignored gold’s near-monster upleg so far, enthralled by the AIstock bubble.  Actually selling gold-ETFshares on balance, gold’s massive gains have instead been fueled by buying fromgold-futures speculators, Chinese investors, and central banks.  This is wildly unprecedented in this moderngold-ETF era.

As this AI stock bubble inevitably bursts, American stockinvestors will remember gold.  They willwant to diversify as the overdue bear mauls mega-cap techs, and doing thatwhile chasing gold’s record-achieving upleg will be incredibly appealing.  With today’s effectively-zero goldallocations, even tiny shifts back into gold-ETF shares by stock-marketstandards will supercharge gold’s gains. Gold stocks will fly on that.

Adam Hamilton, CPA

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