Gold Stocks Investment Strong / Commodities / Gold and Silver Stocks 2020

Gold investment demandremains strong, buoying the yellow metal and its miners’ stocks.  Investors have continued actively diversifyinginto gold despite soaring stock markets and weaker summer seasonals.  The Fed’s extreme money printing fuelingthese precarious stock-market heights is perilously inflationary, making uppinggold portfolio allocations essential.  Thisongoing capital shift is likely to keep pushing gold higher.

The dominant driver ofgold’s major price trends is investment demand.  While it isn’t the largest demand category,it varies greatly depending on global-financial-market conditions.  The best global gold supply-and-demand datais only published quarterly by the venerable World Gold Council, in its must-readGold Demand Trends reports.  Theyhighlight the big volatility inherent in gold investment demand in recentyears.

From 2015 to 2019,jewelry demand averaged 51.2% of overall gold demand.  But the biggest jewelry year out of the last5 was only 1.2x the smallest one in tonnage-demand terms.  Investment demand only averaged 29.0% ofoverall gold demand in 2015 to 2019, yet the difference between the best andworst years in this span was 1.7x.  The WGC’slatest GDT on Q1’20 again proved how important investment is.

Last quarter was extremelyvolatile for gold since it got sucked into mid-March’s stock-paniccapitulation.  But even after thatroller-coaster ride, gold still managed a 4.0% gain in Q1.  Global gold demand per the WGC only edged up1.2% year-over-year to 1083.8 metric tons. That was despite jewelry demand plummeting 38.9% YoY to 325.8t,as the world’s largest market China was mostly locked down for COVID-19!

Gold’s largest demandcategory cratering would’ve gutted its price if investment demand hadn’t soared79.6% YoY to 539.6t.  The 239.1t more goldinvestors bought in Q1’20 compared to Q1’19 more than offset the 207.6tcollapse in jewelry.  And investors weren’tbuying traditional bars and coins, with their demand drooping 6.2% YoY.  All gold’s investment-capital inflows in Q1came in gold exchange-traded funds.

Physically-backed goldETFs tracking prevailing gold prices trade in major stock markets around theworld.  When stock investors buy gold-ETFshares faster than gold itself is being bought, their share prices willdecouple from gold to the upside failing their tracking mission.  To prevent that, ETF managers must shuntexcess gold-ETF-share demand directly into physical gold bullion itselfto equalize capital flows.

They do this daily byissuing enough new gold-ETF-shares to absorb any differential demand.  Then they use the resulting proceeds to buymore physical gold bullion for their funds. So when gold-ETF holdings are rising, it reveals stock-market capital isflowing into gold.  Global ETF golddemand skyrocketed an enormous 594.5% YoY in Q1’20 to 298.0t!  That’s the only reason gold prices have surgedinstead of collapsed.

With ETFs increasinglydominating the world gold market, every quarter the WGC ranks the physically-backedones.  The two largest by far are the AmericanGLD SPDR Gold Shares and the IAU iShares Gold Trust.  At the end of Q1, their total gold bullionheld in trust for shareholders represented 30.4% and 12.3% of all the gold heldby all the world’s gold ETFs!  The next-largestGerman competitor was just 6.6%.

Launched way back inNovember 2004 by the World Gold Council, GLD has maintained a strongfirst-mover advantage ever since.  I’vebeen analyzing its daily-reported holdings for years, as GLD capital flows alone have often driven nearly all of gold’s price moves in volatile quarters.  While IAU only came a bit later in January2005, it has always struggled under GLD’s shadow.  That’s despite a major advantage.

GLD’s managers charge0.40% of their ETF’s total holdings each year to pay all the expenses necessaryto keep GLD running.  IAU’s expense ratiois considerably smaller at 0.25%, which is a big difference for institutionalmoney managers deploying billions.  That,along with IAU’s total gold bullion running about 4/10ths of GLD’s, iscontributing to faster growth in this upstart competitor.  IAU could eventually catch GLD.

So analysis of the hugeAmerican stock-market capital flows into and out of gold ideally would includeGLD’s holdings plus IAU’s.  UnfortunatelyI don’t have IAU’s full daily holdings history since January 2005, whichI’ve been searching for.  I’m offering afree one-year subscription to our weekly newsletter, worth $679, to the firstperson who provides me that verified full dataset.  IAU’s holdings are getting increasinglyimportant.

But for now GLD’s physical-gold-bullionholdings still remain the best-available daily proxy for global gold investmentdemand.  This chart superimposes themover gold prices during this secular bull. Note that major gold uplegs and corrections are generally highlycorrelated with American stock-investor capital flowing into and out of GLDshares.  Gold investment has proven verystrong since March’s crazy stock panic.

Gold investment demandwas solid early this year before that stock panic.  It first flared on geopolitical fears over theUS-Iran conflict briefly going kinetic in early January, and later on themounting COVID-19 worries and resulting stock-market selling.  By March 9th, GLD’s holdings had climbed 7.9%or 70.5t year-to-date.  That helped pushgold 10.4% higher before the stock panic’s fear maelstrom sucked in everything.

Nothing scaresinvestors more than stock panics, which are technically 20%+ collapses in leadingstock benchmarks in 2 weeks or less.  Theyso greatly terrify traders that they rush to sell everything to flee to cash, evengold.  During the previous October2008 stock panic, gold plunged 16.7% over 21 trading days when the flagship USS&P 500 stock index (SPX) plummeted 30.0%! Gold isn’t immune to extreme fear.

As the SPX startedsliding in late February 2020, gold initially enjoyed safe-haven buying.  From the day the SPX peaked at an all-timehigh until March 9th, gold rallied 4.0% to $1675 despite the SPX plunging 18.9%. But once that stock-panic threshold wascrossed, the gold baby was thrown out with the stock bathwater.  Over the next 8 trading days as the SPXplunged another 12.3%, gold dropped 12.1% in sympathy.

A major driver of thatwas American stock investors fleeing GLD shares.  In roughly that same span, they dumped GLD muchfaster than gold was being sold.  Thatforced a 5.8% or 55.6t holdings draw, which of course amplifies gold’sstock-panic selloff.  Gold-ETF managershave to sop up excess supply by buying back ETF shares, and they raise theproceeds to finance this by selling off some of their physical gold bullion.

But just two tradingdays after gold bottomed in mid-March when its sharp V-bounce started becomingapparent, traders flocked back to GLD. They’ve been aggressively deploying capital in gold through this leadingand dominant gold ETF ever since.  Asthis chart shows, GLD’s holdings have rocketed vertically since gold’sstock-panic lows.  That’s similar to whattranspired after that last stock panic in October 2008.

In early April soonafter this latest government-economic-lockdown stock panic, I wrote about the soaring gold investment demand.  I included a chart showing what happened togold prices and GLD’s holdings after gold’s previous late-2008 stock-panic nadir.  Over the following 2.8 years, gold blasted166.5% higher fueled by a massive 71.5% or 535.5t GLD-holdings build!  Stock panics stoke gold investment for years.

So American stock tradersflooding into gold again after March 2020’s panic shouldn’t be surprising.  Since its March 19th stock-panic low of$1472, gold has already surged 18.7% higher at best by its latest interim high of$1748 on May 20th.  GLD’s major 20.6% or190.1t holdings build during that span is the main reason why!  The WGC’s next GDT on gold’s Q2’20 fundamentalswill likely reveal continuing ETF dominance.

And American stockinvestors didn’t stop buying GLD shares when gold stalled last month for a healthyhigh consolidation since.  Theirdifferential GLD-share buying persisted into early June, which is usually aweak time seasonally for gold investment demand.  Between March 20th to June 3rd, GLD’sholdings rocketed up 24.8% or 225.2t! That’s already over triple this ETF’s entire holdings build during allof Q1.

And this goldinvestment demand has been very consistent. In that 51-trading-day span, GLD enjoyed fully 36 holdings-build daysaveraging 0.6% each.  That’s getting to sizable,on the way to 1.0%+ which I consider large for any given trading day.  And there were only 4 holdings-draw daysaveraging trivial 0.1% declines.  Gold investmentbuying has not only been strong, but persistent in the wake of thisstock panic.

The crushing wealthdeclines in stock panics are devastating psychologically, scarring investorsfor years after those extraordinary events. They shock investors into remembering prudent portfolio diversificationis wise, that being all-in stocks is way too risky.  Gold plays a critical role in diversifyingsince it is a rare asset not highly correlated with stock markets.  Gold tends to rally when stocks weaken or areexpected to.

So for decades now I’veargued that every investor always needs a 10%-to-20% gold allocation intheir portfolios!  It acts likeinsurance, stabilizing wealth by offsetting losses during stock bears or othermajor selloffs.  And there’s no greaterwake-up call to the inherent riskiness of stock markets than panic-grade plummetings.  Investors tend to return to gold for years afterstock panics rapidly decimate their wealth.

From February 19th toMarch 23rd, the SPX cratered 33.9%! Investors won’t soon forget forfeiting over a third of their wealth injust over a month.  And American stockinvestors held virtually no gold before that brutal psychological shock.  An excellent gold-investment-level proxy isthe ratio between the total value of GLD’s holdings to the collective market capitalizationsof the 500 elite stocks of that flagship S&P 500 index.

As the SPX reached itslast all-time-record high in mid-February before the stock panic, GLD’sholdings were only worth 0.16% of the SPX companies!  That implies American stock investors wererunning gold exposure around 1/6th of one percent.  While this particular ratio will never get upto 10% or 20%, it sure reveals the radical underinvestment in gold.  It will take huge sustained buying to evenreach 1%, 2%, or 3%.

Since those stock-paniclows the SPX has skyrocketed 44.5% higher at best as of this week, which is just4.5% under mid-February’s record peak. Yet gold investment demand remained strong even during this huge reboundrally, which is acting exactly like a monster bear-market rally.  The driver fueling this gigantic surge is a majorreason investors are still flocking to gold despite the stock euphoria, epicFed money printing.

Federal Reserveofficials panicked in mid-March as the stock markets plummeted.  They feared the powerful negative wealtheffect from cratering markets would plunge the US into a full-on depression.  Thus they frantically unleashed a radically-unprecedenteddeluge of freshly-conjured money.  Frommid-March to early June, the Fed’s balance sheet skyrocketed an insane 66.2% or $2,853.3b higher in just 12 weeks!

This is far beyond anythingever witnessed in US history, as close to hyper-inflation as the Fed has everdared get.  This vast flood of new fiatdollars is being directly injected into the US economy via the huge stimulus billsCongress passed.  The original CARES Actalone that became law in late March weighed in at $2,125b!  This flood of money is competing forshrinking pools of goods and services, bidding up prices.

Even if the stock panichadn’t happened, there’s probably never been a more important time to invest ingold than when the Fed’s printing presses are spinning out of control.  2/3rds more dollars evoked out of thin air injust 2.8 months are going to have a colossal inflationary impact in comingyears.  That mind-boggling andexceedingly-risky monetary inflation is a major driver behind investorsshifting into gold.

So gold investmentdemand is likely to remain strong on balance even during gold’s summer doldrums, normallythe weakest time of the year for gold demand. Gold tends to drift in Junes, Julies, and Augusts as they usually don’t havesufficient catalysts to drive outsized demand. But boy summer 2020 is sure a huge exception to that rule!  Gold investment was strong last summer tooafter gold’s bull-marketbreakout.

In late June 2019, goldfinally achieved its first new bull-market high in several years.  That drummed up investor interest, resultingin gold surging 16.7% between the ends of May and August.  Like usual that was fueled by big capital inflowsinto GLD’s shares, this ETF enjoyed a big 18.2% or 135.1t holdings build lastsummer!  That again showed gold investmentdemand can be strong in summers with a solid catalyst.

Given the COVID-19stock panic’s devastating psychological impact, the resulting far-beyond-extremerecord Fed money printing, and the strong momentum in gold and gold investment,odds are this summer will again buck the normal weak seasonals.  And if these Fed-goosed stock markets rollover hard as they ought to given the horrendous economic data andcorporate earnings, gold will quickly grow way more popular.

Interestingly the mainbeneficiary of gold investment demand isn’t the metal itself, but the stocksof its miners.  Just last week Iwrote an essay explaining how their post-stock-panic upleg was still healthy, whichtraders were increasingly doubting due to a correction-grade selloff.  Gold stocks have bounced back sharply since,as is evident in their leading GDX VanEck Vectors Gold Miners ETF in thisupdated chart.

While gold has rallied18.7% at best out of its deep stock-panic lows, the major gold stocks have dwarfedthat.  At best GDX skyrocketed 95.8%higher from mid-March to mid-May! That makes for awesome 5.1x upside leverage to gold.  And as I explained in my essay last week, thegold stocks still have lots of room to run technically and fundamentally.  Fully 2/3rds of that big post-panic upleg wasjust a mean-reversion rebound.

While gold stocks bear toomany additional risks to usurp gold’s ultimate-portfolio-diversifier crown,they are great to own when gold is powering higher on strong investment demand.  The major gold stocks of GDX more than quadrupled afterthat last stock panic in late 2008, soaring 307.0% higher over the next 2.9 years.  So if you expect strong gold investmentdemand to continue in coming years, own gold stocks!

Gold and its miners alsopower higher during stock-market bears when everything else is burning.  Gold stocks aren’t a replacement forprudently maintaining that 10%-to-20% gold portfolio allocation.  But they are a great place to park additionalcapital during extended episodes of weakening stock markets.  The major gold stocks tend to amplify gold’supside by 2x to 3x, building wealth instead of just preserving it incash.

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscriptionnewsletters back in mid-March right after the stock-panic lows.  We’ve been layering into new positions eversince, with unrealized gains already growing huge.  Today our trading books are full of these fundamentally-thrivinggold and silver miners that aren’t done running yet.

To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles that drivegold.  Our newsletters are a great way,easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off sale!  Seizethis gold-stock consolidation to mirror our many winning trades before this majorupleg runs again.

The bottom line is goldinvestment demand remains strong.  Eversince the stock panic, American stock investors have continued shifting capitalinto GLD shares on balance.  GLD’sholdings have long proven the best daily proxy for global gold investment demand.  Investors are returning to gold with a vengeanceafter March’s stock panic violently reminded them that stock-market cyclesstill exist despite Fed money printing.

And that has goneballistic since the stock panic, with the panicking Fed ramping dollar suppliesby 2/3rds in a few months!  This biggestand most-extreme monetary inflation in US history by far makes investing ingold more essential than ever.  So goldinvestment demand is likely to remain strong in coming months, and soar asthese lofty Fed-goosed stock markets roll over. That portends massive additional gold-stock gains.

Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2019 Zeal Research ( www.ZealLLC.com )

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.