Gold Weekly: Expect A Warm Spring 2019
Gold has rebounded since March 5 despite a mixed macro backdrop.
Gold's spec positioning lightens for a third week in a row.
ETF investors buy gold for the first time in six weeks.
Expect a warm macro backdrop for gold in Spring 2019 on 1) dovish Fed's stance and 2) unsustainable rally in US equities.
I am bullish on GLDM over the short term and beyond.
A warm spring breeze, John Rula (Saatchi Art)
Introduction
Welcome to my Gold Weekly.
In this report, I wish to discuss mainly my views about the gold market through the World Gold Shares SPDR Gold Minishares Trust ETF (GLDM). GLDM is directly impacted by the vagaries of gold spot prices because the fund physically holds gold bars in a London vault in the custody of ICBC Standard bank.
To do so, I analyse the recent changes in speculative positions on the Comex (based on the CFTC) and ETF holdings (based on Fastmarkets' estimates) in a bid to draw some interpretations about investor and speculator behavior. Then, I discuss my global macro view and the implications for monetary demand for gold. I conclude the report by sharing my trading positioning.
Speculative positions on the Comex
The CFTC statistics are public and free. The CFTC publishes its Commitment of Traders report (COTR) every Friday, which covers data from the week ending the previous Tuesday. In this COTR, I analyze the speculative positioning, that is, the positions held by the speculative community, called "non-commercials" in the legacy COTR, which tracks data from 1986.
It is important to note that the changes in speculative positioning in the gold futures contracts do not involve physical flows because it is very uncommon for speculators to take delivery of physical on the futures contracts that they trade. Due to the use of leverage by speculators, the changes in speculative positions in gold futures contracts tend to be much greater than the changes in other components of gold demand like ETFs or jewelry.
As a result, the impact on gold spot prices tends to be relatively more important and volatile, which, in turn, affect the value of GLDM because the latter physically holds the metal in vaults in London and, therefore, have a direct exposure to spot gold prices.
Gold ETF positions
The data about gold ETF holdings are from Fastmarkets, an independent metals agency which tracks ETF holdings across the precious metals complex. Fastmarkets tracks on a daily basis a total of 21 gold ETFs, which represent the majority of total gold ETF holdings. The largest gold ETFs tracked by Fastmarkets are the SPDR Gold Trust (GLD), whose holdings represent nearly 40% of total gold ETF holdings, and the iShares Gold Trust (IAU), whose holdings represent roughly 15% of total gold ETF holdings.
Context
Source: Trading View
GLDM has rebounded well since hitting a low of $12.80 per share on March 5 despite a mixed macro backdrop for the yellow metal. As I discuss below, I expect the macro backdrop to turn increasingly friendly in the next two months, which should push GLDM to a fresh high.
Speculative positioning
Source: CFTC
According to the latest Commitment of Traders report (COTR) provided by the CFTC, non-commercials slashed their net long position in Comex gold - for a third time in a row - in the week to March 12.
The net spec length dropped by 29 tonnes, moving from 274 tonnes (19% of open interest) on March 5 to 245 tonnes (15% of open interest) on March 12. Comex gold spot prices rose 1.1% over the corresponding period.
The fact that gold prices appreciated despite speculative selling is encouraging because this suggests the presence of offsetting buying pressure elsewhere in the market.
Longs lifted marginally their exposure for the first time in three weeks. Shorts lifted their exposure for a second straight week.The wave of speculative selling in gold since late February is primarily driven by the re-emergence of a stronger dollar. After a negative January, the dollar seems to have bottomed out, although it remains far below its December 2018 high.
Interestingly, the dollar has come under renewed downward pressure since March 12, which could prompt the speculative community to lift its net long exposure to gold again. Evidence of this will be visible in the forthcoming COT data, due to be released on March 22.
Importantly, the Fed is due to meet this week (on March 20). Although the financial markets have stabilized, I expect the Fed to maintain its dovish bias by keeping its "patient" attitude in order to have additional time to determine appropriately whether the recent economic risks become reality or not.
Consequently, I expect the dollar to come further under pressure, which should lift the net long spec positioning in Comex gold.
Implications for GLDM: Once speculative buying resumes, Comex gold spot prices will naturally move higher. This will in turn lift the value of GLDM.
Investment positioning
Source: Fastmarkets
ETF investors lifted their gold holdings for the first time in six weeks in the week to March 15, according to Fastmarkets.
ETF investors bought around 8 tonnes of gold last week, after liquidating an accumulative 50 tonnes over the preceding five weeks.
ETF investors are net buyers of 15 tonnes in the year to date.
Taking a closer look at last week's inflows/outflows, I notice that the largest inflow came from the SPDR GLD ETF, at 4.5 tonnes. Other gold ETFs attracted marginal inflows.
As far as GLDM is concerned:
Last week, ETF investors left their holdings unchanged changed at 15.26 tonnes.
In the year to date, ETF investors have lifted their holdings by ~6 tonnes, representing 30% of the total year-to-date inflows into gold ETFs.
I am not surprised to see such a strong growth in favor of the SPDR GLDM because my analysis suggests that GLDM is the cheapest /most efficient ETF to play gold prices. For more details, please refer to the dedicated section at the end of my article.
Source: Deutsche Bank
Although flows into US equity funds have surged markedly of late, at an usually fast pace, Deutsche Bank shows that in the majority of episodes, "surging inflows were a contrarian indicator". To wit:
In a majority of episodes surging inflows were a contrarian indicator. 6 out of the 9 episodes saw the S&P 500 fall an average of -5.9% over the course of the following one month, accompanied by outflows.
Although Deutsche Bank recognizes that the current surge in inflows could be an exception because exceptions occurred when "inflows play catch up after lagging up far behind a market rally, as is the case right now", it acknowledges that " modest equity selloffs of 3-5% happen every 2-3 months on average".
In this context, I believe that the risk of selloff in US equities in the next two months is elevated, judging by historical standards, which in turn could lift monetary demand for gold via a pick-up in gold ETF inflows.
Implications for GLDM: I expect ETF inflows to continue in the weeks and months ahead because investors are expected to position more defensively when volatility in risk assets resume. As safe haven demand for gold increases, gold spot prices will increase, which in turn will lift the value of GLDM.
Bottom line
I expect the macro backdrop to become increasingly friendly for gold in the next two months. First, the Fed is likely to maintain its "patient" attitude at the forthcoming FOMC meeting on March 20, which should pressure the dollar lower and therefore stimulate speculative demand for gold.
While this dovish Fed stance is due to give US equities a little more time to push higher, the rally becomes increasingly unsustainable from April onwards. A renewed selloff in equities will induce macro investors to hide in gold, resulting in a surge in ETF inflows.
Against this, I expect the macro backdrop to be conducive to stronger monetary demand for gold and thus stronger gold spot prices.
In this context, I am inclined to maintain my constructive view on GLDM over the short term and beyond.
GLDM - World Gold Shares SPDR Gold Minishares Trust ETF - Review
Source: MikzEconomics
GLDM is directly impacted by the vagaries of gold spot prices because the fund physically holds gold bars in a London vault and custodied by ICBC Standard bank.
GLDM offers the lowest expense ratio of just 0.18% among its peers. GLD, IAU, and BAR have an expense ratio of 0.50%, 0.25%, and 0,20%, respectively. From a purely cost perspective, GLDM is the most competite gold-ETF, in my opinion.
GLDM's average spread is 0.08% over the past two months, which is a touch lower than that of its competitor IAU, at 0.09%.
GLDM's average daily volume (over the past 45 trading days) is ~$4.5 million, which is much lower than that of IAU, at ~$126 million. But unless you are an institutional investors, liquidity conditions are sufficient.
According to the official website, stricto sensu:
All of the Trust's physical gold is held by the custodian; namely ICBC Standard bank, in their London vault except when the gold has been allocated in the vault of a sub-custodian.
In such instances, ICBC Standard bank has agreed that it will use commercially reasonable efforts to promptly transport the gold from the sub-custodian's vault to the ICBC Standard's London vault, at ICBC Standard's cost and risk.
The gold bar list is updated at the end every working day (EST), on the website below the "Bar list" section.
The Trust has entered into an agreement with ICBC Standard Bank plc, the Trust's Custodian, which will ensure that all of the Trust's gold is held in allocated form at the end of each working day.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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