Gold has been lackluster but sure isn’t faring poorly. Gold’s solid recent gains are despite a…
While gold has been grinding higher, it hasn’t soared yet despite raging inflation and rolling-over stock markets. The main reason has been the lack of investment capital inflows. But long-apathetic investors are starting to return, flocking back to gold exchange-traded funds as the US stock markets threatened a correction. That buying is a bullish gold omen, fueling upside momentum that will attract in more investors.
Still largely flying under traders’ radars, gold has been lackluster but sure isn’t faring poorly. Over 3.9 months between late September to late January, gold powered 7.1% higher in a young bull-market upleg. That way-outperformed the S&P 500 and bitcoin in that span, which fell 0.1% and 10.6%. And gold’s solid recent gains are despite a major 1.7% surge in the US Dollar Index fueled by extreme Fed hawkishness.
Gold-futures speculators watch the dollar as their main trading cue, and it has been very strong with all the Fed jawboning. The FOMC accelerated its quantitative-easing taper, ending its colossal QE4 money-printing campaign early. First Fed officials then the FOMC itself threatened more and more rate hikes, starting sooner. Futures-implied federal-funds-rate expectations skyrocketed to seeing five hikes this year!
And Fed officials started discussing quantitative tightening, beginning to reverse their mind-boggling $4,911b of QE4 bond monetizations in just 27.6 months. The Fed has never lurched so hawkish in so little time as in these recent months! Fed-tightening surprises ignited multiple bouts of heavy gold-futures selling. Yet the yellow metal still gradually climbed on balance, carving higher lows and higher highs in an uptrend.
But gold hasn’t rallied long enough or high enough yet to impress investors, who need upside momentum to entice them back. Gold uplegs can’t grow large without major investment buying, as investors’ vast pools of capital dwarf gold-futures speculators’ trading firepower. Comprehensive global gold investment data is only published quarterly by the World Gold Council, in its outstanding Gold Demand Trends reports.
The latest covering Q4’21 was just released last Friday, revealing a huge 117.5% year-over-year jump in overall world gold investment demand last quarter! That was fairly surprising given gold’s good-but-not-exciting 4.1% gain in Q4. Traditional physical-bar-and-coin demand only grew a far-smaller 18.0% YoY, or 48.5 metric tons. The primary driver of that demand surge was a way-bigger 113.7t jump in gold-ETF demand.
But that only resulted from less selling, not actual buying. In Q4’20, global gold-ETF bullion draws totaled 131.2t. In Q4’21 they greatly moderated to just 17.6t, but investment capital continued flowing out of gold ETFs. The WGC’s GDTs also rank the world’s physically-backed gold ETFs by holdings size at quarter-ends. Two American behemoths had 27.3% and 13.7% of all the gold held by all the world’s gold ETFs in Q4!
They are of course the mighty GLD SPDR Gold Shares and IAU iShares Gold Trust ETFs, commanding 41.1% of global gold-ETF bullion holdings. The distant third place is held by a UK gold ETF at just 6.8%. As the leading gold ETFs, GLD and IAU have long dominated global gold-ETF capital flows. These in turn have long proven the dominant driver of overall world investment demand, which is what moves gold prices.
In Q4’20, GLD+IAU suffered a sharp 5.1% or 91.3t holdings draw as American stock investors fled then-correcting gold. That was 7/10ths of the world gold-ETF total that quarter. Q4’21’s GLD+IAU draw of 1.4% or 21.5t was way better, but still accounted for nearly 5/4ths of all global gold-ETF bullion selling. As GLD+IAU capital flows dominate gold investing, they are a great high-resolution proxy for how that is faring.
GLD and IAU publish their bullion holdings daily, radically superior to the once-a-quarter updates from the WGC. Rising holdings reveal American stock-market capital flowing into gold, while falling holdings show it shifting back out. In order to accomplish their tracking mission of mirroring gold-price moves, GLD and IAU both act as conduits for stock-market capital to migrate into and out of gold. The mechanism is simple.
Gold-ETF-share supply and demand is independent from gold’s own. When gold-ETF shares are being bought faster than gold futures which drive gold’s world reference price, gold-ETF share prices threaten to decouple from gold to the upside. So gold-ETF managers must issue enough new shares to offset that excess demand. They use the proceeds from those new-share sales to buy more physical gold bullion.
And the opposite is also true, differential gold-ETF-share selling will soon force a downside disconnect in gold-ETF share prices compared to gold’s. So excess selling must be absorbed by gold-ETF managers buying back shares. They raise the cash to make these purchases by selling some of their underlying gold bullion. So GLD+IAU holdings changes reveal investment capital flowing into and out of gold itself.
This chart superimposes GLD+IAU holdings in metric tons over gold prices during the past few years or so. Major gold uplegs and corrections are highly correlated with gold-ETF capital flows. Recently until just the last couple weeks, investors largely remained indifferent to gold. That’s the primary reason this young gold upleg hasn’t grown bigger yet. Investment capital inflows were missing in action for most of it.
Gold’s last major selloff bottomed in late September, at a 9.6% loss over 3.9 months which was just shy of 10%+ correction territory. That was driven by bouts of heavy-to-extreme gold-futures selling on Fed officials’ incessant hawkish jawboning about ending QE then hiking rates. That day gold bottomed, GLD+IAU holdings ran 1,489.5t which was already a 17.0-month low. Investors had fled for most of that span.
GLD+IAU holdings had peaked at an all-time-record high of 1,800.5t in mid-October 2020, soon after gold’s own record nominal close of $2,062 in early August. The major 17.3% or 311.0t GLD+IAU holdings draw in the 11.5 months since that holdings crest explains why gold first corrected then consolidated sideways during that timeframe. With gold lacking exciting upside momentum, investors weren’t interested.
Despite gold bottoming in late September before starting its current young upleg, that investment selling persisted. Though gold rallied 4.9% higher by late December after the FOMC’s uber-hawkish meeting with that QE turbo-taper and Fed officials’ aggressive rate-hike outlook, GLD+IAU holdings had slumped another 1.7% or 24.9t. Gold investment capital flows usually lag major gold toppings and bottomings by a few months.
With extended time horizons and no leverage, investors just take longer to perceive gold trend changes. They aren’t in the weeds like speculators constantly analyzing technical and sentimental timing indicators. So gold investment demand keeps moving on inertia until new gold uplegs or corrections become obvious sometime after their precipitating troughs and peaks. Only established momentum changes investors’ minds.
In late December at 1,464.6t, GLD+IAU holdings had sunk to a 20.2-month low. But finally then several months after gold’s young upleg started stealthily marching higher, investors began to notice. They started nibbling in late December and early January, driving several daily 0.1%ish GLD+IAU holdings builds before a bigger 0.4% one. But with the US stock markets at record highs, gold investment demand was low.
For centuries gold has proven the ultimate portfolio diversifier, tending to rally whenever stock markets materially weaken. But gold gets overlooked and ignored when record stock markets generate enormous euphoria and complacency. Stock traders start assuming those lofty markets will rally indefinitely, so they feel no need to prudently diversify their stock-heavy portfolios. So gold investment demand really flags.
But in early January those uber-hawkish Fed officials torpedoed the lofty S&P 500, when the latest FOMC minutes revealed they had discussed starting quantitative tightening soon in mid-December! Since stocks’ record prices and dangerous bubble valuations had been directly fueled by the Fed’s trillions of dollars of QE4 money printing, prospects were ominous for QT starting to destroy some of that epic liquidity deluge.
QT is the death knell for QE-levitated stock markets, as the Fed’s last dismally-failed QT attempt in 2018 proved. So traders fled, battering the S&P 500 a stunning 9.8% lower during the next few weeks or so! The lion’s share of that near-correction plunge came in four trading days in mid-January, when the S&P 500 collapsed 5.7%! It closed under its 200-day moving average for the first time since late June 2020.
That very day, Friday January 21st, American stock investors started remembering they really need to diversify their fast-bleeding portfolios. So they flooded into GLD shares with a vengeance, doing enough differential buying to force a monster 2.8% holdings build in this leading gold ETF! IAU’s didn’t follow, it tends to appeal more to institutional investors due to its lower 0.25% annual expense ratio compared to GLD’s 0.40%.
But GLD+IAU holdings still soared a massive 1.9% or 27.6t that day to 1,501.0t! That was the biggest build in this pair of globally-dominant gold ETFs since way back in late June 2019. Investors had finally started returning to gold, acknowledging its mounting upleg and prodded by the brutal US-stock-market selloff on Fed officials’ hawkish jawboning. More GLD+IAU daily builds of 0.1% to 0.2% would soon follow.
Interestingly those came despite the S&P 500’s big-and-sharp 6.1% rebound bounce in just four trading days. That sure looked bear-market-rally-like, as stock markets’ fastest large surges erupt during bear markets right out of major downlegs. So gold investors didn’t flee as the stock markets reversed hard, but added more gold. GLD+IAU holdings were back up to 1,508.8t this Tuesday, as their daily builds persisted.
Big reversals in GLD+IAU-holdings trends are rare, and they usually prove decisive. Big gold investment buying often becomes self-feeding, driving a virtuous circle. The more stock-market capital that flows into gold ETFs, the higher that differential share buying drives gold prices. The higher gold heads, the more investors chase its upside momentum fueling even more gains. Gold investment demand is likely to keep recovering.
Several major factors will drive that. The looming Fed tightenings stock traders fear haven’t even started yet. Other than doubling the pace of that QE4 taper, all Fed officials have done so far is merely hawkishly jawbone. Their bold talk soon has to yield to action, actually starting a new rate-hike cycle which the FOMC just officially signaled for its next mid-March meeting. And QT is set to get underway soon after by mid-2022.
Despite the S&P 500 plunging 5.3% in January, these elite US stocks’ trailing-twelve-month price-to-earnings ratios remained in bubble territory averaging 30.2x! Historical fair value over the past century-and-a-half is near 14x. So these lofty stock markets still have serious downside risks as the Fed starts hiking rates and rolling off its QE4-monetized bonds. A highly-likely stock bear will greatly boost gold investment.
The raging inflation plaguing the US will also motivate investors to flock back to gold. The latest headline read per the lowballed Consumer Price Index was up a scorching 7.0% YoY, its hottest print since way back in June 1982! So far gold has lagged that massive inflation spike driven by this profligate Fed’s reckless and foolish $4,702b of QE4 money printing since March 2020’s pandemic-lockdown stock panic.
That ballooned the Fed’s balance sheet by a terrifying 113.1% in just 23.0 months, effectively doubling the US-dollar monetary base! Far-more money chasing relatively-way-less goods and services is fast bidding up their prices. During the last major inflation spikes of the 1970s, gold prices literally tripled and more-than-quadrupled! So far mostly-flat in this latest one, there’s no reason gold shouldn’t at least double.
Regardless of whether investors return to gold as a stock-market-bear hedge or runaway-inflation hedge, buying begets buying. The more investment capital flows into gold, the higher its price will climb. And nothing attracts in investors like exciting upside momentum. Gold-futures speculators will also buy heavily as gold rallies, closing out exceedingly-risky leveraged shorts while adding extensive new long positions.
Helping motivate both investors and speculators to flock back, gold is on the verge of a massive upside breakout. Since its last major upleg peaked in early August 2020, gold first corrected then consolidated forming a colossal pennant formation rendered in this chart. Looking like triangular flags, these chart patterns exhibit ascending lower support converging with descending upper resistance gradually forcing breakouts.
And pennants are continuation patterns, meaning those breakouts usually happen in the same direction in which those formations were entered. In gold’s case, that was sharply higher in a flagpole formed by huge bull uplegs in 2020. Gold’s coming big upside breakout should light a fire under both investors and gold-futures speculators sitting on the sidelines. They will rush in to aggressively chase big upside momentum.
So gold investment demand is likely to soar this year, catapulting gold dramatically higher. The coming Fed-rate-hike cycle that will hammer stock markets is actually bullish for gold for that very reason. Since 1971, the FOMC has executed fully twelve rate-hike cycles. During the exact spans of all dozen, gold averaged nice 26.1% gains. In the majority seven where gold rallied, it blasted an average of 54.7% higher!
In the remaining five gold slumped an asymmetrically-small 13.9%. Gold fared the best in Fed-rate-hike cycles if it entered them relatively-low and they were gradual, no more than one hike per regularly-scheduled FOMC meeting. Both conditions are true heading into this next cycle, making gold’s outlook very bullish. With headline inflation near 7%, even eight rate hikes to 2% will leave real rates deeply-negative at -5%.
Gold investment demand soars in negative-real-rate environments, since investors are guaranteed to lose purchasing power by parking in cash. Rising rates also hammer existing bond prices as yields are forced higher. With losses almost certain in stocks, cash, and bonds, gold really shines! Investors remember why they ought to own it and start redeploying massive capital in this ultimate alternative investment.
The biggest beneficiaries of much-higher gold prices ahead are the fundamentally-superior mid-tier and junior gold stocks. Despite gold’s mounting young upleg, these great gold stocks have been lingering near major lows thanks to the periodic bouts of heavy gold-futures selling. Our newsletter trading books are full of high-potential smaller gold stocks trading at dirt-cheap prices. They will soar as gold’s upleg grows!
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The bottom line is investors have finally started returning to gold after ignoring its young upleg for several months. As stock markets plunged on the uber-hawkish Fed threatening rate hikes and QT, differential demand for major-gold-ETF shares soared. That triggered a sharp reversal in their holdings, heralding an accelerating investment-demand-driven gold upleg. Investors love chasing gold upside momentum.
Their buying feeds on itself, pushing gold higher fueling even more investment demand. That should only grow as these QE-levitated stock markets roll over into a long-overdue bear on the coming Fed-rate-hike cycle and QT. The raging inflation the Fed’s reckless QE4 money printing unleashed, and the resulting deeply-negative real rates, will greatly boost gold investment demand. Gold will return to favor in a big way.
Adam Hamilton, CPA