Zeal Research: Gold’s worst year in memory was largely the result of extreme gold-ETF selling. A flood of gold supply hammered gold prices as stock investors around the world aggressively dumped gold ETFs. They were rotating out of gold to chase the Fed-driven stock-market levitation. But as toppy stock markets inevitably reverse, so will capital flows. Gold-ETF outflows are already waning, and will soon shift to accelerating inflows.
This is a very bullish omen for battered gold prices. They are determined by supply and demand, like everything else traded in financial markets. When supply exceeds demand, prices retreat until a new equilibrium level is reached that balances buying and selling. Fundamentally, this year’s extreme gold-ETF selling is responsible for literally all the world’s excess gold supply. That vanishes and gold soars.
The World Gold Council, which is funded by the large gold miners, is the premier authority on global gold supply and demand. According to its data, extreme gold-ETF selling is the entire story behind this year’s brutal gold-price anomaly. In the first three quarters of 2013, overall global gold demand fell 12.0% year-over-year. Gold’s average price perfectly mirrored this decline, falling 11.9% YoY in 2013’s first 9 months.
On balance during this period, buyers wanted 383 fewer metric tons of gold. This was entirely the result of a massive reversal of gold-ETF flows. They swung from inflows of 191t in 2012’s first three quarters to jaw-dropping record outflows of 698t in 2013’s! Obviously this dwarfs the decline in overall gold demand, which would have risen about 10% this year if ETF holdings had been flat. Gold ETFs are the sole culprit.
The world’s dominant ETF remains the American SPDR Gold Shares ETF (NYSEARCA:GLD). Its outflows in the first 9 months of this year were a whopping 445t, or nearly 2/3rds of total global gold-ETF outflows! This alone is bigger than the total world decline in gold demand. So if American stock traders alone hadn’t aggressively dumped GLD, gold would have been higher this year. GLD’s gold sales were so overwhelming nothing else matters.
GLD’s mission is to track the gold price. But the supply and demand of GLD shares doesn’t always match the underlying supply and demand of gold itself. This requires stock-market capital to be shunted into and out of gold. This year GLD was plagued with extreme differential selling pressure, its shares being sold at a much faster pace than gold was being sold. This excess GLD-share supply had to be quickly absorbed.
GLD’s custodians raised the cash to buy back its excess shares being sold by selling some of this ETF’s gold bullion held in trust for its shareholders. That gold hit the global markets as supply, and hammered prices. It’s hard to believe, but exactly one year ago GLD’s holdings hit their all-time record high just over 1353t. This week they are down under 839t, revealing epic GLD liquidations nearing 515 metric tons!
The good news is GLD’s gold holdings, and indeed those of all the world’s gold ETFs, are finite. There is absolutely no way next year can see ETF liquidations even remotely close to this year’s. Down 512t year-to-date, this represents a massive 38% holdings correction. A similar amount next year would gut GLD’s holdings by nearly 2/3rds, which isn’t going to happen even if the gold price somehow spiraled far lower.
With every additional GLD shareholder that sells, this flagship gold ETF’s remaining shares become concentrated in stronger and stronger hands. Those investors understand gold’s bullish fundamentals, and generally still have large gains. The last time GLD’s holdings were at today’s levels was way back in January 2009 when gold was just $885! Even at this week’s dismal levels, this metal is still 40% higher.
And I suspect 2013’s trend of extreme gold-ETF selling is reversing. It is certainly dramatically slowing, with global gold-ETF outflows down 71% sequentially between this year’s second and third quarters. GLD’s alone plummeted by 3/4ths! The main reason is selling exhaustion and the number of remaining weak hands waning. But an additional important major reason is the incredibly-toppy US stock markets.
This first chart looks at GLD’s holdings during this past year superimposed on the flagship American S&P 500 stock index (SPX). The US stock markets have been levitating and melting-up all year long thanks to the notion that the Fed’s massive QE3 campaign is backstopping them. This seduced investors away from alternative investments including gold, leading to the capital rotation out of GLD into general stocks.
A year ago just before the Fed more than doubled QE3, the gold market was still normal. Even though gold was near $1700, it certainly wasn’t loved. It had spent the past 16 months consolidating after getting too overbought in a sharp rally during the summer of 2011. But gold was still at least respected for its essential role as an alternative asset not correlated with stock markets to help diversify stock portfolios.
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