Gold has largely been drifting sideways for the better part of a couple months now, sapping enthusiasm. Gold investment demand has stalled due to extreme stock-market euphoria. Investors aren’t interested in alternative investments led by gold when stocks seemingly do nothing but rally indefinitely. But once stock-market volatility inevitably returns, so will gold investment demand which fuels major gold uplegs.
Like nearly everything else in the global markets, gold prices are heavily dependent on investment capital flows. When investors are buying gold in a meaningful way, demand exceeds supply which drives gold’s price higher. When they’re materially selling, supply trumps demand thus gold’s price naturally retreats. The past couple months have been stuck in the middle, with gold investment flows neutral on balance.
The World Gold Council is the leading authority on global gold supply and demand, publishing quarterly Gold Demand Trends reports that offer the best fundamental reads available on the gold markets. The latest Q3’17 GDT was just released early yesterday morning. While it doesn’t cover the ongoing Q4 where gold is drifting, it does offer great insights into what’s happening with gold investment demand.
Overall world gold demand was quite weak in Q3, dropping 8.6% YoY to 915.0 metric tons. That made for an 86.1t absolute drop. Investment demand, though it only accounted for just over a quarter of the total, was responsible for this entire demand decline. Gold investment demand plunged 27.9% YoY in Q3, or 93.4t! The WGC further breaks down that category into bar-and-coin demand and ETF demand.
The traditional physical-bar-and-coin gold demand was actually quite strong in Q3, surging 16.9% YoY to 222.3t. That’s up a healthy 32.1t YoY. But the stock-market gold demand via exchange-traded funds far more than offset this, plummeting an astounding 86.9% YoY or 125.4t! If ETF demand had been stable in Q3, overall global gold demand would’ve climbed a healthy 3.9% YoY. Gold has stalled because of ETFs.
Gold exchange-traded funds act as conduits enabling vast amounts of stock-market capital to slosh into and out of physical gold bullion. These big changes in collective buying or selling really move gold. Since the gold ETFs seek to mirror the underlying gold price, they have to shunt excess ETF-share supply or demand directly into actual gold bars. There’s no other way for gold ETFs to successfully track their metal.
The world’s leading and dominant gold ETF is the venerable American GLD SPDR Gold Shares. Every quarter the World Gold Council also ranks the world’s top-ten gold ETFs. At the end of Q3, GLD alone accounted for a whopping 36.9% of their total gold-bullion holdings! GLD was 3.8x larger than its next biggest competitor, which is the American IAU iShares Gold Trust. GLD is the behemoth of the gold-ETF world.
The supply and demand of GLD shares, and all gold ETFs, are totally independent from underlying gold’s own supply and demand. So when stock investors buy GLD shares faster than gold is being bought, the GLD share price starts decoupling from gold to the upside. That is unacceptable, as GLD would fail its mission to track gold. So GLD’s managers must vent this differential buying pressure directly into gold.
They do this by issuing sufficient new GLD shares to meet the excess demand. All the money raised by these GLD-share sales is then plowed into physical gold bars that very day. This mechanism enables stock-market capital to flow into physical gold. Of course this is a double-edged sword, as excess GLD-share selling pressure forces this ETF to sell real gold bars to raise the capital to buy back its share oversupply.
What American stock investors are doing with GLD shares is the primary driver of gold’s trends! GLD has grown massive since its launch 13 years ago this month, and acts as a direct pipeline into gold for the immense pools of stock-market capital. So nothing is more important for gold prices now than GLD inflows and outflows. These are very transparent, as GLD reports its physical-gold-bullion holdings daily in great detail.
I call stock-market capital inflows into GLD as evidenced by rising holdings builds, and outflows as seen by falling holdings draws. In recent years there have been plenty of quarters where GLD builds and draws accounted for the entire global change in gold demand! That wasn’t the case in Q3 though. While the world gold-ETF demand fell 125.4t YoY, GLD’s holdings were actually up 12.1t in Q3. So gold edged up 1.4%.
But if American stock investors had been buying or selling GLD shares aggressively, gold certainly would’ve risen or fallen accordingly. Gold has been drifting in recent months because GLD’s holdings are flat, with stock investors neither buying nor selling GLD shares at differential rates relative to gold. That’s why gold investment demand has stalled. GLD has grown into the tail that wags the global-gold-price dog!
Amazingly many if not most investors still don’t grasp GLD’s critical role in gold price trends. They attempt to understand today’s gold’s price action in historical pre-gold-ETF-era terms. But for better or for worse, the gold world is radically different now. GLD, and to a lesser extent the other large gold ETFs trading in foreign stock markets, changed everything. Gold investors ignoring GLD’s holdings are flying blind.
This chart drives home this critical point. It superimposes GLD’s daily physical-gold-bullion holdings in blue over the gold price in red. Carved into calendar quarters, gold’s performance in each one is noted above GLD’s quarterly holdings changes in both percentage and absolute terms. The correlation between GLD’s physical-gold-bullion holdings and gold prices is very strong. GLD capital flows explain much for gold.
Gold has largely been drifting sideways for the better part of a couple months now, sapping enthusiasm.Gold investment demand has stalled due to extreme stock-market euphoria.Investors aren’t interested in alternative investments led by gold when stocks seemingly do nothing but rally indefinitely.But once stock-market volatility inevitably returns, so will gold investment demand which fuels major gold uplegs.
Like nearly everything else in the global markets, gold prices are heavily dependent on investment capital flows.When investors are buying gold in a meaningful way, demand exceeds supply which drives gold’s price higher.When they’re materially selling, supply trumps demand thus gold’s price naturally retreats.The past couple months have been stuck in the middle, with gold investment flows neutral on balance.
The World Gold Council is the leading authority on global gold supply and demand, publishing quarterly Gold Demand Trends reports that offer the best fundamental reads available on the gold markets.The latest Q3’17 GDT was just released early yesterday morning.While it doesn’t cover the ongoing Q4 where gold is drifting, it does offer great insights into what’s happening with gold investment demand.
Overall world gold demand was quite weak in Q3, dropping 8.6% YoY to 915.0 metric tons.That made for an 86.1t absolute drop.Investment demand, though it only accounted for just over a quarter of the total, was responsible for this entire demand decline.Gold investment demand plunged 27.9% YoY in Q3, or 93.4t!The WGC further breaks down that category into bar-and-coin demand and ETF demand.
The traditional physical-bar-and-coin gold demand was actually quite strong in Q3, surging 16.9% YoY to 222.3t.That’s up a healthy 32.1t YoY.But the stock-market gold demand via exchange-traded funds far more than offset this, plummeting an astounding 86.9% YoY or 125.4t!If ETF demand had been stable in Q3, overall global gold demand would’ve climbed a healthy 3.9% YoY.Gold has stalled because of ETFs.
Gold exchange-traded funds act as conduits enabling vast amounts of stock-market capital to slosh into and out of physical gold bullion.These big changes in collective buying or selling really move gold.Since the gold ETFs seek to mirror the underlying gold price, they have to shunt excess ETF-share supply or demand directly into actual gold bars.There’s no other way for gold ETFs to successfully track their metal.
The world’s leading and dominant gold ETF is the venerable American GLD SPDR Gold Shares.Every quarter the World Gold Council also ranks the world’s top-ten gold ETFs.At the end of Q3, GLD alone accounted for a whopping 36.9% of their total gold-bullion holdings!GLD was 3.8x larger than its next biggest competitor, which is the American IAU iShares Gold Trust.GLD is the behemoth of the gold-ETF world.
