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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Is Another Gold Rally On The Horizon?


Gold investment demand reversed sharply higher in recent months, fueling a strong gold rally. The big stock-market selloff rekindled interest in prudently diversifying stock-heavy portfolios with counter-moving gold. These mounting investment-capital inflows into gold are likely to persist and intensify. Both weaker stock markets and higher gold prices will continue to drive more investment demand, growing gold’s upleg.

Early in Q4’18, gold reached a major inflection point. It languished during the first three quarters of 2018, down 8.5 percent year-to-date by the end of Q3. Investors wanted nothing to do with alternative investments with the stock markets powering to new record highs. The flagship S&P 500 broad-market stock index (SPX) had rallied 9.0 percent in the first 3/4ths of last year. That left gold deeply out of favor heading into Q4.

But a critical psychological switch was flipped as the SPX started sliding last quarter. After long years with little material downside, stock traders had been lulled into overpowering complacency. They were shocked awake as the SPX plunged 14.0 percent in Q4, its worst quarter since Q3’11. They poured back into gold as stocks burned, driving it a strong 7.6 percent higher in Q4! Rekindled investment demand was the driver.

Unfortunately, gold investment demand is rather murky. Gold is bought and sold every day all over the world, in countless venues ranging from major exchanges to tiny third-world merchants. Tracking even the majority of this in real-time is impossible. The best-available data on global gold investment comes from the World Gold Council. But it is only published once per quarter, about a month after quarter-ends.

I can’t wait to see the WGC’s new Q4’18 Gold Demand Trends report due out in early February. These quarterly GDTs are very well done and essential reading for all investors. But while detailed and informative, their resolution is really low only being released 4 times per year. Investors need alternative data sources to understand and game what’s going on with gold investment demand between the GDTs, like now.

Thankfully there’s an excellent proxy of investors’ capital flows into and out of gold published daily, a high-resolution read. It is the physical gold bullion held in trust for the shareholders of the world’s dominant gold exchange-traded fund. That of course is the American GLD SPDR Gold Shares. GLD was created and launched by the World Gold Council way back in November 2004, and has grown into a gold juggernaut.

As part of the WGC’s GDT work each quarter, it tracks the world’s top 10 physically-backed gold ETFs. At the end of Q3’18 when you could hardly give away gold to American investors, GLD’s holdings still accounted for nearly 32 percent of the world’s top-10 gold-ETF total. Add in the 2nd-largest ETF which is also American, the IAU iShares Gold Trust, and these two leading ETFs control over 3/7ths of the global top-10 total.

The primary constituency for American gold ETFs is American stock investors. So what they are doing in terms of capital flows through GLD especially is exceedingly important for gold. In recent years most of the major quarterly moves in gold prices are nearly fully explainable by GLD’s holdings alone! They must be watched daily, as changes in them have proven the key to gold’s fortunes. It’s important to understand why.

The American stock markets are the biggest in the world, and American investors’ capital is vast beyond compare. At the end of Q3’18, the collective market capitalization of the 500 elite SPX stocks alone was a staggering $26,141.4b. By comparison, GLD’s total physical-gold-bullion holdings of 742.2 metric tons were only worth $28.4b. That’s less than 1/9th of a single percent, which for all intents and purposes is zero. Related: This Gold Deal Could Be A Boon For The Mining Industry

Thus if even the tiniest fraction of US stock-market capital migrates into or out of GLD shares, gold itself moves big. This dominant gold ETF effectively acts as a conduit between stock-market capital and gold. But as these colossal pools of capital slosh into and out of GLD, it is always at risk of failing its mission of tracking the gold price. The supply and demand of GLD shares and gold are independent of each other.

So differential buying or selling of GLD shares by American stock investors must be directly equalized into the underlying global gold market. This mechanism is simple in concept. When GLD shares are being bought faster than gold itself, this ETF’s price threatens to decouple from gold’s price to the upside. To prevent this, GLD’s managers need to shunt that excess GLD-share demand directly into gold in real-time.

They issue enough new GLD shares to offset that excess demand, and then use the proceeds to buy physical gold bullion held in trust for GLD’s shareholders. So when GLD’s daily holdings are rising, that reveals American stock-market capital is flowing into gold. This GLD capital pipeline into gold also works similarly on the downside, when American stock investors dump GLD shares faster than gold is being sold.

GLD’s share price will soon disconnect from gold’s price to the downside. This ETF’s managers avoid that by buying back GLD shares to sop up the excess supply. They raise the capital to do this by selling some of GLD’s physical-gold-bullion holdings. So when GLD’s daily holdings are falling, American stock-market capital is being pulled back out of gold. These holdings closely mirror world gold-investment trends.

My chart this week compares GLD’s daily gold holdings in metric tons with the gold price over the past several years or so. After falling to a major 6.1-year secular low in December 2015, gold started powering higher in a new bull market. Since gold hasn’t retreated 20 percent+ from its bull-to-date peak in July 2016, this bull remains alive and well. It has been overwhelmingly driven by American stock-market capital flows via GLD.

(Click to enlarge)

Let’s start in the middle of 2018, when GLD’s holdings were stable above 800t which has proven major support for this bull market. In much of the first half of last year, the stock markets were largely grinding sideways after the SPX suffered a sharp-yet-shallow-and-short correction in early February. The SPX finally started climbing decisively again in early Q3, ultimately achieving 5 new all-time record highs in that quarter.

That stoked incredible euphoria, convincing investors these amazing stock markets could rally indefinitely. By late September the SPX had skyrocketed 333.2 percent higher over 9.5 years, making for the 2nd-largest and 1st-longest stock bull in US history! With general stocks looking invincible, there was little incentive to prudently diversify stock-heavy portfolios with gold. American stock investors were actually fleeing it.

In Q3 they sold GLD shares so aggressively that it forced a serious 76.8t or 9.4 percent draw in GLD’s holdings! All that selling pressure pushed world gold prices 4.9 percent lower that quarter. And GLD alone was mostly responsible. The WGC’s Q3 GDT showed total global gold demand actually grew a slight 0.6 percent year-over-year that quarter to 964.3t. Every major demand category grew considerably with a lone exception.

Global investment demand plunged 20.8 percent YoY to 194.9t. The WGC breaks it out into two major sub-categories, physical bar-and-coin demand and gold-ETF demand. The former was very strong, surging 28.0 percent YoY to 298.1t. But the latter plummeted from +13.2t in Q3’17 to -103.2t in Q3’18! Gold would’ve rallied nicely that quarter if not for GLD, which accounted for a commanding 2/3rds of that total world ETF drop.

When American stock investors are sustaining selling GLD shares faster than gold is being sold, it forces the world gold price lower. That serious Q3’18 GLD-holdings draw was the worst by far since back in Q4’16. That was when Trump’s surprise election victory with Republicans controlling both chambers of Congress ignited a major stock-market rally on hopes for big tax cuts soon. The resulting euphoria hammered gold.

While the SPX only climbed 3.3 percent in Q4’16, 8 new all-time record highs were achieved. American stock investors jettisoned gold with reckless abandon, both to chase that stock surge and out of relief that the political uncertainty didn’t trigger a stock selloff as feared. The differential GLD-share selling proved so intense that this ETF suffered a colossal 125.8t or 13.3 percent holdings draw, which crushed gold 12.7 percent lower!

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Total world gold demand per the latest WGC GDT dropped 103.4t or 9.0 percent YoY that quarter. That huge GLD draw alone was 122 percent of that! Overall global gold-ETF demand fell 107.0t from -66.4t in Q4’15 to -173.4t in Q4’16. GLD’s draw was 118 percent of that. So literally the only reason gold plunged in Trump’s election quarter was American stock investors pulling big capital out of GLD forcing it to sell physical gold bullion.

Compared to that extreme dump, gold was relatively resilient in Q3’18. While GLD’s draw ran 61 percent of that Q4’16 episode, gold only declined 39 percent as much. There were hints the stock markets were ready to roll over into a long-overdue new bear. On Q3’s final trading day with the SPX just under its recent record peak, I published an essay explaining why Q4’s first-ever full-speed Fed QT was this stock bull’s death knell.

Indeed within a week of Fed QT ramping up to $50b per month of monetary destruction, the SPX started to falter. Its first serious down day erupted on October 10th when this leading stock-market benchmark plunged 3.3 percent. That triggered a major sentiment shift in gold. GLD enjoyed a large 1.2 percent holdings build that day on heavy differential GLD-share buying. Those were its first capital inflows at all since late July.

That very day American stock investors’ faith in perpetually-levitating stock markets started to crack, they started remembering gold. As Q4 wore on and that SPX selloff snowballed into a 4 percent+ pullback, a 10 percent+ correction, and narrowly missed new-bear-market territory at -19.8 percent on Christmas Eve, gold investment demand continued growing. Tending to rally when stocks fall, gold is essential for wisely diversifying portfolios.

By the time the dust settled on Q4, American stock-market capital sloshing back into gold via that GLD conduit had fueled a 45.4t or 6.1 percent holdings build. That was the biggest by far since way back in Q2’16 soon after this latest gold bull was born. All that differential GLD-share buying forced gold 7.6 percent higher in Q4 as the SPX plunged 14.0 percent. The WGC’s coming Q4’18 GDT will likely prove GLD largely drove gold’s gains.

The last time American stock investors started returning to gold after stock-market corrections spooked them was in the first half of 2016. Remember gold had just slumped to a major 6.1-year secular low, so it was deeply out of favor suffering incredibly-bearish sentiment. Yet in Q1’16 GLD’s holdings skyrocketed an epic 176.9t of 27.5 percent higher, which catapulted gold up 16.1 percent. Nothing else mattered per the WGC.

Overall world gold demand soared 188.1t or 17.1 percent YoY that quarter. GLD’s enormous build driven by American stock investors returning to gold accounted for an amazing 94 percent of that! If their vast pools of capital hadn’t sloshed back into gold via GLD that quarter, this bull never would’ve been born. And that utter dominance of American stock-market-capital inflows through GLD persisted in the subsequent quarter.

In Q2’16 gold surged another 7.4 percent higher on a 130.8t or 16.0 percent GLD-holdings build. The WGC reports that total world gold demand climbed 123.5t or 13.2 percent YoY that quarter. GLD’s huge build alone was responsible for 106 percent of that. So again without American stock-market capital moving into gold through that leading GLD conduit, that initial gold-bull upleg wouldn’t even exist. GLD dominates the gold world.

There have been 13 quarters since Q4’15 when today’s gold bull was born. 8 of them have seen major gold moves higher or lower. In all but one of these cases, GLD’s builds or draws accounted for the vast majority of the overall yearly change in total world gold demand. In the remaining 5 quarters where gold ground sideways or moved comparatively modestly, GLD’s holdings didn’t change very much either.

So there’s no doubt GLD’s strong build in Q4’18 ignited and fueled by this new SPX selloff is an important omen for gold. Once American stock investors start buying gold again via GLD shares in a big way, the resulting major gold uplegs tend to become self-feeding. Investors love chasing performance. The higher gold rallies, the more stock investors want to own GLD. And the more GLD they buy, the faster gold climbs.

And while correction-grade 10 percent+ stock-market selloffs are the catalysts that trigger renewed investment demand for gold, it usually persists well after the SPX bottoms and bounces. In essentially the first half of 2016, gold blasted 29.9 percent higher in just 6.7 months. That was totally fueled by an epic 351.1t or 55.7 percent build in GLD’s holdings as American stock investors rushed back into gold. That upleg peaked in early July.

But the 13.3 percent SPX correction that spawned it actually bottomed in mid-February. Over the following 4.9 months leading into gold’s top, the SPX blasted 16.4 percent higher! Nearly 3/4ths of gold’s upleg duration came after the stock selloff that ignited it, and just over 3/4ths of GLD’s upleg build also happened after the SPX had bottomed. Major gold uplegs take on a life of their own after being triggered by stock selloffs.

So even if today’s stock selloff ended at a severe correction on Christmas Eve and this record bull still has farther to run, gold investment demand should remain strong on upside momentum. But far more likely the long-overdue young new stock bear is being born. The SPX’s enormous and violent surge since that deep Christmas Eve low looks exactly like a classic bear-market rally technically, an ominous sign.

Bear-market rallies are the biggest and fastest ever witnessed in all of stock-market history. They soar out of major lows in sharp V-bounces on frantic short covering, then gradually run out of momentum over a couple to few weeks. If the stock markets are indeed rolling over into a new bear, far more weakness is guaranteed over the next couple years or so. That will fuel sustained gold-investment-demand growth.

Bear markets in stocks following major bulls are nothing to be trifled with. The last couple bears in the early and late 2000s saw the SPX fall 49.1 percent over 2.6 years and 56.8 percent over 1.4 years! 50 percent bears are common and expected after large bulls. And if we are early in the next bear, gold will likely be the top-performing asset class while it runs its course. American stock investors buying GLD shares will lead the way.

So far in January 2019, this huge apparent bear-market rally in the SPX has stalled investment demand for gold. Like many bear rallies, it has rekindled great greed and complacency. So GLD hasn’t experienced many significant builds yet in this young new year. But those capital inflows will return with a vengeance once the SPX starts rolling over and weakening again, likely driving gold sharply higher like in early 2016.

Again that sustained investment demand in H1’16 catapulted the yellow metal 29.9 percent higher pretty much exclusively on differential GLD-share buying. A mere 20 percent upleg off gold’s recent mid-August low driven by record gold-futures short selling would catapult it back up over $1400. Anything above the bull-to-date peak of $1365 in July 2016 is going to unleash a flood of new investor excitement in gold and big demand.

So this gold bull is likely to grow a lot larger in coming quarters. The greatest beneficiaries will be the gold miners’ stocks, as their profits leverage gold’s gains. Roughly during that mostly-H1’16 major gold upleg, the leading GDX and GDXJ gold-stock ETFs rocketed 151.2 percent and 202.5 percent higher! The better gold stocks with good fundamentals are going to soar again during gold’s next upleg, which is already well underway.

The bottom line is gold investment demand began surging again in Q4, ignited by that major stock-market selloff. American stock investors started remembering gold, returning to GLD to diversify their portfolios which drove gold sharply higher. Once gold begins returning to favor after such major inflection points, its uplegs tend to grow large. Investment buying is self-feeding, with higher gold prices enticing in ever more capital.

Gold buying begets gold buying long after stock markets bounce, as investors love chasing performance. But odds are these lofty stock markets are now rolling over into a major new bear, portending much more weakness to come. Gold investment demand will thrive for years in that scenario, catapulting both gold and the stocks of its miners far higher. There’s no better place to multiply wealth during bear markets.

By Adam Hamilton

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  • Robert on January 18 2019 said:
    "In recent years most of the major quarterly moves in gold prices are nearly fully explainable by GLD’s holdings alone!"

    Adam, you've made the same claim many times in your past articles. This still contradicts data and even your own charts. In your previous charts comparing GLD's holdings with the gold price, you can see numerous periods where the gold price leads GLD's holdings rather than the opposite. So which data leads which data again? In Jan 2017, there was a 7.4% rise in the price of the GLD, which means people have been buying. Yet, since gold bottomed, GLD's holdings have fallen another 4.3%. It fails as both a leading and a lagging indicator. There are many other examples outside of this January example as well. This indicator is useless as proven by its track record. Also, the gold exchanges completely dwarfs GLD's movements. GLD's movements are so very insignificant compared to the overall gold market.

    "By comparison, GLD’s total physical-gold-bullion holdings of 742.2 metric tons"

    "Let’s start in the middle of 2018, when GLD’s holdings were stable above 800t"

    "In Q3 they sold GLD shares so aggressively that it forced a serious 76.8t or 9.4 percent draw in GLD’s holdings!"

    "The differential GLD-share selling proved so intense that this ETF suffered a colossal 125.8t or 13.3 percent holdings draw"

    Adam, I've also seen you make these claims before on GLD's holdings but I still have yet to see any verifiable evidence to support these claims. How reliable are GLD's holding reports? GLD does not give retail investors the right to redeem for any of its mystery physical gold holdings. This fact alone ensures the GLD shares to be nothing more than paper at the end of the day. GLD also has a glaring audit loophole in their prospectus that states they have no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this backdoor to the fund.

    For anyone interested but have not heard, I recommend looking into CNBC's Bob Pisani making a highly publicized visit to GLD's gold vault in a segment called Gold Rush: The Mother Lode. GLD's management organized this visit to show that GLD's gold actually exists. However, the gold bar held up by Mr. Pisani showed a serial number of ZJ6752 which did not show up on the latest bar list during that time. It was later discovered that this "GLD" bar actually belonged to ETF Securities.

    Note that even on the subject of GLD's insurance, they are not at all straightforward about it. Their representatives will not confirm nor deny the existence of GLD's insurance. I recommend anyone curious about this to confirm via calling GLD's publicly listed number for general inquiries at 866 320 4053 and ask about this clause from the GLD prospectus: "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." Exactly how much of the fund is insured? They will not give you a straight answer and might even throw in some bizarre excuse which I've experienced. Why hide this information from investors? The people behind GLD certainly do not seem like the most honest types.

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