Gold ETF Selling Slows

And when gold-ETF-share supply runs higher than gold’s, those share prices threaten to disconnect to the downside. Gold-ETF managers avert this by buying back enough shares to absorb the differential supply in real-time. They raise the money to finance those purchases by selling some of their gold-bullion hoards. So when gold-ETF holdings are falling, stock-market capital is shifting back out of gold.

This chart shows the physical-gold-bullion holdings of these dominant gold ETFs during gold’s current secular bull market. Gold is the red line in the background, divided into its major uplegs and corrections. Superimposed over that is GLD+IAU holdings in dark-blue and GLD holdings in light-blue. IAU’s holdings would be rendered in yellow, but their recent record high of 531.0t remains below this chart’s lower axis.

For all of this gold bull’s uplegs and corrections, the percentage and absolute changes in these dominant gold ETFs’ holdings are shown. Note that the fortunes of gold are heavily dependent on the stock-market capital flows into and out of GLD and IAU. The red gold-price line and blue GLD+IAU-holdings line are almost interchangeable. All traders interested in precious metals must follow these ETFs’ bullion balances.

(Click on image to enlarge)

Before we get into gold’s latest upleg and correction in major-gold-ETF terms, there’s a crucial high-level observation to consider. Crests and troughs in gold-ETF holdings tend to lag gold upleg toppings and correction bottomings. GLD+IAU holdings usually peak in the months after gold uplegs give up their own ghosts. And these ETFs’ physical gold bullion usually hits a cycle nadir in the months after gold itself has.

Several factors likely play into GLD+IAU holdings’ leisurely reactions to major gold-price trend reversals from uplegs to corrections and vice versa. Gold-ETF shareholders have proven to be momentum players, a common trait among stock traders. They rush to add gold exposure when the yellow metal is surging, trying to ride its upside. But once gold stalls out, stock traders’ interest in this contrarian asset starts to fade.

Major gold-upleg toppings are usually drawn-out affairs, with gold consolidating high after peaking instead of selling off sharply. So the greed and enthusiasm for gold often continues coasting even after gold has topped. Stock traders still expect it to soon resume marching higher on balance, so they continue to buy gold-ETF shares. Those flows don’t end and reverse into selling until gold’s correction becomes obvious.

Then later when those healthy mid-bull selloffs finally bottom, they’ve finished their mission of rebalancing both sentiment and technicals. Yet fearful and depressed traders assume gold will keep spiraling even lower. So their gold-ETF-share liquidations during corrections continue gliding along on pure momentum, until gold rallies enough to convince them a new upleg might be underway. So gold-ETF holdings lag gold.

Another factor is gold-ETF-share positions are usually a minor secondary focus for most stock traders. They are happy to ride gold’s upside momentum when it gets exciting, but they don’t carefully monitor gold like dedicated contrarian speculators. So trend changes have to persist for some time before they sufficiently catch stock traders’ attention. Only then will they start reacting with new buying-and-selling behavior.

A final likely reason the major gold ETFs’ holdings lag gold’s trend reversals is these capital flows aren’t the yellow metal’s only primary driver. Speculators’ gold-futures trading dominates gold price action when stock traders aren’t doing much buying or selling. Though these speculators command far less capital than stock traders’ vast pools, the extreme leverage inherent in gold futures gives them an outsized price impact.

That also is exceedingly-risky, forcing the gold-futures specs to have myopic ultra-short-term focuses that are measured in days or weeks on the outside. So specs’ lightning-fast gold-futures trading probably forces major gold toppings and bottomings well before stock traders even realize it and respond. Whatever the reasons, GLD+IAU peaks and troughs have lagged gold toppings and bottomings during this bull market.

Gold’s latest upleg emerging from mid-March’s stock panic was a monster, soaring 40.0% over the next 4.6 months into early August. That was partially fueled by massive differential buying of both GLD and IAU shares. Over that exact span, GLD’s holdings rocketed 37.5% or 345.7t higher while IAU’s shot up 30.0% or 114.8t. Together GLD+IAU holdings soared a colossal 35.3% or 460.5t higher during that short span!

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