GLD Holdings Plunge
Gold has faced stiff headwinds lately as investors abandon alternative investments to chase record-high stock markets. Probably the most significant has been the major selling hammering the flagship GLD gold ETF. It has suffered such intense differential selling pressure that its custodians have been forced to dump enormous quantities of physical gold. What are the implications of this flood of new supply?
The amount of gold bullion GLD has hemorrhaged recently is amazing. To put it into perspective, earlier this week the rumor that embattled Cyprus may be forced to sell its official gold reserves made news. The Cypriot government owns 13.9 metric tons of gold. But on a single trading day alone in February's gold capitulation, GLD had to sell 20.8 tonnes! The supply recently added by GLD dwarfs everything else.
Why is GLD dumping gold so aggressively? While silly conspiracy theories abound as always in the gold world, the reality is far less provocative. GLD's mission is simply to track the price of gold. The World Gold Council (which is funded by leading gold miners) created this gold investment vehicle in November 2004 to offer stock investors an easy, cheap, and efficient way to obtain gold exposure in their portfolios.
The gold miners created a direct conduit for the vast pools of stock-market capital to chase gold. The only way for GLD to fulfill its mission of tracking gold is for this ETF to shunt excess GLD-share demand and supply into underlying physical gold bullion itself. This capital sloshing into and out of gold via GLD has naturally had a massive impact on global gold prices. And lately gold has suffered a major GLD exodus.
During times like 2009 when gold grows popular among investors, GLD shares are bought up far faster than gold itself is rallying. This excess, or differential, GLD demand would quickly force this ETF to decouple from the metal to the upside if not equalized into physical gold. So GLD's custodians sop it up by issuing new GLD shares to meet demand. They then use the proceeds to buy more gold bullion.
But when gold is falling out of favor like now, capital flows reverse. GLD shares are dumped at a quicker pace than gold's own selloff. This differential selling pressure creates an excess supply of GLD shares. This ETF would decouple from gold to the downside if this wasn't equalized into the metal. So GLD is forced to buy up this excess supply. It raises the cash to do this by selling some of its gold bullion.
And this is what we've experienced lately, heavy differential selling pressure. As the levitating stock markets rise ever higher, investors have sold gold to buy general stocks. Because of its incredible liquidity, GLD has been the epicenter of this anti-alternative-investment rotation. It's rather illogical when you think about it, selling gold low to buy stocks high. Investors are supposed to buy low and sell high!
But sadly greed and fear always overwhelm reason at market extremes. Foolish investors rush to sell low after long corrections, just before new uplegs are born. And later they eagerly flood into markets after long uplegs, buying high just before major corrections. Selling low and buying high leads to financial ruin, which is why such a small fraction of investors ever achieve significant success in the financial markets.
Gold is universally despised right now because it is low, the ideal time to buy. General stocks are adored if not worshipped because they are high, the prudent time to sell. Every day on CNBC, a long parade of analysts effectively proclaim gold is doomed to sink to zero while stocks will joyously rally forever more. The intense selling pressure GLD has faced in recent months simply reflects these emotional extremes.
As a contrarian I've grown rich fighting the crowd, being brave when others are afraid and afraid when others are brave as Warren Buffett once eloquently put it. That's the only way to buy low and sell high. So I've watched GLD's holdings lately with great interest. Thankfully this flagship gold ETF is very transparent, publishing its holdings daily. How does GLD's holdings plunge stack up relative to precedent?
This first chart over the past year or so highlights the extreme differential selling pressure GLD has faced in recent months. Its holdings are shown in blue and tied to the right axis, superimposed over the gold price in red. There has been no bigger headwind facing gold lately than the deluge of physical-gold-bullion supply GLD has been forced to dump into the global gold markets. It has proven overwhelming.
Remember Cyprus's 13.9t of official gold reserves? The recent "correction" in GLD's holdings has forced it to dump a staggering 169.8t of gold bullion simply to keep GLD shares' price tracking gold! We are talking about 5.5m ounces of gold here, from this single American ETF! There are only two gold-mining companies in the entire world (Barrick and Newmont) that produce that much gold in a whole year!
Yet the mass exodus from GLD by stock investors forced it to add 169.8t of gold supply in just over 4 months. It's hard to believe given how despised gold is today, but back on December 7th GLD's holdings hit an all-time record high of 1353.4t. They remained stable and held near this record for several weeks, until two simultaneous events hit in early January that started cracking gold's bullish sentiment.
First the flagship S&P 500 stock index soared 2.5% on January's opening trading day on news of the fiscal-cliff tax deal. The biggest tax hike in US history had been narrowly averted at the very last minute. And then the very next day, the minutes from the recent FOMC meeting were misinterpreted to imply the Fed was already preparing to shut off its brand-new QE3 debt-monetization campaign. So gold sold off.
Ever since 2013's fateful initial trading days, those psychological cracks plaguing gold have spread. Every day that the stock markets' levitation continued, gold fell farther out of favor among investors. And then every few weeks there was either an FOMC meeting or the minutes from one to spook traders into somehow assuming the Fed's unprecedented open-ended inflation campaign would end prematurely.
The resulting heavy differential selling pressure on GLD shares is readily apparent above. This peaked in late February just after gold selling cascaded into a full-blown capitulation. In just 7 trading days late that month, GLD's custodians were forced to sell 5.0% of its holdings (65.5t) to buy back enough excess share supply to keep this ETF from decoupling from gold. Like many market extremes, this became self-feeding.
As GLD dumped bullion to raise enough cash to buy back the flood of excess shares being sold, those very gold sales weighed on global gold prices. This caused more gold stops to be triggered, and kindled more fear, scaring still more traders into exiting. The lower gold went, the more people sold, and the more this selling forced GLD to add big supplies to a very weak gold market. It was a relentless vicious circle.
As of this past Wednesday, GLD's holdings had fallen a mind-boggling 12.5% in just over 4 months! It has had to liquidate 1/8th of its total gold bullion to keep up with stock traders rushing for the gold exits. Over this same span, the gold price is down 8.6%. Since rising and falling GLD holdings reveal whether stock traders are buying or selling gold on balance, I've closely followed them daily since GLD's birth.
GLD holdings trends are one of the best gold sentiment indicators available. And provocatively they've long proven rather "sticky". While stock traders eagerly buy up GLD shares when gold is rallying and in favor, they have generally not sold too aggressively when gold was correcting. So the sheer degree of the recent GLD holdings plunge sure felt exceptional. I've been wondering if it was the biggest ever.
So this week I decided to look at all the GLD holdings "corrections" over this ETF's entire history. And I was pleasantly surprised to find out that we've weathered worse. Coming off record highs, the recent 169.8t GLD dump is certainly the biggest absolute decline in its holdings. But in percentage terms, GLD's holdings suffered even bigger retreats as gold fell deeply out of favor during 2008's crazy stock panic.
My suspicion that the recent GLD holdings plunge was exceptional was generally correct. Outside of that once-in-a-century stock panic, GLD's average holdings correction has merely been 5.9% over 3.9 months. So while the recent holdings correction's 4.0-month duration is on par, its 12.5% slide more than doubled what has been typically witnessed for the vast majority of GLD's lifespan. It was indeed very big.
The only comparable declines were leading into and during 2008's stock panic, when GLD's holdings plunged 12.6% over 1.4 months and later another 13.0% over 2.0 months. It is interesting that these were the worst GLD selloffs ever seen, and they happened in far-worse gold conditions. While gold is merely down 8.6% during the recent GLD holdings correction, it plunged by 13.3% and 22.0% during 2008's!
The latter is particularly interesting and relevant today. If there was ever a time for gold to shine as a safe haven, it was during that epic stock panic. In a single month in October 2008, the flagship S&P 500 stock index plummeted 30.0%! Fear was off the charts, with the definitive VXO fear gauge challenging 90 when only around 50 is normally the worst-case extreme. The financial world was crumbling right before our eyes.
Yet gold couldn't catch a bid! Its price plunged 16.7% over that month-long span where the stock markets lost nearly a third of their value. Stock investors deployed in GLD rushed to sell their shares, both disgusted by gold's failure to surge on a financial Apocalypse and trying to raise cash wherever they could. Between July and November 2008, gold fell an astounding 27.2%. It was truly a total disaster.
The main reason gold plummeted during that panic is because safe-haven buying flooded into the US dollar instead, driving its biggest and fastest rally (22.6% higher in 4 months) ever witnessed. But the key takeaway today is that the financial world was totally convinced gold was dead. If it couldn't rally in that panic, then it was no longer a safe haven. There was no reason to own gold anymore, its bull was over.
Sound familiar? That's the exact kind of thing we've been hearing in recent weeks. Because gold hasn't rallied despite the Cyprus bank failures and record Fed debt monetizations, there must be something fundamentally wrong with this metal. Traders are abandoning it in droves, just like they did in late 2008. But obviously they were dead wrong to sell low then when gold was hated. It was on the cusp of soaring.
Right as investors totally capitulated and gave up on gold in November 2008, it was carving a major bottom. It would ultimately power from around $700 then to $1900 by August 2011. And ever since it has consolidated high, it is simply at the low end of its multi-year trading range today. A major gold correction driving or being driven by a massive 1/8th GLD holdings selloff was the best buy signal of gold's bull!
I suspect the recent 1/8th GLD holdings correction will prove similarly bullish. In order for stock traders to dump GLD shares rapidly enough to force it to sell so much bullion so fast, their sentiment has to be hyper-bearish. They have to be utterly convinced gold's bull is dead to sell so aggressively. But whenever sentiment swings to such unsustainable extremes, major bottoms are carved leading into major uplegs.
Extreme GLD selling on a daily basis is also a fantastic contrarian indicator itself. I generally consider GLD differential selling pressure on any given day material if it is big enough to force GLD's holdings down by more than 0.5% that day alone. And big GLD holdings liquidation days are over 1.0%. Clusters of these near gold lows are major bottoming indicators, they reveal sentiment in gold has grown too bearish to persist.
Since the February gold capitulation, we've seen 3 separate trading days where GLD's holdings fell more than 1.0%. They are pretty rare over GLD's 8.4-year history, only occurring 51 times or about once every 40 trading days. The last time a similar cluster was seen was actually in October 2008 during the stock panic, just before gold started more than doubling in its next mighty upleg that was being born in despair.
So historically big GLD liquidations, both in individual-trading-day and multi-month-trend terms, have actually been very bullish contrarian indicators. This precedent completely contradicts many of the gold bears dominating the financial media, who claim excessive GLD selling is bearish rather than bullish. In reality, stock traders panicking out of GLD shares is an indicator of fear reaching irrational extremes.
So smart contrarians fight the crowd and aggressively buy GLD holdings plunges. The only way to buy low is to be brave when others are afraid, and they are certainly afraid of gold today. Bearishness in this yellow metal has recently hit extremes not seen since the stock panic, the best gold buying opportunity of its secular bull. The recent GLD holdings liquidation was also panic-magnitude, utterly unsustainable.
Stock investors have been fleeing GLD, selling low, so they can plow their capital into general stocks near nominal record highs. The red-hot stock markets have fueled the dismal sentiment in alternative investments like gold. But as soon as they decisively turn, which ought to be imminent given how overbought and euphoric the stock markets are today, the precious metals will start returning to favor.
The same unsustainable hyper-bearish sentiment forcing the massive GLD liquidation in recent months is crushing the gold miners' stocks. They are hyper-oversold, trading at their lowest valuations of their entire secular bull. The main gold-stock index is scraping fundamentally-absurd 45-month lows, trading as if gold and silver were 41% and 53% lower than today's levels! The gold-stock sector is loathed today.
Which makes it an extraordinary contrarian buying opportunity! At Zeal we've been concentrating our buying around this major gold bottom in smaller dirt-cheap gold and silver miners with dazzling fundamentals. As sentiment inevitably turns in gold, the entire precious-metals realm is going to soar but the best of the miners ought to skyrocket. We are talking about stock prices tripling or quadrupling!
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The bottom line is stock investors have indeed been panicking out of GLD in recent months. This extreme bearishness has created a panic-grade drawdown in GLD's holdings. All this excess gold supply from GLD's forced selling has been a major headwind for gold, exacerbating its latest correction. But historically extreme GLD selling by stock traders is a major bottoming indicator for the yellow metal.
Like everything else in the markets, gold bottoms and embarks on major new uplegs when everyone is convinced it is dead. Widespread fear soon leads to selling exhaustion, leaving only buyers. So gold soon starts rallying again, gaining momentum. This coming upleg has the potential to be very large as the euphoric, overbought, levitating stock markets inevitably reverse. Alternatives will quickly regain favor.
Apr 12, 2013
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