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The McClellan Market Report
Daily Edition (snippet)


McClellan Financial Publications, Inc
Written Jun 27, 2013
Posted Jun 29, 2013

The Daily Edition was prepared after the close of trading, Thursday, June 27, 2013

It is no secret that I think gold is in the process of forming a major bottom. I had thought that the end to that process was at hand already, but the market seems intent on washing out the maximum number of gold holders. Why would the market do that? Edwards and Magee wrote years ago about the principle of shares of stock going back and forth from “weak hands” to “strong hands”. At a top, the strong hands “distributed” their stock to the latecomers who are eager to ride a winner. At bottoms, shares are wrung out of the hands of disgusted shareholders, and those shares go into the “strong hands” of investors who are willing to buy a stock when it is down.

(Click on image to enlarge)

That is a good operating philosophy, although I have never met anyone in person whose actual hands I could evaluate according to this model. But it is still a good way to think about each side.

We have seen this in action in the gold market with the assets of GLD and IAU. When gold prices rise (which it may be tough to remember that they actually have done at some points in history, and will do again), people get more interested in owning shares of these ETFs. So the sponsoring firms issue more shares and compile more assets in response to that greater demand.

When gold prices fall, investors want to get out of these ETFs, and so the sponsoring firms have to sell off their gold holdings in order to meet the demand for redemptions. This is different from a closed-end fund, in which the number of shares remain constant, and the shares thus trade at a premium or discount based on investor demand.

I have noted in the past that a “big fast drop” in total assets tends to mark a bottom for gold prices. The recent decline in gold prices and its associated purging of these ETFs’ shares from investors’ portfolios has redefined the scale of what constitutes a “big” drop. But the point is that a whole lot of gold (or the representation of gold, which is what GLD owners own) has come out of the hands of these ETF investors, and into someone else’s hands.

Whose hands the gold is going into is precisely the point of this whole discussion. The mostly retail investors in GLD can pretty fairly be considered to be the weak hands that Edwards and Magee talked about. Who the strong hands are that are taking ownership of the gold that is leaving the control of the sponsoring firms of GLD and IAU is an interesting question, and those firms understandably are not very keen to reveal who they sell their gold to. But somebody is taking the other side of that transaction when a gold bullion ETF investor is puking out of his position, and selling at a depressed price.

So the question for us to consider is this: do we want to join with the pukers, or do we want to side with the strong hands who are buying in at a deep discount? It should already be clear where I stand on this.


Tom McClellan
Editor, The McClellan Market Report
(253) 581-4889

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