Gold Investment Soaring!
Adam Hamilton April 10, 2020 3478 Words
Gold investment demand is soaring in the wake of the COVID-19 stock panic! Investors are rushing back into gold to diversify after seeing mind-boggling central-bank money printing and government spending. Since that epic monetary inflation wonít be unwound, and investors were radically underinvested in gold before the panic, this trend is likely to persist for years. It will catapult gold and its minersí stocks far higher.
The most comprehensive look into global gold investment demand is published quarterly by the World Gold Council. Its experts have been deeply studying the gold markets for decades, which shows in their outstanding Gold Demand Trends reports. These must-read analyses are released about a month after calendar quarters end. But while that data is invaluable, in fast-moving markets like these it simply isnít enough.
Fortunately thereís a high-resolution daily proxy that often closely tracks global gold investment. Thatís the physical gold bullion held in trust for shareholders of the leading and dominant American GLD SPDR Gold Shares gold ETF. Sponsored by the WGC, it launched way back in November 2004. That and GLD being in the biggest stock markets on the planet have given it an insurmountable first-mover lead in its space.
In their latest GDT covering Q4í19, the WGCís analysts revealed GLD commands 31% of the gold held in all the worldís gold ETFs! Its next-biggest competitors are much smaller at 12% and 7%. But even more importantly than its massive size, GLDís holdings have closely tracked later-reported quarterly global gold investment demand in many key quarters for gold. Sometimes GLDís holdings almost solely drive big quarters.
This secular gold bullís maiden quarter was Q1í16, when the yellow metal blasted 16.1% higher. GLDís holdings soared 27.5% higher that quarter, adding an enormous 176.9 metric tons of gold bullion to its vaults. According to the WGCís subsequent comprehensive data, overall global gold demand grew by 200.4t YoY that quarter dominated by ETF demand. GLDís colossal build alone represented 7/8ths of that total!
Global gold-ETF demand is incredibly volatile, the dominant swing category driving most of the changes in overall world gold demand. Gold-ETF shares are incredibly easy and cheap to trade, acting as direct conduits into the gold market for the worldís vast pools of stock-market capital. So in many if not most quarters, what is going on in the worldís biggest gold ETF closely mirrors overall global gold investment.
GLDís simple mechanics are important to understand. When American stock investors buy GLD shares faster than gold itself is being bought, this ETFís share price threatens an upside decoupling from gold. That differential share demand would cause GLD to fail its gold-price-tracking mission. So its managers have to act in real-time to shunt any excess GLD-share demand back into the underlying global gold markets.
They do this by issuing enough new GLD shares that day to satisfy the excess demand. The proceeds raised from these share sales are then plowed into physical gold bullion. So when GLDís holdings are rising, American stock-market capital is flowing into gold. When they are falling, capital is flowing back out. Differential GLD-share supply is sopped up by managers buying back shares, financed by selling gold.
GLDís managers publish its physical-gold-bullion holdings daily in great detail, down to the individual-gold-bar level. In the middle of this week, GLDís Gold Bar List ran 1566 pages of serial numbers, refiners, weights, assays, and production years! Watching trends in GLDís holdings offers an excellent proxy on whatís likely happening in global gold investment demand. And it has been soaring since the stock panic!
This chart superimposes GLDís daily holdings over todayís secular gold bull, which started galloping in mid-December 2015. Gold investment demand was incredibly strong in its initial couple quarters, but dwindled over the next few years with gold failing to break out to new bull-market highs. Once that finally happened in June 2019, gold investment demand started returning and has mostly remained strong since.
Back in May 2019, gold slumped to $1271 and you could hardly give it away. Investors were enamored with the record-high US stock markets, and couldnít care less about prudently diversifying their stock-heavy portfolios. So GLDís holdings slumped to 733.2t with gold investment demand evaporating. But gold started recovering on trade-war and tariff fears, so differential-GLD-share demand started picking up too.
The day after gold finally decisively broke out to its first new bull-market high in 3.0 years in late June, GLDís holdings rocketed 4.6% higher in a massive build to 799.0t! Gold was finally back on investorsí radars after long languishing in obscurity. By late September, GLDís holdings would soar 26.1% higher to 924.9t. But after rocketing so fast, gold was super-overbought on excessive speculator gold-futures buying.
I warned about the resulting ominous gold-futures-selling overhang in mid-September. Then as gold indeed retreated, investment demand as indicated by GLDís holdings waned. By mid-January they were down 5.5% to 874.5t, despite a flaring military conflict between the US and Iran. The Fedís extreme QE4 bond monetizations were seriously goosing US stock markets, breeding euphoria which stunts gold demand.
But with Chinaís government locking down that entire country to fight COVID-19ís spread, investors soon started nibbling on gold again. GLDís holdings climbed 6.5% into mid-February on the day the US stock markets hit their last all-time-record peak on the Fedís risky QE4 stock ramp. An important metric then proved American stock investors were radically underinvested in gold, which will take years of buying to rectify.
GLDís holdings of 931.6t were worth $48.3b with $1611 prevailing gold prices. Yet the 500 elite stocks of the flagship US S&P 500 stock index had a monster collective market capitalization of $29,823.7b. That implied American stock investors had 0.16% gold exposure! Thatís no typo, it was literally 1/6th of one percent. Relative to wildly-overweight stock holdings, gold investment was nonexistent leading into the panic.
American stock investors and speculators that had been lulled into extreme complacency by the Fedís epic QE4 Treasury monetizations finally started worrying about a COVID-19 pandemic in late February. That helped gold continue rallying to $1675 in early March. Seeing the yellow metal at a 7.1-year high after US stock markets had plummeted 18.9% in under a few weeks kept investment capital flowing into gold.
American stock investorsí differential-GLD-share demand drove its holdings to 963.8t on that day gold peaked. But as Iíd warned in late February, that gold surge was peculiar and precarious. There just wasnít enough identifiable investment demand per GLDís holdings, or speculator gold-futures buying, to justify that kind of gold surge being sustainable. Indeed gold confounded most by soon beginning to plummet!
Governmentsí draconian responses to the COVID-19 outbreak triggered an ultra-rare stock panic, when major indexes crater by 20%+ in 2 weeks or less. That unleashed incredibly-extreme fear fueling stock-panic trading dynamics. Speculators and investors were so terrified that they dumped everything to flee into cash, including gold. That safe-haven cash demand unleashed a violently-big-and-sharp rally in the US dollar.
Gold-futures speculators look to the dollar for trading cues, and its meteoric rise quickly convinced them to rapidly exit their excessively-bullish upside bets on gold. As they liquidated massive amounts of gold-futures long contracts, gold plunged with the plummeting stock markets. Thatís really counterintuitive, although the same thing happened during the last stock panic in late 2008. Stock-panic dynamics are strange.
Over an extraordinary 8 trading days in mid-March where the S&P 500 plummeted another 12.3%, gold collapsed a similar 12.1%! That was a vicious bull-market correction greatly compressed into less than a couple weeks. Investors fled that carnage, hammering GLDís holdings 5.8% lower to 908.2t in essentially that same span. They were confused and perplexed that gold wasnít surging on safe-haven capital inflows.
The day before GLDís holdings bottomed, gold hit $1472 on close. That was down $203 in those 8 short days, an exceedingly-brutal rout! In intraday terms, goldís total loss was even greater. But such an ugly capitulation flush was very bullish, forcing out the weak hands including huge amounts of speculator gold-futures long selling. That left gold much better positioned to start rallying in the aftermath of the stock panic.
The major gold stocks bottomed over the next couple trading days, free-falling to unbelievably-deep stock-panic lows. In last weekís super-popular essay, I analyzed gold stocksí crash and subsequent V-bounce. After being all-out gold stocks for months waiting for an overdue correction, and actually shorting them, we started aggressively redeploying capital in fundamentally-superior gold stocks the day after.
Thereís nothing scarier for investors, nothing that shatters their worldviews, like these ultra-rare stock panics. March 2020ís COVID-19-government-lockdown-fueled one was the first since October 2008, and before that the last one happened in October 1907. In just 10 trading days into mid-March, the S&P 500 cratered a jaw-dropping 22.8%! Its total loss by late March was a soul-crushing 33.9% in less than 5 weeks!
Seeing over a third of their investable wealth obliterated in just over a month, from euphoric all-time-record highs that led them to falsely believe everything was awesome, shook investors to their cores! Maybe it wasnít such a great idea to be all-in stocks. Maybe it really is prudent to diversify stock-heavy portfolios contrary to what Wall Street advisors had been telling them for years. Maybe stocks donít rally forever.
Maybe market cycles still exist. Maybe even trillions of dollars of Fed money printing canít stave off a long-overdue serious bear market. So in the wakes of stock panics, gold investment demand soars as the wisdom of portfolio diversification is remembered. Starting in late March the very day the S&P 500ís latest interim stock-panic low was carved, investment capital started deluging back into gold via GLD shares.
GLD enjoyed three massive 1.7%, 1.3%, and 1.4% daily holdings builds right out of the gates! That kicked off a 13-trading-day streak continuing into the middle of this week with 12 GLD builds. The only draw day was a trivial 0.0%. Those dozen daily builds averaged a strong 0.7% each. In that short span GLDís holdings blasted 8.9% higher to 988.6t! That propelled them over an important milestone this Monday.
American stock investorsí gold demand peaked with GLDís holdings at 982.7t in early July 2016 after this gold bullís mighty maiden upleg. Total gold investment, at least in tonnage terms, had languished way under that for most of the time since. But this latest flood of stock-market capital into GLD finally lifted its holdings to a new high-water mark in this secular gold bull! Heavy gold buying on balance should persist for years.
There are a couple major reasons, the precedent following late 2008ís stock panic and the impact of this latest one being vastly more extreme due to government actions. This next chart rewinds this same data back to 2008 and the few years following. Just like in March 2020, during that October 2008 stock panic gold was crushed. In just 21 trading days where the S&P 500 plummeted 30.0%, gold collapsed by 16.7%!
But once that mid-panic rush for cash finishes catapulting the US dollar higher spawning huge selling in gold futures, investors realize the great folly of portfolios all-in stocks. So they finally start diversifying, which includes allocations into gold. These donít have to be big, even gradually moving up to 5% gold would have an enormous impact on its prices. And it literally takes years to shift serious capital into gold.
From its stock-panic low of $711 to its all-time high of $1894 in August 2011, gold blasted 166.5% higher over 2.8 years! Big investment-capital inflows were a major driver of that strong bull run, with GLDís holdings soaring 71.5% or 535.5t higher over that same span. But itís not just stock-panic devastation that drives gold investment demand in those extreme eventsí wakes, their resulting higher gold prices contribute.
Investors love chasing winners, so seeing gold rally on balance for years after a stock panic eventually attracts in legions of investors. The better goldís gains get, the more of them want to buy in to ride that bull and the more capital they deploy. We saw this gold-is-winning phenomenon last summer, with big investment buying catapulting gold higher even when the stock markets were still near all-time-record highs.
After that last stock panic, gold investment buying per GLDís holdings actually peaked well over a year before gold itself. At best by late June 2010, GLDís holdings had soared 114.9% higher over 1.8 years to hit 1320.4t! Gold had rallied 64.7% during that GLD-centric span. It is also interesting to note that the post-stock-panic gold buying was heavily front-weighted as funds flooded into GLD following that brutal selloff.
And the situation we are facing today after March 2020ís stock panic is radically more bullish for gold than the outlook after October 2008ís. While this COVID-19 pandemic is scary, it pales in comparison to what governmentsí insane overreactions to it are doing to the US economy. These unconstitutional lockdown orders most Americans suffer under, essentially illegal house arrest without due process, are devastating.
With businesses being forced to shut, countless people are losing their jobs and livelihoods. The last few weeks of initial-jobless-claims data show a mind-boggling 16.8m Americans have filed for unemployment! Thatís an unconscionable 40 jobs lost for every single confirmed case of COVID-19 across the US at that point! The economic impact of Americans being deprived of our rights of liberty and commerce is apocalyptic.
Just last week, prestigious Wall Street investment bank Goldman Sachs published a report forecasting US GDP collapsing at a 9% annualized rate in Q1 and crashing an epic record 34% annualized in Q2! Other major Wall Street firms and various US government agencies have similar expectations of Q2 GDP cratering 25% to 33%. A quarter to a third of the US economy is getting wiped out by these quarantine orders!
And even when they are lifted, the deep fears they have sown will leave scars lasting a generation. This unnatural chimeric COVID-19 virus isnít going away, so Americans are going to be less likely to gather, eat out, and travel for years to come. The businesses involved in mass entertaining, feeding, and moving people arenít going to recover for a very long time. These government-slayed jobs arenít coming back soon.
I started closely following the Chinese coronavirus outbreak, and writing extensively in our newsletters about what was going on in that country, in late January. The news out of China was deeply troubling while the US stock markets were still hitting euphoric record highs on the Fedís QE4. Iíve spent a crazy amount of time on this virus, including reading many technical studies on it by scientists from around the world.
Literally all of them agree that the vast majority of COVID-19 cases are so relatively mild that they arenít tested or documented. Conservative estimates by medical experts say at least 4/5ths of the infected arenít tested into confirmed cases. Out of the remaining 1/5th tested and confirmed, the mortality rate in the US is running about 1%. But with actual cases at least 5x as high, that number is really closer to 0.2%.
And the great majority of those deaths come in unhealthy elderly people with chronic conditions which wouldíve killed many of them anyway within a few years. COVID-19 is mostly pulling deaths forward from the seasonal flu, lung problems, heart disease, diabetes, and obesity. Elderly people with those issues are vulnerable, and should shelter in place. The rest of us could easily provide everything they need to thrive.
But crashing the economy by a third or more, destroying countless jobs, businesses, and thus lives of the 99.8% of Americans who arenít going to die from COVID-19, is absurdly asinine! The economic havoc this wreaks, and the serious wide-ranging societal problems it spawns, will radically dwarf the worst that COVID-19 could ever do. The US government is trying to mitigate its self-inflicted catastrophe by money printing.
Ever since the last stock panic investors have had to closely follow the Fedís balance sheet, which it ballooned through long years of quantitative easing. I recently wrote a couple comprehensive essays on what the Fed was doing with its QE4 Treasury monetizations. In the 4 weeks ending this Wednesday, the absolute growth in the Fedís balance sheet has been far beyond what any superlatives could ever hope to convey.
It skyrocketed an insane 41.1% or $1,771.2b higher in just 4 weeks, soaring way up to an unthinkably-extreme new all-time-record high of $6,083.1b! The Fedís Treasury holdings under the wildly-expanded QE4 blasted 44.0% or $1,111.4b higher to another crazy record $3,634.4b over this same brief span! The Fed is directly monetizing the stupendous debt the US government is incurring to pay Americans not to work.
This is as close to hyper-inflation as the US has ever seen, and Fed money printing is going to continue soaring as long as this crisis lasts. But even after these ludicrous countrywide house-arrest orders are finally rescinded, the Fed isnít going to unwind that epic inflation. The examples of QE1, QE2, and QE3 proved that, totaling $3,617.5b of money printing over 6.4 years starting in the last stock panic back in late 2008.
After long years of endless stock-market record highs fueled by those very QE excesses, the Fed finally found the courage to try to unwind QE through quantitative tightening. But QTís monetary destruction ultimately only totaled $825.0b, less than 23% of the QE that necessitated it! All it took to short-circuit QT was a deep stock-market correction mostly in Q4í18. The Fed will never unwind its epic COVID-19 inflation.
The trillions of dollars of freshly-conjured money paid to the American people will chase a vastly-slower-growing pool of goods and services on which to spend it, relentlessly bidding up their prices. The resulting serious price inflation in household expenses will further scare investors. This colossal deluge of new money the panicking Fed and US government are unleashing will fuel high gold investment demand for years.
Even Wall Street firms that have long ignored gold are sounding the warning on this. Late last week the chief investment strategist at Bank of America put out a stunning report on what the 2020s are going to look like due to the incalculable damage being done to the US economy by the lockdowns. That is going to unleash terrible stagflation, so he recommends allocating 25% each in gold, cash, stocks, and bonds!
A few months ago, any Wall Street firm even recommending 5% in gold wouldíve been shocking. Iíve written for decades that every investor always needs a 10% to 20% gold allocation. While even this nightmare wonít push that ratio of the values of GLDís holdings to the S&P 500 companiesí market caps to 25%, thereís no doubt American stock investorsí gold allocations are heading far higher in the coming years.
Thatís going to fuel monster gains in the gold minersí stocks, which should be the worldís best-performing sector as long as investors are still actively diversifying into gold. Following that late-2008 stock panic as gold powered 166.5% higher over the next several years, the leading GDX gold-stock ETF rocketed up by 307.0%. The major gold stocks more than quadrupled, and goldís setup today is wildly more bullish than that!
At Zeal we started aggressively redeploying in fundamentally-superior gold stocks back in mid-March just after GDX bottomed. Weíve long done the hard and tedious fundamental work of winnowing down the gold-stock field to uncover the likely big winners. These are recommended in our popular weekly and monthly newsletters when gold-upleg odds look good. Last yearís trades had big realized gains running up to 110%!
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The bottom line is gold investment is soaring after last monthís extraordinary stock panic! The terrible losses that inflicted helped stock-heavy investors remember the wisdom of prudently diversifying their portfolios with gold. After the last stock panic, gold investment demand remained elevated for years as investors upped their paltry allocations. Another similar secular shift is likely in coming years, but much bigger.
While COVID-19 is scary, the unprecedented economic damage heavy-handed governments are doing by shutting down their economies is radically worse. They are trying to paper over the tens of millions of lost jobs with vast money printing far beyond anything ever witnessed. This extreme inflation is wildly-bullish for gold investment demand. The trillions of dollars being conjured out of thin air will greatly bid up gold.
Adam Hamilton, CPA April 10, 2020 Subscribe