Gold investment demand remains strong, buoying the yellow metal and its miners’ stocks. Investors have continued actively diversifying into gold despite soaring stock markets and weaker summer seasonals. The Fed’s extreme money printing fueling these precarious stock-market heights is perilously inflationary, making upping gold portfolio allocations essential. This ongoing capital shift is likely to keep pushing gold higher.
The dominant driver of gold’s major price trends is investment demand. While it isn’t the largest demand category, it varies greatly depending on global-financial-market conditions. The best global gold supply-and-demand data is only published quarterly by the venerable World Gold Council, in its must-read Gold Demand Trends reports. They highlight the big volatility inherent in gold investment demand in recent years.
From 2015 to 2019, jewelry demand averaged 51.2% of overall gold demand. But the biggest jewelry year out of the last 5 was only 1.2x the smallest one in tonnage-demand terms. Investment demand only averaged 29.0% of overall gold demand in 2015 to 2019, yet the difference between the best and worst years in this span was 1.7x. The WGC’s latest GDT on Q1’20 again proved how important investment is.
Last quarter was extremely volatile for gold since it got sucked into mid-March’s stock-panic capitulation. But even after that roller-coaster ride, gold still managed a 4.0% gain in Q1. Global gold demand per the WGC only edged up 1.2% year-over-year to 1083.8 metric tons. That was despite jewelry demand plummeting 38.9% YoY to 325.8t, as the world’s largest market China was mostly locked down for COVID-19!
Gold’s largest demand category cratering would’ve gutted its price if investment demand hadn’t soared 79.6% YoY to 539.6t. The 239.1t more gold investors bought in Q1’20 compared to Q1’19 more than offset the 207.6t collapse in jewelry. And investors weren’t buying traditional bars and coins, with their demand drooping 6.2% YoY. All gold’s investment-capital inflows in Q1 came in gold exchange-traded funds.
Physically-backed gold ETFs tracking prevailing gold prices trade in major stock markets around the world. When stock investors buy gold-ETF shares faster than gold itself is being bought, their share prices will decouple from gold to the upside failing their tracking mission. To prevent that, ETF managers must shunt excess gold-ETF-share demand directly into physical gold bullion itself to equalize capital flows.
They do this daily by issuing enough new gold-ETF-shares to absorb any differential demand. Then they use the resulting proceeds to buy more physical gold bullion for their funds. So when gold-ETF holdings are rising, it reveals stock-market capital is flowing into gold. Global ETF gold demand skyrocketed an enormous 594.5% YoY in Q1’20 to 298.0t! That’s the only reason gold prices have surged instead of collapsed.
With ETFs increasingly dominating the world gold market, every quarter the WGC ranks the physically-backed ones. The two largest by far are the American GLD SPDR Gold Shares and the IAU iShares Gold Trust. At the end of Q1, their total gold bullion held in trust for shareholders represented 30.4% and 12.3% of all the gold held by all the world’s gold ETFs! The next-largest German competitor was just 6.6%.
Launched way back in November 2004 by the World Gold Council, GLD has maintained a strong first-mover advantage ever since. I’ve been analyzing its daily-reported holdings for years, as GLD capital flows alone have often driven nearly all of gold’s price moves in volatile quarters. While IAU only came a bit later in January 2005, it has always struggled under GLD’s shadow. That’s despite a major advantage.
GLD’s managers charge 0.40% of their ETF’s total holdings each year to pay all the expenses necessary to keep GLD running. IAU’s expense ratio is considerably smaller at 0.25%, which is a big difference for institutional money managers deploying billions. That, along with IAU’s total gold bullion running about 4/10ths of GLD’s, is contributing to faster growth in this upstart competitor. IAU could eventually catch GLD.
So analysis of the huge American stock-market capital flows into and out of gold ideally would include GLD’s holdings plus IAU’s. Unfortunately I don’t have IAU’s full daily holdings history since January 2005, which I’ve been searching for. I’m offering a free one-year subscription to our weekly newsletter, worth $679, to the first person who provides me that verified full dataset. IAU’s holdings are getting increasingly important.
But for now GLD’s physical-gold-bullion holdings still remain the best-available daily proxy for global gold investment demand. This chart superimposes them over gold prices during this secular bull. Note that major gold uplegs and corrections are generally highly correlated with American stock-investor capital flowing into and out of GLD shares. Gold investment has proven very strong since March’s crazy stock panic.
Gold investment demand was solid early this year before that stock panic. It first flared on geopolitical fears over the US-Iran conflict briefly going kinetic in early January, and later on the mounting COVID-19 worries and resulting stock-market selling. By March 9th, GLD’s holdings had climbed 7.9% or 70.5t year-to-date. That helped push gold 10.4% higher before the stock panic’s fear maelstrom sucked in everything.
Nothing scares investors more than stock panics, which are technically 20%+ collapses in leading stock benchmarks in 2 weeks or less. They so greatly terrify traders that they rush to sell everything to flee to cash, even gold. During the previous October 2008 stock panic, gold plunged 16.7% over 21 trading days when the flagship US S&P 500 stock index (SPX) plummeted 30.0%! Gold isn’t immune to extreme fear.
As the SPX started sliding in late February 2020, gold initially enjoyed safe-haven buying. From the day the SPX peaked at an all-time high until March 9th, gold rallied 4.0% to $1675 despite the SPX plunging 18.9%. But once that stock-panic threshold was crossed, the gold baby was thrown out with the stock bathwater. Over the next 8 trading days as the SPX plunged another 12.3%, gold dropped 12.1% in sympathy.
A major driver of that was American stock investors fleeing GLD shares. In roughly that same span, they dumped GLD much faster than gold was being sold. That forced a 5.8% or 55.6t holdings draw, which of course amplifies gold’s stock-panic selloff. Gold-ETF managers have to sop up excess supply by buying back ETF shares, and they raise the proceeds to finance this by selling off some of their physical gold bullion.
But just two trading days after gold bottomed in mid-March when its sharp V-bounce started becoming apparent, traders flocked back to GLD. They’ve been aggressively deploying capital in gold through this leading and dominant gold ETF ever since. As this chart shows, GLD’s holdings have rocketed vertically since gold’s stock-panic lows. That’s similar to what transpired after that last stock panic in October 2008.
In early April soon after this latest government-economic-lockdown stock panic, I wrote about the soaring gold investment demand. I included a chart showing what happened to gold prices and GLD’s holdings after gold’s previous late-2008 stock-panic nadir. Over the following 2.8 years, gold blasted 166.5% higher fueled by a massive 71.5% or 535.5t GLD-holdings build! Stock panics stoke gold investment for years.
So American stock traders flooding into gold again after March 2020’s panic shouldn’t be surprising. Since its March 19th stock-panic low of $1472, gold has already surged 18.7% higher at best by its latest interim high of $1748 on May 20th. GLD’s major 20.6% or 190.1t holdings build during that span is the main reason why! The WGC’s next GDT on gold’s Q2’20 fundamentals will likely reveal continuing ETF dominance.
And American stock investors didn’t stop buying GLD shares when gold stalled last month for a healthy high consolidation since. Their differential GLD-share buying persisted into early June, which is usually a weak time seasonally for gold investment demand. Between March 20th to June 3rd, GLD’s holdings rocketed up 24.8% or 225.2t! That’s already over triple this ETF’s entire holdings build during all of Q1.
And this gold investment demand has been very consistent. In that 51-trading-day span, GLD enjoyed fully 36 holdings-build days averaging 0.6% each. That’s getting to sizable, on the way to 1.0%+ which I consider large for any given trading day. And there were only 4 holdings-draw days averaging trivial 0.1% declines. Gold investment buying has not only been strong, but persistent in the wake of this stock panic.
The crushing wealth declines in stock panics are devastating psychologically, scarring investors for years after those extraordinary events. They shock investors into remembering prudent portfolio diversification is wise, that being all-in stocks is way too risky. Gold plays a critical role in diversifying since it is a rare asset not highly correlated with stock markets. Gold tends to rally when stocks weaken or are expected to.
So for decades now I’ve argued that every investor always needs a 10%-to-20% gold allocation in their portfolios! It acts like insurance, stabilizing wealth by offsetting losses during stock bears or other major selloffs. And there’s no greater wake-up call to the inherent riskiness of stock markets than panic-grade plummetings. Investors tend to return to gold for years after stock panics rapidly decimate their wealth.
From February 19th to March 23rd, the SPX cratered 33.9%! Investors won’t soon forget forfeiting over a third of their wealth in just over a month. And American stock investors held virtually no gold before that brutal psychological shock. An excellent gold-investment-level proxy is the ratio between the total value of GLD’s holdings to the collective market capitalizations of the 500 elite stocks of that flagship S&P 500 index.
As the SPX reached its last all-time-record high in mid-February before the stock panic, GLD’s holdings were only worth 0.16% of the SPX companies! That implies American stock investors were running gold exposure around 1/6th of one percent. While this particular ratio will never get up to 10% or 20%, it sure reveals the radical underinvestment in gold. It will take huge sustained buying to even reach 1%, 2%, or 3%.
Since those stock-panic lows the SPX has skyrocketed 44.5% higher at best as of this week, which is just 4.5% under mid-February’s record peak. Yet gold investment demand remained strong even during this huge rebound rally, which is acting exactly like a monster bear-market rally. The driver fueling this gigantic surge is a major reason investors are still flocking to gold despite the stock euphoria, epic Fed money printing.
Federal Reserve officials panicked in mid-March as the stock markets plummeted. They feared the powerful negative wealth effect from cratering markets would plunge the US into a full-on depression. Thus they frantically unleashed a radically-unprecedented deluge of freshly-conjured money. From mid-March to early June, the Fed’s balance sheet skyrocketed an insane 66.2% or $2,853.3b higher in just 12 weeks!
This is far beyond anything ever witnessed in US history, as close to hyper-inflation as the Fed has ever dared get. This vast flood of new fiat dollars is being directly injected into the US economy via the huge stimulus bills Congress passed. The original CARES Act alone that became law in late March weighed in at $2,125b! This flood of money is competing for shrinking pools of goods and services, bidding up prices.
Even if the stock panic hadn’t happened, there’s probably never been a more important time to invest in gold than when the Fed’s printing presses are spinning out of control. 2/3rds more dollars evoked out of thin air in just 2.8 months are going to have a colossal inflationary impact in coming years. That mind-boggling and exceedingly-risky monetary inflation is a major driver behind investors shifting into gold.
So gold investment demand is likely to remain strong on balance even during gold’s summer doldrums, normally the weakest time of the year for gold demand. Gold tends to drift in Junes, Julies, and Augusts as they usually don’t have sufficient catalysts to drive outsized demand. But boy summer 2020 is sure a huge exception to that rule! Gold investment was strong last summer too after gold’s bull-market breakout.
In late June 2019, gold finally achieved its first new bull-market high in several years. That drummed up investor interest, resulting in gold surging 16.7% between the ends of May and August. Like usual that was fueled by big capital inflows into GLD’s shares, this ETF enjoyed a big 18.2% or 135.1t holdings build last summer! That again showed gold investment demand can be strong in summers with a solid catalyst.
Given the COVID-19 stock panic’s devastating psychological impact, the resulting far-beyond-extreme record Fed money printing, and the strong momentum in gold and gold investment, odds are this summer will again buck the normal weak seasonals. And if these Fed-goosed stock markets roll over hard as they ought to given the horrendous economic data and corporate earnings, gold will quickly grow way more popular.
Interestingly the main beneficiary of gold investment demand isn’t the metal itself, but the stocks of its miners. Just last week I wrote an essay explaining how their post-stock-panic upleg was still healthy, which traders were increasingly doubting due to a correction-grade selloff. Gold stocks have bounced back sharply since, as is evident in their leading GDX VanEck Vectors Gold Miners ETF in this updated chart.
While gold has rallied 18.7% at best out of its deep stock-panic lows, the major gold stocks have dwarfed that. At best GDX skyrocketed 95.8% higher from mid-March to mid-May! That makes for awesome 5.1x upside leverage to gold. And as I explained in my essay last week, the gold stocks still have lots of room to run technically and fundamentally. Fully 2/3rds of that big post-panic upleg was just a mean-reversion rebound.
While gold stocks bear too many additional risks to usurp gold’s ultimate-portfolio-diversifier crown, they are great to own when gold is powering higher on strong investment demand. The major gold stocks of GDX more than quadrupled after that last stock panic in late 2008, soaring 307.0% higher over the next 2.9 years. So if you expect strong gold investment demand to continue in coming years, own gold stocks!
Gold and its miners also power higher during stock-market bears when everything else is burning. Gold stocks aren’t a replacement for prudently maintaining that 10%-to-20% gold portfolio allocation. But they are a great place to park additional capital during extended episodes of weakening stock markets. The major gold stocks tend to amplify gold’s upside by 2x to 3x, building wealth instead of just preserving it in cash.
The bottom line is gold investment demand remains strong. Ever since the stock panic, American stock investors have continued shifting capital into GLD shares on balance. GLD’s holdings have long proven the best daily proxy for global gold investment demand. Investors are returning to gold with a vengeance after March’s stock panic violently reminded them that stock-market cycles still exist despite Fed money printing.
And that has gone ballistic since the stock panic, with the panicking Fed ramping dollar supplies by 2/3rds in a few months! This biggest and most-extreme monetary inflation in US history by far makes investing in gold more essential than ever. So gold investment demand is likely to remain strong in coming months, and soar as these lofty Fed-goosed stock markets roll over. That portends massive additional gold-stock gains.
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