Gold Investment Bleeding

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from Silver Doctors:

Gold has sure been a four-letter word lately, suffering one of its worst bull summers, and the primary culprit was…

by Adam Hamilton of Zeal LLC

Gold has sure been a four-letter word lately, suffering one of its worst bull summers.  The primary culprit was heavy gold-futures selling on a parabolic US-dollar surge fueled by extreme Fed hawkishness.  But the resulting gold technical damage really disheartened investors, spawning additional relentless selling from them.  This investment bleeding has certainly exacerbated gold’s downside, but its days are numbered.

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With inflation raging in its biggest super-spike since the 1970s, gold should be soaring today.  Instead it has been bludgeoned 14.3% lower between mid-April to late July, defying long precedent.  And at the mid-week data cutoff for this essay, gold had again been pummeled right back to those deep summer lows.  Technically gold looks pretty broken, which has whipped up bearish sentiment to suffocating extremes.

Gold was trading near $1,977 in mid-April just before the US Dollar Index started rocketing vertically.  In the past five months starting then, US headline CPI inflation has run red-hot blasting up 8.3%, 8.6%, 9.1%, 8.5%, and 8.3% year-over-year!  That high-water June print was the worst witnessed since way back in November 1981, a 40.6-year high!  It’s hard to imagine a more-irrational backdrop for a major gold selloff.

Gold skyrocketed during the last similar inflation super-spikes in the 1970s.  In the first the CPI blasted from +2.7% YoY to +12.3% over 30 months into December 1974.  Gold’s monthly-average prices from trough to peak CPI months launched 196.6% higher!  During the second the CPI exploded from +4.9% YoY to +14.8% in 40 months climaxing in March 1980.  Gold’s monthly-average prices were a moonshot, up 322.4%!

In last week’s essay, I analyzed the recent heavy-to-extreme gold-futures selling that is still dogging gold.  The crazy leverage inherent in futures enables those speculators to punch way above their weights in gold-price impact.  The good news is their capital firepower available for dumping gold is quite finite and already mostly-spent.  They will soon do massive mean-reversion buying which will catapult gold sharply higher.

But tragically temporary futures-driven gold-price distortions greatly affect investors’ psychology.  They have seen gold floundering in recent months contrary to all history, fueling overwhelming bearishness.  They assume gold has somehow fundamentally disconnected from inflation, so they are abandoning it.  Their resulting selling hasn’t been massive, but it keeps on dripping and dripping like Chinese water torture.

Had gold-futures speculators not duped gold investors into thinking gold’s ultimate-inflation-hedge status has failed, gold’s recent price action wouldn’t have been as ugly.  This chart is updated from my latest gold-summer-doldrums essay of early July.  It indexes gold’s summer performances to May’s final closes in all modern gold-bull years.  Gold has just suffered one of its worst summers in this multi-decade span!

Between mid-April before that massive gold-futures selling erupted to last week, speculators dumped the gold-futures equivalent of 541.3 metric tons of gold!  Those hyper-leveraged traders are forced to have myopic ultra-short-term time horizons, and all they cared about is the soaring USDX.  They dumped gold futures in lockstep with that leading dollar benchmark rocketing up to unsustainable 20.2-year secular highs.

That epic dollar strength was driven by extreme hawkish jawboning by Fed officials, monster rate hikes and wildly-unprecedented levels of quantitative-tightening monetary destruction from the FOMC, the European Central Bank dragging its feet on raising rates, and Europe’s severe energy crisis caused by its heavy reliance on Russian imports.  The euro has long dominated the USDX at 57.6% of its total weighting.

Before that enormous gold-futures selling slammed gold, investment demand was growing.  Unfortunately comprehensive global gold supply-and-demand data is only released once per quarter by the World Gold Council, in its fantastic Gold Demand Trends reports.  But thankfully there is an excellent highly-correlated high-resolution proxy for overall world gold investment demand that is published daily, revealing real-time trends.

That is the combined holdings of the leading American GLD SPDR Gold Shares and IAU iShares Gold Trust gold exchange-traded funds.  According to the WGC, at the end of Q2 their combined holdings of 1,560.5t accounted for fully 41.1% of all the gold held by all the world’s physically-backed gold ETFs!  That dwarfed the distant third one at just 7.5%.  GLD and IAU dominate because they are tied to US stock markets.

These mighty ETFs act as conduits for the vast pools of American stock-market capital to slosh into and out of gold.  When their gold-bullion holdings are rising, investors are shifting capital into gold on balance.  When they are falling, investors are pulling capital back out.  In plenty of quarters in recent years, moves in GLD+IAU holdings alone accounted for the great majority of changes in overall global investment demand!

In Q2’22 for example when gold started rolling over on that heavy-to-extreme gold-futures dumping, the combined GLD+IAU holdings fell 47.5t.  That was nearly 6/10ths of the 80.3t total drop in world investment demand last quarter per the WGC’s latest GDT.  Some quarters have actually seen GLD+IAU holdings changes exceed global gold-investment-demand changes, these behemoths dominate gold capital flows!

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