LAWRIE WILLIAMS: Watch GLD for gold price guidance
Whether it is the tail wagging the dog, or vice versa, the major gold ETF performance in terms of attracting gold, or liquidating it, is an excellent guide to gold pricing and sentiment. The World Gold Council notes in its latest release that outflows from gold ETFs continued in August, but mostly from North American funds for the third month in a row, although the fall was not consistent around the globe. European gold ETFs were just about flat and Chinese ones saw small inflows. The WGC goes on to note that recent reports of COMEX futures show extreme short positioning as gold’s pullback generated additional selling pressure from money managers. But such negative positioning, however, has historically preceded rallies in the price of gold, as discussed in detail in its recent note Gold recoils amid selloff but may rebound.Supporting this latter theory is that recent reports suggest that the bullion bank considered by some analysts to effectively control the gold and silver futures markets, JP Morgan, may have switched from a heavy short position in the two main precious metals to a net long position, which some see as a precursor to a major reversal in precious metals price direction.
But be this as it may , one should perhaps look at the positioning in ETF holdings as a guide to the likely direction of the gold price. In this respect it is easiest to look at the biggest gold ETF of all, The SPDR Gold Shares ETF (GLD) for guidance rather than trying to keep tabs on all the gold ETFs out there. GLD tends very much to be an easily visible proxy for all these exchange traded gold funds given it publishes, on its website, a spreadsheet of its daily gold holdings back to November 2004. And it seems to be the North American futures markets which largely call the tune in gold price weakness or strength at the moment despite the continuing flow of gold bullion to the major Asian consuming nations.
It is thus extremely interesting to compare this year’s gold prices with the daily growth, or decline in GLD’s holdings which have reflected the gold spot price pretty well, but probably lag it by a couple of weeks – in other words the gold dog does seem to be wagging the GLD tail in this instance.
A look at the GLD figures to date this year shows that in the four months to April, which saw strength in the gold price up to over $1,350, GLD inflows were fairly strong with almost 35 tonnes of gold added. But since then its been downhill all the way for gold with some 116 tonnes being liquidated out of GLD between the April peak and the recent Labor Day holiday. Indeed with a big 8.25 tonnes being sold out of GLD over the holiday and the first day of trading thereafter, and another smaller liquidation out of the fund on Friday, GLD gold holdings are now at their lowest level since February 2016 or for just over 2 ½ years.
What the GLD figures do show are U.S. sentiment towards gold at any given time and that has not been positive of late given the strength of the dollar, although the opposite may be true for those nations whose currencies have been strongly adversely impacted by the dollar’s strength. As the global gold price is usually reported in U.S. dollars the media largely views this as gold price weakness, but it could also be equally viewed as dollar strength.
But gold sales out of GLD could turn around fast given the low gold price and any intimation that the dollar’s advance might be about to be curtailed. We are beginning to see some bullish commentary on gold emerging from Wall Street pundits and the international banking community. President Trump is very obviously under pressure and that could put the dollar under pressure too if the possible impeachment process gains legs. In our view a President Pence might be an even less predictable option, which would be the case were President Trump be forced to resign. If Congress has this opinion too it may well make the two thirds majority necessary to force Trump to stand down even less likely to be achieved. However, the real prospect of big Democratic Party gains in November does put another dimension into the U.S. political equation.
So, at the moment with GLD still bleeding gold and the dollar remaining strong ahead of the Fed meeting later this month we don’t really see gold making much in the way of an advance. Indeed it might even drift further downwards until the Fed meeting, which is widely expected to add another 25 basis points to U.S. interest rates, but gold will have largely discounted the likely rise anyway, and will perhaps be more likely trade either side of the $1,200 level for the time being. There is some encouragement in that today the dollar index has slipped below 95 (just) and there have been no withdrawals from, or additions to, GLD for a couple of days. This could indicate e a turning point for the gold price, but don’t bank on it yet.
But once the Fed meeting and the likely next rate increase are out of the way we could well see a sharp turnaround which could continue through to the year end. We still feel there’s a good chance of gold regaining the $1,300 level and higher then. Take GLD holdings as a pointer. If they start to rise then the gold price will probably be rising as well. It would suggest a change in sentiment to the positive for gold and may be the result of institutional buying again. And if the JP Morgan switch into being long gold is maintained then we could be in for a very sharp price increase down the road. JP Morgan’s dealings are all about profit so a long call there would seem to be particularly significant.