SPDR Gold Trust ETF (GLD): The Bull Within The Bear

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September 5, 2013 1:16pm NYSE:GLD NYSE:IAU

record gold holdingsJeff Clark: Gold investors will recall there was a surge in bullion buying when the price crashed in mid-April. We saw less of this with the June decline, though global investment demand has still been stronger than what was seen in 2012.


What virtually every mainstream headline has been screaming about, though, is the huge outflows in GLD. This frustrates someone like me who knows the “paper” gold market comprises only a part of the total investment picture for gold. As the saying goes, they’re looking at only one part of the elephant.

The reason it’s important to look at the entire picture of investment demand is because an investor might draw an erroneous conclusion if they read just the headlines. For example, China and other Asian nations represent well over half of all global investment demand, while North America is just 9%. Is this bigger source of demand experiencing a lot of selling, too?

Let’s look at the bigger picture of investment demand for gold this year. In the following chart, we compare GLD outflows to Chinese imports through Hong Kong, as well as other sources of demand for physical metal. Here are the data through last month.

As is clearly visible, Chinese gold imports alone are much greater than what GLD holders have sold. It’s not even a fair comparison, because Hong Kong import data are currently available only through May, while GLD sales are through June. And when combining imports with the country’s production—remember, China doesn’t export any metal—it’s roughly double GLD outflows.

This is just the Chinese market… adding in central bank purchases and the numbers from the US and Perth Mints, along with Japanese imports, pushes the total over 150% higher than GLD liquidations.

But the difference is more dramatic than this. The data also exclude…

  • All other sovereign mints that haven’t reported recent sales figures for the year. This includes well-known mints in Canada, South Africa, and Austria. The Royal Canadian Mint, for example, reported a 96.4% increase in gold Maple Leaf coin sales in the first quarter of 2013 vs. the same period in 2012.
  • Central banks that have not yet reported their purchases. Based on the trends in their activity over the past five years, we’ve probably only seen about one-quarter of year-end totals.
  • All private mints. Data here are hard to come by, but not one ounce from any private mint is included in the chart above.
  • All numismatic and rare coin sales. Data are again difficult to obtain, but net numismatic purchases have yet to be added to demand.

To be fair, the chart also excludes ounces sold by other gold-backed ETFs (they have not reported their Q2 data as of this writing), though their holdings are a small fraction of GLD. I’ll also point out that CPM Group, a metals consultancy, cautions that some of the Chinese import data may not relate to investment or fabrication demand, and that some metal likely ends up in Thailand, Philippines, Malaysia, and other regional countries, though in that case it’s still part of demand. Even if we subtract a portion of those ounces, though, the net result is the same: the global demand for physical metal wildly exceeds GLD sales.

This more complete view of investment demand sends a clear message to investors: the gold bull market is not over. Here’s why:

A bullish response to the correction. Stampeding to buy an asset that’s crashing in price is not the kind of behavior associated with a trend that is over—just the opposite, in fact. Clearly, most bullion investors around the world see the corrections in gold as a sale, including China and other Asian nations.

Long-term buyers vs. short-term sellers. Someone who buys a paper form of gold typically has a short-term time horizon in mind. What have many of them been doing? Selling. The investor who buys actual physical metal, meanwhile, tends to have a longer-term time frame. And what are they doing? Buying.

Lack of physical selling. It’s not just the tremendous amount of buying that’s taking place; it’s still very difficult to find any significant amount of selling by holders of physical metal. This adds strength to what we’re seeing from long-term investors.

Don’t be fooled by what happened in the futures market. The retreat in the gold price is a buying opportunity for physical metal. And those who do so will be in strong company.

The bottom line for me can be summed up by Zhang Bingnan, secretary-general of the China Gold Association: “The dumping recently of holdings in gold exchange-traded products by overseas investors may not prove to be a wise move.”

Indeed. Let’s follow the bull within the bear and take advantage of the current sale.


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