Born in early October 2023, today’s gold upleg has blasted up 38.7% at best over 10.8 months now! In early December, gold achieved its first nominal record close in 3.3 years. Since then 28 more records have been written into the books, an incredible run by any standards! Gold’s upleg is now on the verge of powering up 40%+ into monster status. Remarkably this has happened with one hand tied behind its back.
The leveraged gold-futures speculators who often bully around gold prices have certainly done their part. During this upleg they’ve added an enormous 143.7k long contracts, while buying to cover an also-huge 82.4k short ones. That adds up to the equivalent of 703.2 metric tons of gold, a colossal amount! But such gargantuan buying has pretty much exhausted specs’ probable buying firepower for this gold upleg.
Total spec longs have soared way up near their secular resistance, while total spec shorts have collapsed under their own secular support! While digging into gold futures is outside the scope of this essay, every week I analyze specs’ latest-reported trading, positioning, and its implications for gold’s outlook in our popular weekly newsletter. While specs could do a frenzied spurt of long buying, it wouldn’t last long from here.
Big spec gold-futures buying is a potent gold driver, with futures’ extreme leverage giving them outsized impacts on gold prices. But alone that typically fuels 20%-to-25% gold uplegs at best. While good and very profitable to trade with gold stocks, futures-driven uplegs don’t grow to mighty 30%+ gains or 40%+ monster ones. The finite pool of capital deployed in gold futures is expended before gold uplegs get huge.
The largest uplegs require big investment demand, which dwarfs gold-futures buying. For many years that has been most apparent in the combined holdings of the leading GLD and IAU gold ETFs. Exiting Q2, they alone commanded fully 38.9% of all the gold bullion held by all the world’s physically-backed gold ETFs! Ranking distant third is a British gold ETF with merely 6.6% of those global bullion holdings.
GLD and IAU have long been gold-demand juggernauts. Every quarter the World Gold Council publishes the best-available global gold fundamental supply-and-demand data. In a sizable fraction of all quarters in the last decade-plus, changes in GLD+IAU holdings have mostly explained gold’s price trends during those spans. Sometimes capital inflows or outflows into GLD and IAU prove gold’s biggest demand swings!
This ironclad relationship exists because physically-backed gold ETFs act as conduits for the vast pools of stock-market capital to slosh into and out of gold. Gold-ETF shares can’t mirror their underlying metal’s price action and accomplish their mission unless their own excess supply and demand is shunted directly into gold itself. If that doesn’t happen, gold-ETF-share prices will quickly decouple from gold’s own price action.
The mechanism is simple. When gold-ETF shares are being bought faster than gold itself, their prices threaten to surge faster than gold’s. So gold-ETF managers need to force that excess demand into gold. They do that by issuing sufficient new gold-ETF shares to fully offset any demand overage, then use the proceeds to immediately buy more gold bullion for their vaults. Of course the opposite is also true.
When gold-ETF shares are being sold faster than gold, their prices risk disconnecting to the downside. To avoid failing their gold-price-tracking mission, gold-ETF managers buy back sufficient gold-ETF shares to totally sop up any excess supply. They raise the funds to do that by selling some of their ETFs’ gold bullion. Rising gold-ETF holdings reveal stock-market capital flowing into gold, and falling draining back out.
This chart superimposes GLD+IAU holdings in blue over gold prices in red. Astoundingly gold’s latest near-monster upleg has blasted higher despite zero differential GLD+IAU-share buying! A year ago I wouldn’t have believed that was even possible, yet here we are. Today’s mighty gold upleg is truly remarkable for growing so big while distracted American stock investors all but completely ignored it!
Unbelievably and exceedingly-anomalously, GLD+IAU holdings have actually fallen rather sharply on balance during this mighty upleg’s lifespan! These dominant gold ETFs’ physical bullion normally tends to closely track gold’s uplegs and corrections, as evident here from 2020 to late 2023. American investors buy GLD and IAU shares to ride gold uplegs when they’re underway, their added demand boosting gold’s gains.
While the extreme risks inherent in leveraged gold-futures trading force myopic ultra-short-term time horizons for those guys, investors are much-more-casual gold observers. They grow bullish after gold has already rallied considerably, and bearish once it rolls over and decisively corrects. So peaks and troughs in GLD+IAU holdings tend to lag upleg toppings and correction bottomings in gold, as this chart shows.
Back in October soon after this gold upleg was born, GLD+IAU holdings were behaving normally. They carved a deep 3.8-year secular low, then started recovering with gold. But just a month later, American stock investors’ inflows into gold via GLD and IAU shares stalled. Despite gold’s young upleg surging a big 10.2% higher in just several weeks, investors quickly abandoned it. With hindsight, the reason is clear.
In late October, the flagship US S&P 500 stock index had rolled over into formal correction territory with a 10.3% loss in 2.9 months. That selling probably should’ve continued, as the SPX left that month still trading at a lofty 26.3x trailing-twelve-month price-to-earnings ratio. It had soared way up to 30.5x in late July, well into dangerous bubble territory. A necessary valuation mean reversion looked to be underway.
While a brief oversold bounce was due, it exploded when the Fed came into play. After hiking 11 times over 16.3 months for an extreme 525-basis-point hiking cycle, the FOMC and Fed chair came across as dovish implying the Fed was done hiking. So stock markets took off like a rocket, soon morphing into the AI stock bubble led by market-darling AI-chipmaker NVIDIA. The SPX soared an amazing 16.2% by late December!
That quickly overshadowed gold, despite it achieving that first record close in 3.3 years. Gold has always been an alternative investment, an essential portfolio diversifier that tends to rally when stock markets weaken. So when the SPX is surging towards its own record highs generating universal euphoria, gold is soon forgotten. For all its unique benefits, gold will never be as sexy as the hottest mega-cap tech stocks.
In Q1’24 the S&P 500 surged another 10.2% higher, achieving 22 record closes and blasting above 5,000 for the first time ever! Despite the SPX components’ average P/Es also surging way back up to 31.0x, investors were captivated by the promises of AI. NVIDIA’s stock was a moonshot, skyrocketing 82.5% that quarter alone! While gold was no slouch in Q1 also surging 7.6%, it couldn’t compete with AI mindshare.
So American stock investors dumped a good chunk of even their meager existing allocations in GLD and IAU. Their holdings fell 4.7% in Q1, or 60.4t! That forced them to a deep 4.5-year secular low, which was an extreme anomaly with gold powering to 10 new record closes in March alone. Since then these leading gold ETFs’ holdings have mostly ground sideways, reflecting American stock investors’ serious apathy.
Yet gold continued forging higher on balance anyway, again extending its upleg to a mighty 38.7% at best in late August. Astonishingly during that exact span, GLD+IAU holdings actually fell 4.4% or 55.8t! Such a disconnect is wildly unprecedented in the entire modern gold-ETF era. The SPX soaring a similar 37.6% on AI hype between late October to mid-July was the reason, stealing all the limelight from everything else.
That certainly included gold, which was overlooked and ignored. Nothing could compete with NVIDIA’s parabolic 236.2% stock gains at best within that span! While gold’s many new records have won it plenty of financial-media coverage this year, investors didn’t care with their mega-cap-tech-dominated portfolios performing so well. The wisdom of prudent diversification is forgotten in surging, lofty, and euphoric markets.
The fact gold could still enjoy a near-monster upleg not only without any differential gold-ETF-share buying but despite active selling is remarkable! That’s a testament to amazing underlying strength in gold demand, which wasn’t just from gold-futures speculators. The last couple quarterly reports on global gold fundamentals from the World Gold Council have confirmed big buying from Chinese investors and central banks!
I’ve analyzed these in depth in our subscription newsletters, including our latest monthly just published. Without those atypical demand sources, today’s gold upleg likely wouldn’t have grown much bigger than 20% to 25% on spec gold-futures buying alone. By all indications, that major Chinese and central-bank gold buying will probably continue. China’s economy and stock markets are struggling while yuan gold is surging.
Investors all over the world love chasing winners. And with out-of-control US-government spending still ramping the mind-boggling US debt while Treasury interest expenses soar, the US dollar’s fundamental outlook is dismally-bearish. So global central banks need to continue paring their dollar-heavy reserve holdings, and nothing beats gold for weathering globally-rampant fiat-currency inflation and debasement.
Ironically American stock investors ignoring gold’s mighty upleg is the single-most bullish argument for it powering much higher! Euphoric stock-bubble toppings are always short-lived, soon bursting then rolling over in busts. That process may have already started, with the SPX plunging 8.5% between mid-July to early August. While it has bounced back since, the AI market darlings driving the greed aren’t faring as well.
NVDA plunged 27.0% at worst from mid-June to early August, and was still down 21.7% midweek! If decisive new highs aren’t seen soon in the US stock markets or NVIDIA, investors’ worries will mount. Some will sell driving mega-cap techs and stock markets lower, spawning wider anxiety and selling. Sooner or later the SPX will have fallen far enough to dispel euphoria and convince traders this bubble has popped.
Some will look to diversify, and remember gold. Even if a tiny fraction of stock-market capital migrates into gold, that will drive its price much higher. The value of GLD+IAU holdings relative to the S&P 500’s total market capitalization is a great proxy for American stock investors’ gold investment. Exiting August, that literally ran under 0.2%! That’s not a typo, 2/10ths of one percent! Gold investment may as well be zero.
All the gold bullion held by GLD and IAU is worth less than $99b. What happens to gold prices if $50b, or $100b, or $200b of stock-market capital flows in? That’s pocket change for stock markets, a rounding error. This Tuesday alone NVIDIA’s stock plunged 9.5%, wiping away a stock-market-record $279b in market cap! American stock investors face ugly mega-cap-tech losses with virtually no gold holdings.
I wrote an essay in early August looking at big US stocks’ latest fundamentals after Q2 earnings reports. It explained why a bear market is overdue. The last SPX bear proved relatively-mild, with 25.4% losses from early January 2022 to mid-October that year. Surrounding that span, the beloved Magnificent 7 mega-cap techs including NVIDIA averaged brutal 54.6% losses more than doubling the stock markets’!
As market-leader losses mount again, gold will be remembered. Interestingly today’s gold upleg devoid of American-stock-investor demand is the biggest by far since a pair of 40%+ monsters both cresting in 2020. Those were also the last record-achieving ones. New records fuel virtuous circles of increasing and increasingly-bullish financial-media coverage, which entices in more new traders amplifying the gains.
Four-to-five years ago gold soared 42.7% and 40.0% on enormous differential gold-ETF-share buying by American stock investors. Their aggressive chasing of mounting gold gains and records catapulted GLD+IAU holdings up 30.4% or 314.2t during that first upleg, and then an epic 35.3% or 460.5t higher in the second! Those average out to enormous 387.4t builds, which overwhelmingly fueled those monster uplegs.
With today’s gold upleg already up 39%, what happens when American stock investors inevitably return? Their gold demand will make a comeback as the AI bubble’s euphoric pall dissipates, that’s almost certain. What if GLD+IAU holdings swing from their -50t so far in this upleg to +400t or more as investors rush to chase gold and diversify their mega-cap-tech-dominated portfolios? Gold will power a heck of a lot higher!
Since we’ve never before seen a monster gold upleg in this modern gold-ETF era that wasn’t fueled by big differential gold-ETF-share buying, no one has any idea how big gold’s gains could grow. But if $100b+ of American stock-market capital sloshes back into gold, its upside from here will be major. The last time gold grew popular was summer 2020, when American stock investors catapulted it up 18.3% in seven weeks.
Similar gains from midweek would push gold over $2,950, which would generate endless bullish press. But American stock investors would need many months if not years to reestablish even trivial 1% gold allocations, so gold’s bull-market gains should grow much larger. The biggest beneficiaries of much-higher gold prices remain the gold miners’ stocks, especially smaller fundamentally-superior mid-tiers and juniors.
In Q2 gold averaged a record $2,337, fueling the fattest and richest profits gold miners have ever earned! Over the last four quarters, the GDXJ-top-25 mid-tiers have seen unit earnings skyrocket 106%, 126%, 63%, and 66% YoY! And Q3 is going to be awesome too, with gold already averaging $2,436 quarter-to-date. Still largely-unloved and deeply-undervalued, the gold stocks have enormous upside potential with gold.
So if you’ve been sleeping on this sector, you need to do your homework and get deployed. Even modest portfolio allocations on the order of 5% in gold and 20% in great gold stocks will work wonders for future gains. This AI stock bubble’s days are numbered, and gold regaining visibility in its aftermath should eventually make gold stocks one of the hottest sectors. Smaller gold miners could easily double to quadruple.
The bottom line is American stock investors’ gold demand will almost certainly make a comeback. They have totally ignored gold’s near-monster upleg so far, enthralled by the AI stock bubble. Actually selling gold-ETF shares on balance, gold’s massive gains have instead been fueled by buying from gold-futures speculators, Chinese investors, and central banks. This is wildly unprecedented in this modern gold-ETF era.
As this AI stock bubble inevitably bursts, American stock investors will remember gold. They will want to diversify as the overdue bear mauls mega-cap techs, and doing that while chasing gold’s record-achieving upleg will be incredibly appealing. With today’s effectively-zero gold allocations, even tiny shifts back into gold-ETF shares by stock-market standards will supercharge gold’s gains. Gold stocks will fly on that.
(By Adam Hamilton)
