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Bookmark- Renewed interest in the U.S. is key for sustaining the current rally.
- Gold demand in cost-sensitive Asia could suffer, but it could also spur even higher prices.
Yesterday, for the third time in the last 8 weeks, the trust for the SPDR Gold Shares ETF (GLD) added 7.5 tonnes to its holdings. These are the biggest daily inflows the trust has seen since late-2012 and they signal renewed interest in the metal by U.S. investors, a key prerequisite for extending the current gold market rally.
As shown below using data from the SPDR website, Monday’s big increase in GLD holdings follows the same size increase less than a month ago on February 13th and this followed less than a month after the same size gain on January 17th.
It is not clear why 7.5 tonnes seems to be a magic number of late, however, there are other daily inflow and outflow amounts that seem to repeat, for example, the 6.6 tonne additions last August and October.
As shown in the chart above, there was an addition of 5.4 tonnes in December and those six inflows comprise the entire list of 5+ tonne additions to the trust going all the way back to October 2012 as indicated by the black arrow.
Zooming out to include over six years of data in the chart below, it’s clear to see that 7.5 tonne additions to GLD holdings were once quite common. In fact, recent gains look very pedestrian when compared to the rate at which metal was flowing into the trust right up until October 2012.
Last month, for the first time since December 2012, GLD saw a net inflow and the additions have accelerated in the first days of trading in March. This recent change from outflows to inflows is important because GLD is widely seen as a good gauge of investor sentiment toward gold in the West and, in the view of many analysts (including myself), the gold market needs buying in the West to support higher prices.
Note that this is in sharp contrast to Asia where buying increases as prices fall. Should the gold price rise another few hundred dollars from here, those responsible for the record gold buying in China last year (at much lower prices) are going to look awfully smart as investors and traders in the West chase prices higher.
Commodity prices have been surging in recent weeks and that has helped the gold market rebound considerably. As noted in this item yesterday, inflation is suddenly back on the radar of at least a few investors with some even warning of a “perfect storm” for consumer prices if the labor market continues to improve.
With many commodities now sporting double-digit price increases so far this year and broad commodity indexes up between five and ten percent in 2014, more than a few U.S. money managers have seen fit to increase their asset allocation to natural resources and this will help both precious metals and mining stocks.
How long these trends continues remains to be seen, however, the key at this point is that each new inflow to ETFs such as GLD provides more confirmation that this really is a change in trend. Importantly, the last five changes to GLD holdings have all been inflows totaling 17 tonnes and nothing like this has been seen since September 2012 when, in eight consecutive additions, some 41 tonnes were added.
For better or worse, Western investors set the price of gold in paper markets while most of the world’s physical gold is purchased in the East, primarily in China and India.
What has now become a tantalizing prospect for gold owners all around the world is that U.S. investors appear to be rapidly warming up to the metal again and, if cost-sensitive buyers in Asia fear that low prices will not be available for long, the current gold rally could accelerate rather quickly.
That would be a welcome development for long-term gold investors who haven’t had much to cheer about in the last year-and-a-half.
