The popular SPDR Gold Shares ETF (GLD) saw outflows for the seventh straight day yesterday as more U.S. investors appear to be dumping the metal in favor of other investments, notably U.S. stocks.
Is this cause for concern for gold investors?
Well, it might not be a bad idea to worry a little bit, particularly over the very short-term because there is not a catalyst in sight in the week or two ahead to bolster gold prices.
Dovish comments by Federal Reserve Chairman Ben Bernanke earlier this week provided only a temporary reprieve from the recent selling in yet another reminder of how poor sentiment in this market currently is.
But, over the long-term, investors who hold onto their GLD shares will surely be rewarded since, despite the recent optimism about the U.S. economy that has accompanied soaring U.S. stock prices, we are unlikely to avoid one of two outcomes:
- Much higher inflation
- Another financial crisis
These arguments were laid out in last week's "Why You Should Hold Onto Your Gold And Silver" and will be further explored in future articles, but declining GLD holdings are the focus today.
Per the latest data at the SPDR Gold Shares website, GLD holdings fell by another 12 tonnes yesterday to 1,258 tonnes, the lowest since August and the seventh straight daily decline that has now totaled 65 tonnes.
You'd think that this recent selling might be driving the gold price lower, however, as detailed here the other day and as shown again below, this is another good example of "correlation is not causation".
Nonetheless, as anyone who has followed this ETF for a long period of time knows, this is quite a drop. In fact, it is the longest stretch of daily outflows since the fund was launched in 2004.
In dollar terms and percentage terms, recent outflows are dwarfed by a 61 tonne decline over seven days in the spring of 2008 when the gold price was about $900 an ounce and GLD holdings were about half their current level, so, a little perspective here is important.
As shown below, after the gold price had briefly topped the $1,000 an ounce mark in early-2008 and then moved lower, analysts were calling for an end to the long-term bull market back then, just like they are today.
But, by the end of the year, gold as an investment outperformed just about everything that wasn't a U.S. Treasury, gaining about 6 percent as equity markets tumbled during the financial crisis.
By and large, falling gold ETF holdings reflect fading bullish sentiment in the West and, in the scheme of things, this just marks another little hiccup on the way to sharply higher precious metals prices while presenting a better buying opportunity for the brave investor today.
Positive U.S. economic data and optimism about the housing market have led to declining safe haven demand and virtually no one seems to think they need a hedge against inflation anymore.
So, waning interest in the metal in the West is understandable.
But, today's second estimate on fourth quarter U.S. economic growth is likely to quell some of that optimism. Real GDP was revised up from a rate of -0.1 percent to +0.1 percent, which, in population adjusted terms is really about a one percent contraction.
After some hawkish comments by non-voting regional Fed Presidents last week, Fed Chief Ben Bernanke made clear in Congressional testimony this week that there is no end in sight for central bank money printing.
Will this lead to inflation?
We'll find out as soon as next month when recently surging gasoline prices show up in the consumer price data for the first time. When combined with a sharp rise in core inflation in recent months, the outlook on inflation may suddenly change - along with sentiment in the gold market.
Sadly, many U.S. investors who made gold purchases over the last 18 months at higher prices may end up doing what investors are prone to do - buy high and sell low - as they fail to realize that the combination of a crisis-free, improving economy and low inflation are not likely to continue.
Disclosure: I am long GLD. I also own gold coins.