One of the features of investment money flows so far this year has been the enormous flows of gold into the world's major gold ETFs. This has been exemplified by the biggest of them all - the SPDR Gold Trust ETF (NYSEARCA:GLD) - which has taken just under 300 tonnes of gold into its vaults since the beginning of the year. Indeed at the recent rate it may well have exceeded 300 tonnes by the time you get to read this article.
On Friday, as news of the British vote for Brexit hit the markets investment requiring a massive 18.1 tonnes of gold to be added was put into this one ETF alone. This is a huge amount for a single day's intake, but has actually been exceeded on two other days so far this year, prior to which one has to go back to the heady days (for gold investors at least) of August 2011 as the gold price was reaching its all-time high for this kind of one-day intake to be exceeded. (On August 8th that year fully 23.6 tonnes was added to the GLD holdings in a single day. This year 20.8 tonnes were added on May 2nd and 19.5 tonnes on February 22nd.)
So Friday was not the largest one-day gold intake into GLD even this year, but some expect continuing large inflows as the Brexit vote is digested. So what does this mean for the gold price should this happen?
In general, large inflows into GLD have tended to coincide with substantial strength in the gold price. There is also certainly evidence that the large amounts are putting stresses on the supply availability of unencumbered physical gold. Recently this has manifested itself in a drastic directional switch of Swiss gold imports and exports.
Switzerland is very much the middle country in global gold flows. It is not a producer, nor a major consumer in its own right, but it is the international centre of the gold re-refining industry taking doré bullion from mines, gold scrap and LBMA good delivery gold bars, mostly from London, and re-refining this mix into sizes and purities most in demand elsewhere. In recent years much of this imported gold has come from the U.K. and been exported to the big gold jewelry, artifact and general investment markets in Asia and the Middle East.
But so far this year we have seen a huge reversal in these gold flows. The U.K. (London) has suddenly become the largest importer of gold from Switzerland which is almost certainly because it is needed to supply the big gold ETFs - notably GLD which vaults nearly all its gold in London - while the biggest exporters of gold to Switzerland have been the United Arab Emirates and Hong Kong, which had previously been major importers.
As we have pointed out before the implications of this switch in patterns has to be significant. It suggests that London is needing to import gold to fulfil its needs which further implies that available unattributable gold in its vaults could be becoming in short supply.
On the other side of the coin, gold demand has been dropping this year in Asia which means the dealers may be sitting on inventories they are finding it difficult to move in normal sales, but that the rise in price this year means they can make their margins by repatriating excess supplies back to Switzerland at a sharply higher price than they will have paid for it.
If these big movements into GLD and into other gold ETFs are indeed stretching supply availability from normal channels to the limit, this may well begin to start impacting even more strongly on the gold price. One assumes that excess inventories in the Middle East and Asia are certainly not unlimited. The return of gold from Hong Kong to Switzerland for example already appears to be drying up, and should Asian demand in general (notably in India and China) start to recover, which many believe is likely, then increasingly tight supplies are likely to start (they have already done so) to drive the price up purely on supply/demand grounds. This could reach such a stage that the futures markets (particularly COMEX) which appear to have been largely responsible for setting the gold price in recent months and years, will start to lose control. Should this occur, and providing demand for physical gold remains high (led by the gold ETFs and gold coin sales) and perhaps an Asian demand pick-up, the gold price could really fly.
While GLD, and other gold ETFs like the iShares Gold Trust (NYSEARCA:IAU) would thus remain good buys and generate positive returns, one might find it worthwhile to put some of this investment into the ETFs investing in gold stocks like the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) which primarily invests in the major gold miners and the big royalty/streaming companies. GDX has been a pretty good investment so far this year rising 90% - definitely a better return than GLD or IAU.
The same company's Junior Gold Miners ETF (NYSEARCA:GDXJ), up 110% so far this year is slightly more risky, but covering mostly the better quality junior gold (and silver) producers. If gold continues to rise, these will continue to promise some exceptional gains, although perhaps now more limited than when I recommended putting some funds into GDXJ back in mid-December.
So maybe the moral is watch GLD and IAU gold flows. If these continue to look positive, and we think they will be, then the gold price should continue to benefit. By all means take the safer route and invest in the major gold ETFs, but for potentially higher returns look at the admittedly more risky GDX and GDXJ ETFs which offer hugely greater leverage, as we have already seen year to date.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.