So far this year the world's largest gold ETF - SPDR Gold Shares (NYSEARCA:GLD) - has added a grand total of 182.17 tonnes of gold, a rise of 28.4% in volume terms. But the last five months - ever since the end of the Independence Day weekend - has seen GLD's holdings fall by a little over 158 tonnes from a peak of 982.72 tonnes - a drop of 16%. Over the same period, the gold price has fallen by around $220 - or also by some 16%, suggesting that gold price performance may be very closely related to GLD purchases or sales. Price wise, GLD pretty well follows the gold price in overall performance
So what is it with U.S. holidays that they should provide the triggers to changes in sentiment on gold? They do suggest that a complete perception reset can follow just a few days of financial sector inactivity as the sector closes down for even a brief holiday period. It doesn't take a particularly long memory to recall that the start of the gold bear market in 2012 happened almost immediately following the Labor Day holiday that year, while this year's six-month long gold bull market commenced immediately following the 2015/16 Christmas and New Year holiday period. It's as if those who are reckoned to be driving the markets make arbitrary decisions to change investment tack over one or other of the key holidays. Certainly reading the transcripts of some of the Deutsche Bank emails on silver price manipulation it does appear that some collusions to drive the price down were indeed arbitrary and bore little relation to the actual supply/demand equation as seen at the time.
But that is all surmise, but it does beg the question might we see yet another turnaround in sentiment when the current holiday season is over? There is almost certain to be a degree of uncertainty regarding the U.S. economy with the seemingly unpredictable Donald Trump who appears to have a penchant for making policy decisions on the hoof - and on Twitter. No one really knows if his policy proposals will fly or fall by the wayside. Will a cosying up to President Putin's Russia and a more confrontational approach to President Xi's China, which appear to be his intent, bear positive or negative fruit? The jury is very much out and we suspect equity markets will remain volatile until at least six months into the new presidency - and maybe longer dependent on how President Trump's term of office is seen as progressing.
However, we now have a situation where sales out of, or purchases into, GLD are probably the primary gold price driver - just as we saw from the end of 2012 up until 2015 where heavy sales out of GLD led the gold price on a downwards path despite actual physical gold demand, led by China and India, being very much on an upwards path. Indeed, were it not for the massive liquidations out of the gold ETFs, gold could have been in a massive short supply situation in the calculations of the major gold consultancies. However whether that is even relevant to the path of the gold price given the presence of huge above ground stocks remains uncertain - sentiment alone is probably the key price driver as the gold price does not seem to follow traditional commodity-type supply/demand patterns.
If sentiment is indeed the key to the gold price, then the uncertainties which seem to be building for 2017 in terms of the known knowns alone should see GLD and gold performing positively. Add in the likely unknown unknowns (black swan events) and 2017 could well be a good year for gold - and by association perhaps an even better one for silver which normally outperforms gold on the upside.
But, if GLD and gold do perform positively then the better gold and silver mining and associated stocks (like the gold and silver royalty companies) should do hugely better. Recently we suggested that in a rising gold price scenario investors might do worse than look to Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) the world's two largest gold miners as the "go to" stocks for institutional investors, along with recovery gold stocks like Goldcorp (NYSE: GG) and Gold Fields (NYSE: GFI) as well worth following assuming a rising gold price scenario. Freeport McMoRan (NYSE: FCX) could also do well if copper and oil prices hold up, or advance. We suspect all these could be outperformed by silver and gold miner Hecla (NYSE: HL). Royalty and streaming stocks Franco Nevada (NYSE: FNV), Royal Gold (NYSE: RGLD), Silver Wheaton (NYSE:SLW) and Sandstorm Gold (NASDAQ: SAND) would also be likely positive buys if gold performs reasonably well in 2017.
So, in our view GLD could be a positive investment in 2017, but will only move in parallel to gold itself. The gold stocks add substantial potential additional leverage in a rising gold price scenario and a silver stock like HL perhaps even more so. But be warned. If gold falls all the noted stocks could fall sharply, but are strong enough to remain with us failing a possible merger or acquisition, which could provide an even better outcome, although we don't feel any of these stocks are acquisition fodder. But then Barrick did take a tilt at a merger with Newmont in 2014, so who knows?
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.