Gold Weekly: Investors In Need Of Protection

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Orchid Research


  • Gold has performed well so far this year, despite the strong risk rally.
  • Gold’s spec positioning shows that there is plenty of dry powder for market participants to extend their net long positioning.
  • ETF investors added significant long positions to their gold holdings in January, for a second straight month.
  • As the US cycle nears its end, macro investors are likely to position their portfolios in an increasingly more defensive way in the near to medium term.
  • I propose GLDM to express my constructive outlook for gold.

Protection, Laura Molonaro (Saatchi Art)


Welcome to my Gold Weekly.

In this report, I wish to discuss mainly my views about the gold market through the World Gold Shares SPDR Gold Minishares Trust ETF (NYSEARCA:GLDM). GLDM is directly impacted by the vagaries of gold spot prices because the fund physically holds gold bars in a London vault in the custody of ICBC Standard Bank.

To do so, I analyse the recent changes in speculative positions on the Comex (based on the CFTC) and ETF holdings (based on Fastmarkets' estimates) in a bid to draw some interpretations about investor and speculator behavior. Then, I discuss my global macro view and the implications for monetary demand for gold. I conclude the report by sharing my trading positioning.

Speculative positions on the Comex

The CFTC statistics are public and free. The CFTC publishes its Commitments of Traders report (COTR) every Friday, which covers data from the week ending the previous Tuesday. In this COTR, I analyze the speculative positioning, that is, the positions held by the speculative community, called "non-commercials" in the legacy COTR, which tracks data from 1986.

It is important to note that the changes in speculative positioning in the gold futures contracts do not involve physical flows because it is very uncommon for speculators to take delivery of physical on the futures contracts that they trade. Due to the use of leverage by speculators, the changes in speculative positions in gold futures contracts tend to be much greater than the changes in other components of gold demand like ETFs or jewellery.

As a result, the impact on gold spot prices tends to be relatively more important and volatile, which, in turn, affect the value of GLDM because the latter physically holds the metal in vaults in London and, therefore, has a direct exposure to spot gold prices.

Gold ETF positions

The data about gold ETF holdings are from Fastmarkets, an independent metals agency which tracks ETF holdings across the precious metals complex. Fastmarkets tracks on a daily basis a total of 21 gold ETFs, which represent the majority of total gold ETF holdings. The largest gold ETFs tracked by Fastmarkets are the SPDR Gold Trust ETF (NYSEARCA:GLD), whose holdings represent nearly 40% of total gold ETF holdings, and the iShares Gold Trust ETF (IAU), whose holdings represent roughly 15% of total gold ETF holdings.

Speculative positioning

Source: CFTC

The CFTC released this week Commitments of Traders (COT) data for the period December 24-31, 2018.

While I discussed gold’s spec positioning in details in a recent note (see Gold Spec Positioning Shows A Bullish Setup, February 7), the main points I intend to highlight here are the following:

  1. Speculators lifted their net long exposure to Comex gold by 414 tonnes between mid-November and the end of December, which is a significant amount of speculative buying.
  2. I estimate that the current net spec length in Comex gold is at 431 tonnes as of February 6, 2019, which is far below the historical high of 983 tonnes.
  3. This suggests that there is a lot of dry powder for the speculative community to extend their net long positioning to Comex gold over the next months.

Against this, I believe that the increase in speculative demand for Comex gold will drive Comex gold spot prices increasingly higher in the near to medium term, and therefore, the value of the World Gold Shares SPDR Gold Minishares Trust ETF should move proportionally higher.

Investment positioning

Source: Fastmarkets

Gold ETF holdings have increased by a robust 57 tonnes or 3% since the start of the year to reach roughly 2,187 tonnes as of February 1, according to Fastmarkets.

In January, ETF investors added around 63 tonnes to their gold holdings, marking a second straight month of significant inflows. Last December, ETF investors bought roughly 65 tonnes of gold.

Source: Fastmarkets

Last week (January 25-February 1), ETF investors added 8 tonnes to their gold holdings, marking an 8th straight week of net inflows.

Macro investors are cognizant that the risk rally since the start of the year is unlikely to prove sustainable due to a number of macro/political/geopolitical clouds on the horizon.

As we near the end of the US economic cycle, investors are inclined to position their portfolios in a more defensive way. This explains why the recent rally in US equities has been accompanied with outflows rather than inflows, as Bank of America shows in the chart below.

Source: Bank of America

These dynamics should prevail in the coming months, which should result, on net, in a stronger investment demand for gold and other haven assets.

GLDM – World Gold Shares SPDR Gold Minishares Trust ETF - Review

Source: MikzEconomics

To play a rally in gold prices, I propose the World Gold Shares SPDR Gold Minishares Trust ETF.

GLDM is directly impacted by the vagaries of gold spot prices because the fund physically holds gold bars in a London vault and custodied by ICBC Standard Bank.

According to the official website, stricto sensu:

All of the Trust’s physical gold is held by the custodian; namely ICBC Standard Bank, in their London vault except when the gold has been allocated in the vault of a sub-custodian.

In such instances, ICBC Standard Bank has agreed that it will use commercially reasonable efforts to promptly transport the gold from the sub-custodian’s vault to the ICBC Standard’s London vault, at ICBC Standard’s cost and risk.

The gold bar list is updated at the end every working day (EST) on the website below the “Bar list” section.

The Trust has entered into an agreement with ICBC Standard Bank plc, the Trust’s Custodian, which will ensure that all of the Trust’s gold is held in allocated form at the end of each working day.

The investment objective of the fund is to replicate the performance of the price of gold, less trust expenses (0.18%), according to GLDM's factsheet.

The physically-backed methodology prevents investors from getting hurt by the contango structure of the gold market, contrary to ETFs using futures contracts.

GLDM offers the lowest expense ratio of just 0.18 among its peers. GLD, IAU, and GraniteShares Gold Trust ETF (BAR) have an expense ratio of 0.50%, 0.25%, and 0.20%, respectively. From a purely cost perspective, GLDM is the most competitive gold ETF, in my opinion.

GLDM’s average spread is 0.08% over the past two months, which is a touch lower than that of its competitor IAU, at 0.09%.

GLDM's average daily volume (over the past 45 trading days) is ~$4.5 million, which is much lower than that of IAU, at ~$126 million. But unless you are an institutional investor, liquidity conditions are sufficient.

According to the prospectus, stricto sensu, GLDM is:

Easily Accessible: Listed on the NYSE Arca

Secure: The shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash.

Cost Effective: The ETF allows investors to buy gold at a much lower cost than if they had to purchase, store and insure their physical gold by themselves.

Final note

While I am aware of some concerns among some Seeking Alpha readers regarding the presence of physical gold in the vaults, it seems to me that the presence of gold in the vaults cannot be refutable. For investors preferring to be able to touch the actual gold, which is not possible in an investment in GLDM shares, owning physical gold may be a more suitable situation. The risk of loss/theft is, however, very real.

This article was written by

Orchid Research profile picture
Orchid Research focuses mostly on commodity and macro analysis, with a particular emphasis on the metals markets and China. We conduct research on supply and demand trends across commodities. We also analyse global macro dynamics and their reflexive interactions with the commodity complex. With 10+ years of experience in macro and commodity research, Orchid Research seeks not only to deliver unbiased views and accurate forecasts, but also to identify trade opportunities generating α.

Disclosure: I am/we are long BAR. 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.

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