Sit tight, Cristian Marin (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 (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 Commitment 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 jewelry.
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 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 (GLD), whose holdings represent nearly 40% of total gold ETF holdings, and the iShares Gold Trust (IAU), whose holdings represent roughly 15% of total gold ETF holdings.
Source: Trading View
GLDM has come under marked downward pressure since hitting a high of $13.45 per share on February 20, which is attributable to an unwinding of risk-off positions stemming from the overall reduction in risk aversion amid stronger macro sentiment.
According to the latest Commitment of Traders report (COTR) provided by the CFTC, non-commercials slashed markedly their net long position in Comex gold at the largest pace since December 2017 in the week of March 5.
The net spec length dropped by 148 tonnes, moving from 422 tonnes (27% of open interest) on February 26 to 274 tonnes (19% of open interest) on March 5. Comex gold spot prices fell 3.1% over the corresponding period.
Longs cut their positions by 106 tonnes over February 26-March 5, for a second straight week.
Shorts built 42 tonnes of fresh positions over February 26-March 5, for the first time in three weeks.
Because gold’s spec positioning has not moved to an extremely bullish configuration yet, I see the latest decline in the net spec length as temporary.
At 27% of its open interest, the net spec length in gold is bullish but not extremely bullish. As a reminder, the net spec length reached an historical high of 52% of its open interest. This means that there is plenty of dry powder to deploy on the long side.
Implications for GLDM: Once speculative buying resumes, Comex gold spot prices will naturally move higher. This will in turn lift the value of GLDM.
ETF investors slashed their gold holdings for a fifth time in a row in the week of March 8, according to Fastmarkets.
ETF investors sold around 17 tonnes of gold last week, the largest weekly outflow since October 2018.
As far as GLDM is concerned, ETF investors added ~0.51 tonnes to their holdings.
ETF investors are now only net buyers of 8 tonnes of gold this year, with strong inflows in January being offset by outflows in February and so far this month.
I asked Juan Carlos Artigas, the plausible drivers behind the change in ETF dynamics from January (inflows) to February and thereafter (outflows). Here is what he suggested.
1. In January, despite the market beginning to rally, investors were still pulling money from the market as evidenced by outflows in broad-based funds. This shifted in early February with inflows into broad-based market funds. Essentially, it is likely that investors were still reeling a bit from December losses, so moved with caution in January. By February, they became a bit more comfortable, moved money into the market, and sold gold.
2. By the end of February, rates increased as bond market re-adjusted its Fed expectations, increasing the opportunity cost of maintaining large exposure to gold.
3. In the US, where the outflows were concentrated, there was likely profit-taking from more tactical gold positions while strategic positions continued being built.
The fact that strategic positions continue to be built is reassuring and confirms my intuition, according to which, the recent wave of ETF outflows is a temporary bout of profit-taking.
The more dovish stance from the Fed should continue to push the dollar and US real rates lower, contingent that inflations dynamics do not explode higher. For now, the US seems to enjoy a “Goldilocks environment”, in which the economy is neither too hot, nor too cold.
Implications for GLDM: As ETF inflows are likely to resume in the coming weeks after the wave of tactical profit-taking comes to an end, this should directly benefit GLDM’s funds. As investment demand for gold increases, gold spot prices will increase, which in turn will lift the value of GLDM.
Because the Fed has moved from an “autopilot” mode to a “patient” attitude since the start of the year, I believe that the dollar and US real rates should push lower, unless there is a meaningful positive surprise in inflation, which could trigger a repricing of the Fed hiking cycle. Against this backdrop, I expect the monetary demand for gold (sensitive to the moves in the dollar and US real rates) to grow.
I therefore maintain my constructive view on GLDM over all my time horizons.
World Gold Shares SPDR Gold Minishares Trust ETF (GLDM)
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 (NYSEARCA: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 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.
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.
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.