"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, September 21, 2013

GLD - Still no Interest from Western Investors

One of the points I have been making about gold is that its recent gains at the Comex have been primarily driven by short covering by large hedge funds and not by the influx of fresh investment demand coming from this same group.

Whether we like it or not, the main driver of our modern markets is this hedge fund community. It is their buying and selling which moves the markets. Once upon a time the big 800 pound gorilla in the commodity markets was the Commercial category. Not any more - while the Commercials are always a force to be reckoned with, as they are generally on the opposite side of the trade from the hedge funds - these Hedge Funds are now the big boys on the block. Ignore them at your own peril.

That being said, those guys are paper pushers. They LOVE paper; they ADORE paper; they DREAM paper. In other words, they are not the least bit interested in obtaining physical supplies of much of anything as most of them are not set up for storage and other associated costs. This is one of the reasons they love the paper gold ETF's. They can flex their financial muscles and buy boatloads of these investment vehicles when it suits them or when it does not suit them, sell boatloads of the same.

What troubles me about gold right now is the lack of interest on their part to own the paper gold ETF, the largest being the SPDR Gold ETF or GLD.

Take a look at the following chart of the reported gold holdings of this enormous ETF. I have posted this chart before on my site here to demonstrate the lack of investment demand coming from the West in regards to gold. Yes, gold demand is very strong in Asia but gold needs this Western investment demand IF IT IS TO TREND HIGHER. It is NOT GETTING THAT. That is a problem if you are a bull.

Even with the recent announcement by the FOMC that the Tapering option is supposedly off the table for a while longer, it seems as if GLD is not attracting any new strong inflows of money. The tonnage is noted on the left hand side of the chart. Notice that it continues to hover near the 900 ton level and has not been able to climb back above the 1000 ton level for some time now. It might be stabilizing here but the jury is still out.

I am not sure when this will change but change it must if we are going to see gold embark on a new leg higher.


  1. Dan,
    Your honesty and guidance are appreciated. Gold is so hated and reviled now it indicates sentiment may be dropping even further. On the heels of a Fed admittance they are not going to stop QE. Friday should have given any investor pause about being in anything gold. The volumes were dizzying even greater than on Wed. I have invested in gold and gold shares for nine years. What we are seeing now is paper gold exerting itself like never before.

    Your comments here on your blog are unvarnished and speak to the damage down in the paper gold market. Nobody is buying(except for Wed) and the many leaders in the gold community have no reason to be bullish but from the most fundamental and long term picture. A disaster for those of us sitting in losses who have to decide about getting out or losing more. I refuse to root for a systemic collapse to bail out my gold positions. Jim Sinclair announced a three years ago not to trade gold and in my opinion this was his worst advice. Trading gold is the only way to invest in it.

  2. I agree with the points made here but Dan, like most other people, make the mistake of thinking that GLD is a managed fund. The tonnage of gold held has no relation to whether investors are buying or selling shares. They don't need to sell the underlying asset when investors sell shares. They can hold 400 tonnes or 1200 tonnes and it doesn't matter. They started the fund with 8. If you look at the history of the fund you will see that the tonnage does not track the way most suppose.

    1. " The tonnage of gold held has no relation to whether investors are buying or selling shares."

      I believe this is incorrect though I admit that I am no expert. GLD's price is related to gold's price. When investors buy lots of shares, there is the danger of GLD's price rising above what is dictated by the relationship to spot gold. So the authorized participants (APs) keep the price in check by creating new shares. They then have to deposit an equivalent amount of gold into the trust within a few days (from what I understand)! Now it is their choice where they get the gold from. They may have to buy it in the futures market, they may take it out of their own warehouses, or they may get it from some other source!

      Just the opposite happens when investors sell too many shares. The APs have to keep the price of GLD from falling too much and they do so by buying the shares themselves. At the end of the day they have to withdraw an equivalent amount of gold from the trust. Now whether the APs sell the withdrawn gold or store it in their own warehouses is their choice. I have heard that they were taking all this gold to Asia and selling it there since premiums were higher in Asia, but I have no idea if this is true or hearsay.

      Therefore, the tonnage of gold held does have a strong relation to whether investors are buying or selling shares. IMO it is more correct to say that the price of gold has little relation to whether investors are buying or selling GLD shares.

    2. GLD is just reflecting the increasing shortage of physical, it is being used by the BIS / CBs to support deliveries from LBMA and other large banks who are now having to settle Gold sales in cash as seen by ABM AMRO. The lower the Gold price goes being distorted by the COMEX and futures markets the less physical available because of smart long term accumulation, hence less at GLD. GLD will more than likely become smaller and irrelevant.

  3. "Gold demand is very strong in Asia but gold needs this Western investment demand IF IT IS TO TREND HIGHER."

    Hi Dan,
    Great article, thanks!
    I have very little time this weekend, even to post a comment but one question : what do you think may make this statement change? When won't other forces than western paper investment in gold be necessary to see prices going up?
    Have a nice weekend (I answered quickly to your email yesterday)

    1. hmm...I don't understand my last question myself lol :)
      I meant : will there be a day when we won't need western investment demand to see an uptrend in gold.

  4. Dan - what do you make of the argument that GLD's inventory has declined largely to take advantage of gold selling for a premium in Shanghai rather than it being a metric to measure western interest in GLD.

    Supporting evidence to this is the fact that SLV hasn't lost any tonnage, even though it too has suffered an even more severe price drawdown than GLD.

    Here's a chart to this effect:


    Currently Shanghai gold is selling at a $6 premium to the COMEX. I check the premium a few times per week - Chinese market marks their closing price as of 0400 EST and I pull the COMEX quote from that particular minute time bucket to do the comparison.

    A few months ago, Shanghai gold was selling as high as $27 per ounce higher than on COMEX. Prior to the crash in April, Shanghai gold was actually selling at a discount.

  5. Concord

    I am in agreement with you.
    I also am a long term gold investor (not trader)
    Here is the gold paradox, the fundamentals just keep getting better but the outlook is becoming bleaker by the day.
    I find it hard to believe that the people we read and follow could be so very wrong.
    Something is not passing the smell test.

    However, I blame no one but myself. Had I followed the mainstream financial media I would be sleeping very well at night right now. This is the same MSM we all love to make fun of thinking we have more insight and insider information from the parade of doomsayers we all follow...WE are the ones who are starting to look manipulated and foolish.

    The gold market has been gutted. You would probably have a hard time selling a gold coin at a garage sale right now.

    Really bummed out today...just don't know what to do next.

    1. Dean,

      I remember only 4 years ago, gold was under 1000 $ and had never reached 1000 $. It was in 2009. On Bloomberg, they endlessly interviewed experts who were arguing whether or not gold would reach 1000 $, and if so, if it would be in a bubble. Only a few claimed that 1000 $ would not only be reached but that we wouldn't go back to those levels, but instead would keep going higher. Such as Goldcorp CEO, etc... Those people were considered lunatics by MSM.
      After reaching 1900 $ within only 2 year, after nearly tripling from 700 $ to 1940 $ in 3 years, just give gold a break please.
      Volatility is part of the game, even in a bull market.
      You had 12 years of consecutive gains in gold.
      It's huge and rare.
      Don't cry every time you have a pullback.
      At 1900 +, a correction was technically overdue. Period.
      You were outside the bollinger bands, the bollinger bands 20 periods were above the bollinger bands 100 periods, both going up, which is a sign among many others.
      The time of this correction and its amplitude are at the measure of the previous rallye and its length.
      Remember where gold comes from.
      Be patient.
      With crazy QE, nowadays everything is volatile. You can't look for Yield AND no volatility. It's whether TBonds and "safe" negative interest rates or volatile and risky investments, PAPER gold included.
      The advantage with PHYSICAL gold is that you can store it where you want, including outside the banking system, and protect yourself from a financial systemic collapse.
      It's an advantage you neglect if you only think about yield, yield, yield.
      With that reasoning, you'd be one of the most profitable investor just before the krach of october 1929. But a month later, 100% invested in stocks, you'd probably also have become the most ruined.
      Just keep your gold, consider it may go down to 1000 $ and I'm damn serious about it, keep the amount of gold you think is of no consequence for you if it drops to 1000 $, sell the rest and buy shares if you want, understanding also then the risk that you'll be buying shares which are now at their top and overbought, and selling something which corrected -600 $ so 35% of its total worth and is still in a long term bull market.
      Last I knew, rich investors usually buy the dips and sell the tops, not the other way around, but that's your choice.
      Personally, I'll repeat that I'm a long term investor of physical gold and I can't care less if gold drops to 1000 $ within a year. Like Jim Rogers, I just hope I'll be wise enough to buy more if it does. So, I keep some cash just in case it would happen. I'm not 100% invested in gold, but I'm reasonably invested, and I think that 30% of your cash assets make perfect sense in the current environment.

    2. Dean,
      We are in the same boat. Reading the traders here we see the reality of a market like this. Jim Sinclair needs to speak to those who have held and tell us going forward not only the direction of gold but the time involved for a possible recovery. Of course no one knows but Jim has been so predictive over the years he needs to explain why he has been so wrong. It would be instructive to us all.

    3. Concord,

      Dan is offering us a free forum and possibility to exchange with each other on interesting topic. Maybe let's respect his wish not to namely point at some of his contacts, as I think he asked.
      Too many people see Sinclair as a demi-god with a magic cristal ball. You write that he must tell you the direction and the time. Only that? :) As you said, noone knows. You are right about that, so why be angry particularly on Sinclair, as if he should be right all the time?
      You want the direction. You want the time. So you want a cristal ball, really. Or a super analyst coming out and telling you "look, in 3 months, gold will be at this price!", which gives you time and direction indeed.
      That super analyst doesn't exist.
      Trading is never about predicting imho where the price will be in X months. I'm serious : no trader can do that. Trading and T.A are used in terms of probabilities, but most important, to try to detect potential ENTRY POINTS, meaning MANAGEABLE, meaning with an interesting risk / reward ratio.
      You must integrate this.
      T.A will show you potential supports, confirmed by other indicators, and tell you when you can try to buy in good conditions, meaning with a stop loss which makes your loss little if you are wrong. Then money management and other indicators can tell you when to take a profit, move your stop loss, etc...
      Though I know many many many people are now boasting that they can do this. Well, let them PROVE IT by simultaneously showing their trading positions!!

      Sinclair's message is buy gold as an insurance and to partially get out of the western financial system.
      Sinclair's mistake was to call a wrong bottom at 1530 last spring, he was too sure of himself probably, thinking it was so probable that he could make the call.
      OK, period, are we going to make this movie again and again every week? Can we turn the page here?

    4. P.S : besides modern T.A is even more dynamic than previously, when you simply watched prices and figures, for example a fixed price target for a cup and handle, a rising edge or a hedge and shoulders.
      Now the (few, actually) traders I know are monitoring the trend, it's momentum, it's strength, and they don't hesitate to sell or take a profit if the trend is threatened. They never know exactly when they buy, where they will sell. They usually protect quickly their trade by selling a bit of their winning position and put their stop loss at the price they bought. Then it can only be win or zero.
      You don't want a guy predicting you times and direction to make money.
      You want entry points, money management, good risk reward ratio, confirmation of entry points by indicators, confirmation that the trend you bet on is still strong through other indicators. It's a real time monitoring. And stop loss is a key in this system.
      I know preditor will disagree here.
      So, I'm only sharing my convictions, because it's a conviction here, but of course, it's again only my own opinion.

  6. Dean,
    We see Dan asking the right questions and pointing out the realities of the gold market. Why can't Jim address these issues, at one time he was the biggest gold trader around.

  7. As this is a free forum to share experience about T.A, speaking under Dan's control if I say something wrong, just to emphasize about this "give a price and direction and timing" aspect, I think that most of the times, prices are fleeting wildly and it's like chaos, and you won't be able to predict what will happen.
    Only here and there, you will meet a potential support or resistance which, if confirmed, can be interesting to trade.

    To try to analyze price direction, you must consider what is your time horizon?
    Asking yourself this, you will realize that gold prices can be in a dowtrend in a very short term horizon, in an uptrend in a short term horizon, and back in a downtrend in a longer term horizon.
    Knowing which time unit you trade is critical.

    So, for example now to me, I see a configuration where gold prices are still in a downtrend on a weekly basis, but in an uptrend in a bimonthly basis, and neutral on a daily basis.
    It is rare to see many time units trending to the same direction.
    That's why trading is difficult.
    That's why, whether you are a day trader or a long term investor, you should always remember what is your time horizon.
    I could be short gold for the next 24 hours, but long gold on a monthly time scale, and short again on a yearly time scale (that's just an example).
    Dan's time horizon is obviously not the same than Sinclair's.

    1. P.S : to conclude for long term, at the moment I'm watching weekly candle charts (see previous link friday).

      I see a downtrend which led from 1940 to 1180. So it's big! In this condition, it is frequent to see prices need time to stabilize and form a bottom. Time in a weekly candle chart means months.
      The bollinger bands are nearly horizontal, so it means that probably the 1200-1220 is a good support level.
      It is not uncommon to see a double bottom after such a correction. Once more, on a weekly time unit, it means it would not be uncommon to see prices correct to 1200 area.
      So the real test for long term investors, unfortunately and imho, is not before we re-test the area close to the last lows.
      No need to get worried at this time if gold corrects down further.
      On this time unit, weekly, it can happen, and doesn't necessarily mean that the 1180 bottom will not hold.
      Because (not only) of the bollinger bands, I'd favor a bounce in the 1220 area (should we get there, which I don't know)

  8. Thanks Hubert,
    I am painfully aware of your wisdom here. I see that the buy and hold of the past ten years or so is not working at all.

    I also accept that Jim Sinclair has been brilliant more than not. The thing I was pointing out to Dean was that Sinclair is not predicting because of the many contradictions you point out in the various time frames. The adjustment to the discarding of fundamentals in the gold market and the realization that gold is trading technically and driven by the hedge funds is something that I am now very aware of. To be stuck with losses in gold and gold shares is also something I am trying to deal with. Hubert you have explained the realities as well as anyone could. I just have to live with them and adjust.

    Thanks again for you very informative and truthful assessment.


  9. Hubert

    Thank you for the great post.

    It really is hard to deal with these markets.
    Many of us are not traders (nor should we be) so our outlook and emotions are different.
    As we have witnessed, some of the best traders in the world have been burned in this market.
    This is maybe why we have been told not to trade but "be right and sit tight"
    Easy to say..not so easy to do.

    My physical gold holdings have actually been okay because I bought them early in the game.
    It is the miners that have been the cause of most anguish for most gold investors.

    Mark is totally correct in mocking us. We are indeed in a equities Bull market, we are also in a world wide economic recovery.

    It will probably all end very poorly (as Jim Rogers has repeatedly stated), but as Dan has stated, it could go on much longer than we can imagine.

  10. NEM is trading sideways 26 - 34. long gold at 26, short gold at 34---easy peasy!


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