GLD Bleeds Out; Weekly Gold Update

The one factor that gold bulls have had going in their favor during the recent selloff that occurred in gold and the gold mining shares in this month of October, has been the stellar performance of the reported holdings in the gigantic gold ETF, GLD. It has held rock steady in spite of the carnage witnessed, especially in the mining shares, even as the US Dollar has turned strongly bullish on the technical price charts. It has been a point of solace among the bulls to be able to see the resolve of some of their large sponsors holding firm in GLD.

That came to an abrupt end this afternoon as the numbers were released and they are ugly.

gld-holdings

In surprising fashion, given its stability for most of the month, it coughed up a bit over 16.6 tons of gold.

You can see the sharp drop on the chart.

The good thing is that it still has about 5.5 more tons of gold in it even after today’s sharp reduction than it did to start the month of October. Considering that gold itself has lost some $50 over the same time period, that has to be a bit of consolation for shell-shocked bullish traders. The big question becomes, “Is this the beginning of the breaking of the dam, or is it more of a one-off, an anomaly that will soon be righted?”. Knowing the answer to this in advance would be most profitable. The problem is we are not going to know until events unfold and we observe the results.

The reason that this is such a big deal in my view is because of the other negative factors we have been citing for gold over the intermediate and longer terms.

Most notable among these factors is the surge higher in the US Dollar. Simply put, the technical price charts for the Dollar are powerfully bullish.

chart_16-10-21_16-22-02chart_16-10-21_16-22-22

Gold has been remarkably resilient in spite of the stronger Dollar which I believe is more a function of buying come out of Asia more than anything. That has served to stabilize the price. The problem however remains what it always is when it comes to gold and Asian buying. That buying is good for putting floors under the price of gold but what it is not good for is driving the price of the metal sharply higher. The latter requires strong, sustained and eager Western-based investment demand, the kind of demand that GLD gauges for us. That GLD has bled out so much gold this past week is not an encouraging sign because Asian buyers will not chase the price higher. They are extremely value-conscious; they are not momentum buyers like the Western hedge funds.

I am of the view that the reason the West may be having some second thoughts about gold is not only tied to the strength in the US Dollar, but also to the continued expectation of higher interest rates ahead.

Here again for your convenience is a comparison chart I have created of the gold price overlaid against the big Utilities ETF, namely “XLU”. The two are trading in near perfect lockstep at the moment.

chart_16-10-21_16-20-10

Until the utilities sector gets a bid once more, gold has lost one of the bullish impetuses that were driving it.

Additionally, while the HUI finally showed some signs of stabilizing lately, especially after recovering and moving back above the 200-day moving average ( technically significant), it has thus far failed to garner anything that could remotely be called “bullish follow through enthusiasm”. On the contrary, it cannot even poke its head up into the downside Gap noted on the price chart.

chart_16-10-21_16-30-11

One would have thought that as beaten up as the sector had become lately and as oversold it had been on the price charts, the corrective rally higher would have shown some legs. Instead, it is puking out with the bulls being unable to recruit enough believers to their cause. They are going to have to do better than they have been doing recently to persuade the skeptics, especially when those same skeptics can look over at the Currency boards and see the US Dollar leading practically everything.

The HUI to gold ratio has improved as it was able to climb back above that broken downside support level formed off the May low but it will need to turn higher immediately next week or it is in danger of collapsing back through that May low. That would be a negative development.

chart_16-10-21_16-32-40

The Commitments of Traders report out today shows more long liquidation from hedge funds and other specs was the order of business over the past reporting period.

gold-cot

gold-hedge-funds

Total open interest continues to decline, something which bears close scrutiny for without an increase here, the path of least resistance for gold is going to be lower.

gold-open-interest

The weekly or intermediate term gold chart is currently in a negative posture and will remain that way until or if bulls can take the price back up through the bottom of the box (range trade) out of which it fell.

chart_16-10-21_17-37-19

A handle change to “13” will first be necessary if that is to take place.

Downside chart support lies near $1250-$1245. Below that is $1230-$1228.

19 thoughts on “GLD Bleeds Out; Weekly Gold Update

  1. Dan,
    Once again, thanks for the clear reports this morning. I have a feeling that I jumped in too quickly. The GLD situation is a concern, but the HUI sort of balances it. I was amazed that it recovered so nicely late in the afternoon. The one saving grace for me was the move up of my favorite gold stock (GGN) was up over 3% the last 2 days. Hope it continues.
    Keep us posted.
    Jim

    • will do Jim….let’s keep an eye on GLD…. one thing gold has going for it at the moment is that it is coming into a period for good physical demand from Asia. That generally tends to keep a floor beneath the metal.

      My concern will be how it holds up if the Dollar were to push to 100 on the USDX and possibly even punch through that level.

      As Piet noted in his comments, gold can be a chameleon and one never knows whether it is going to trade as a commodity, an inflation hedge/currency risk hedge/ or a deflation item. Since we are still in uncharted waters from a monetary history standpoint, none of us can be 100% sure what this metal might do.

      Folks should not forget the lesson from the 2008 credit crisis when gold surprised a lot of people, myself included, by collapsing in price along with the rest of the commodity world as the Yen carry trade was unwound. Instead of going to $2500, it went to $700. Ouch!

      We are all learning as we go through these historic times but the key to being successful will be keeping an open mind and staying objective., That is very hard for most people to do. As a matter of fact, I would say it is the most important factor to being successful. Because the overwhelming majority cannot surrender their subjectivity, that same overwhelming majority consistently end up losing money in this profession.

      I have been on the receiving end of some of the vilest emails and posts that you can imagine because I am not a perma bull anything nor am I a perma bear anything. But what those who love attacking me for holding bearish views of the precious metals at times seem to forget is that I have been at this for a long, long time and make a good living doing it when most people fail and are forced to move on to different things. In other words, you learn a few things along the road when you become a survivor. That is why I can laugh off the insults and attacks. Those spouting them are merely ignorant of how markets work and any seasoned pro can see that easily knowing the disaster they are headed for.

      The school of hard knocks leaves us old-timers with a lot of bruises, wounds and welts does it not?! Those are all well worth it however if we learn from them! Most never do!

      • Dan,
        This is the reason that I signed on with you. You have the long term experience and you stay objective. I have a guy who is now patting himself on the back because he posted October 7th as the bottom for gold. He also called the bottom to be back in June-July, and again in September. He only missed by 5 months. By the way, I am cancelling my subscription to his newsletter and going to renew yours when it comes time.
        Jim

  2. Great stuff.
    Looking at the weekly gold chart, I would be tempted to draw a parallel descending price channel. Figure that might hold until the stock/bond market breaks down.

    Presumably the new administration will force something in the change area that has unintended consequences shortly after the new year. Stepping way out on the limb here.

    • mike – thanks my friend! If gold were to lose that support near $1245 and work down towards $1225 or so, that would not be a bad idea to sketch in another channel.

      $1200 is a big level. It is the level from which gold proved that it had finally bottomed out when it moved above that level earlier this year. Here we are now approaching the end of this year and it is a bit below the mid point of the high made this year and that same $1200 level which held as a support level after being retested in late May. Stability down here would therefore be constructive as it would be a higher low but no gold bull would want to see gold break below $1225 and especially below $1200 as that would sour the chart picture rather dramatically for the short term.

      We’ll see what the Dollar does from here on out to the end of the year and now the metal handles it.

      about that election… I am still too depressed out it to want to even think on it any more. Like I said, I am not a fan of Trump but I loathe clinton and the though of seeing her and her corrupt cronies having the reins of power for 4 long years fills me with dread, disgust and dismay.

  3. Hi Dan,
    I hope you have a nice weekend.

    Let me post one reaction regarding: “That (Asian) buying is good for putting floors under the price of gold but what it is not good for is driving the price of the metal sharply higher. The latter requires strong, sustained and eager Western-based investment demand”.
    Gold is a “kameleon” I once heared. In periods of time, the function (and price) of gold is set by gold being a commodity (mainly jewelry demand), in other periods of time the function/price is set as investment (mainly safe haven), and in periods it is set as being a currency. The last happens when other currencies are devalued and inflated, and accordingly gold will increase in value as being the worldwide, by every human being accepted currency and store of value (*).
    The fact that gold went up sharply from about 1000 to 1900 in the period 2009-2011 was mainly caused by the expectations of Western-based investors that QE’s were going to cause inflation. So the gold-kameleon took the color of the safe haven investment. When the practice in society demonstrated to the investors that “only QE” (QE=increase the moneysupply) does not lead to inflation (**), gold started to move downwards and bounced at 1100-1200, being the commodity-kameleon pricelevel (***).
    In 2016, the real interest rates moved negative and this made gold as an alternative (safe haven) investment versus bonds. The investment-kameleon was back again.
    In recent two months data show that inflation increases and bond-prices decrease. The majority of traders seems to appraise this situation as that the economy starts growing again. And what is under these circumstances judged as most popular investment by them? The USD-currency, being the actual worldcurrency and a safe haven, also because the rest of the economies in rest of the world look less prosperous. Parallelly the gold-demand slided and seems under pressure by the FED-talk to increase the interest with 25bp.
    However my big doubt is whether the global economy has possibility to pick up grow with this never been bigger worldwide debtsituation? In fact, one third more debts then before the crisis! The only reason why overloaded debtors survived during recent years is the fact that the interests moved to zero. Let’s be realistic: the bond yields of countries like Greece, Spain, Portugal and Italy would have gone skyhigh in case there wouldn’t have been the ECB-easening-actions. And still these countries have budget-deficits, and so they are not fit for the next recession.

    Despite 10YR Treasury bond decrease lately, the longer trend for bond-yield is for me still downwards, which should on longer term be positive for gold as investment-kameleon. However, in case the economy will start to grow, the by you mentioned Western-based investment demand will not show up again. But bonds will step-by-step move down, interest rates will go back to normal. But what about the debtbubble then? Have the debtors the money then to pay the increased financial obligations, taking into account the Central Banks stopped the money supply for the debtors.

    (*): If gold changes into the currency-kameleon, it is better to have physical gold, since paper gold has “money under inflation” as counterpart.
    (**): Investors should have studied Milton Friedman better who explained that increase of inflation require 3 conditions: 1. Increase of the wage-spiral, or in other words economic growth and undercapacity; 2. Increase in moneyvelocity; 3. Increase in moneysupply.
    (***): The 1100-1200 level is according to me the best timing to buy physical gold, because the price will structurally never go below 1100-1200, since the minimal mining costs are in the meantime arrived at that level, due to the increasing number of low grade mines and increased scarcity.

    • piet – very informative post. I thank you for the time it must have taken for you to type this up and the thought that went into it and for sharing it with our readers.

      I too share your concerns about the gargantuan levels of debt, especially government debt of Western nations. Even relatively small interest rate increases on mid-term to longer-term government bonds will add a huge burden to the already unsustainable budget deficits and national debts.

      The problem we have as traders and investors Piet is that many times we are ahead of the curve in our thinking and analysis. Taking a macro view as you are doing, and as I also have a habit of doing, can more often than not in these increasingly shortsighted markets, end up putting us on the wrong side of the hedge funds, which as we both know, could care less about any of this sort of thing since they are purely momentum driven and are all short term focused.

      What I have found is that markets will ALWAYS come back to reflecting the fundamental picture but by the time that they do so, the sheer enormity of the hedge fund warchests can end your career as a trader if you get on the wrong side of them.

      things were not like this many years ago when I started out my career. Most successful traders were thinkers and analyzed their markets. Nowadays, it often seems like the brain-dead zombies who just run around chasing things moving up or day are the winners. Thus, we have had to adapt and take a more short term focus on things all the while keeping a longer term macro view in the back of our minds if we are to be successful at this.

      regarding a buy point for gold. I also like that zone you are speaking off between $1100-$1200 as a buy zone for PHYSICAL gold. One’s downside should be limited there due to the cost of production. Again, this is only for the physical metal as one can easily sit through $50-$100 price swings in the bullion they hold for safe haven reasons but a move of that magnitude, in a market that runs on leverage, can be a killer if sound money management techniques are not followed.

      You would be astonished to learn how many people have been ruined ( I know more than a few of them personally) because they took an attitude of ” I am buying and sitting tight and am not selling my gold under any circumstances because I know the big move is right around the corner”. they did that in a futures market! Now, they are all FORMER TRADERS!

      Thanks again for sharing this.
      Dan

      • Dan,
        thanks for extensive reaction.
        Although where we are heading to on the long term is more or less clear, it are the short term actions that determine how we are arriving there: richer or poorer, happier or unhappier,
        Clearly understood, and that is also the reason why I am here.
        Your remark about the Asian versus Western buying and the bottom-setting, triggered me to share above thoughts. Most traders are no economists and economists are no trader.
        But the debtmountain and resulting interests is for me setting the direction, but the way towards is unpredictable.

    • Piet,
      Here in Canada I work in building houses and demand for skilled labour in that field is high and hard to find. Also, home prices keep rising. Makes no sense to me, because house prices are extremely high. I keep waiting for the, ever elusive, down move in housing.
      It seems to match your Milton Friedman point #1 (**). Is there increase in money velocity #2 and #3 money supply?

      • Bokkie,
        thanks for thought!
        Re 1: in case of scarce capacity, wages will increase. Happened so in Weimar, but nowadays with few exceptions there is overcapacity. Capacity utilisation is already long time below 80%.
        Re 2: https://fred.stlouisfed.org/series/M2V demonstrating historical low money velocity
        Re 3: Nearly all the money on the right side of the balance sheets of the Central Banks is nowadays additionally created and supplied (QE’s).

        • Was Weimar not an artificial thing done by leadership to settle war debt? In other words: different leaders; different outcome?
          What do you think the outcome will be of such a sobering chart (that you posted) of money velocity?

          • In Weimar the leadership wanted indeed inflation, so started printing money. But the money was also needed in the economy because also in Germany there was from 1919-1922 GDP growth of 20% and industrial growth of 75%. The reason that it went from inflation to HYPERinflation is the complete loss of trust in their currency by the German people.

            Regarding the trend of the moneyvelocity, conclusion can be made that based on the average velocity in the past that there is actually too much money in the system. So far the overload of money in the system is no big issue. Our economies seem to be able to handle it and can even postpone a recession, that normally takes place every 8 years or so. And isn’t this postponement even “logical” since debt yields are so low that governments continued to stimulate the economies with higher deficits?
            However, as all things have pro’s and cons’s, the negative of too much money in the system is that it brings that the “price” of money (interest) into historically low values. That brings me to the BIG risk that the oversupply of money may lead to bubbles in assets.
            Even gold may be too high valued when it is above 1100-1200. But on the other hand, with physical gold you have at least something hard, no counterparty promiss needed, and therefore even a better insurance then a statebond.

  4. Great post. It is rather surprising how gold has held up considering the move in the dollar. May be a decent trade (long dollar/long gold) given its hard to see both gold and the dollar trading lower simultaneously at this particular time.

    • trinity – that is a possible strategy. it could be set up as a ratio trade. I need to think about this some more and see if that might be a good strategy moving forward. I am outright long the Dollar at the moment, but adding some long gold legs to that might be a nice way to minimize some of the volatility risk. I don’t think I would want to get too crazy on a long gold futures position given the big move in the Dollar now that it has broken through chart resistance but a smaller long gold position against a larger long dollar position might be a good idea. great suggestion!

      • Dan/ informed commenters, this commentary/ discussion is what makes this site the best the internet has to offer, and is why this is the only site I subscribe to and while I’ll continue to for as long as I’m in the biz. re volatility levels in gold from king dollar post,short term volatility right now out about a month is in the 12-13 percent range. That is low when looking over a 1 year period or so, but not really unjustified given the patterns we see in gold. It moves and then sits in tight ranges for prolonged periods of time. Think about this dip from the 1300s to the mid 1200s. It moved and now it’s effectively doing nothing. They really crush the ultra short term volatility in these periods of time. As I mentioned in other comment, the 3 day straddle in gold is currently trading about 12 dollars. Somehow these straddle sellers at such low levels seem to be right the bulk of the time, but when they are wrong, the upside on even minimal moves can be very high. Dan, if it’d be helpful I’d be happy to send along any info regarding volatility/ price of options. I think that your stellar analysis of crossing moving averages, viewed in comparison with the option volatility might show us some interesting entry points for trades. I spend too much of my life looking at this stuff anyway, so sending along info regularly is no sweat. Let me know. Enjoy the weekend everyone

    • Shortstack,
      Last week AG came out with their 3rd quarter report. Take a look, it was spectacular. The stock went from under $3 to over $19 in just 1 year. Now, it has declined to $8. This will happen a lot as gold (and especially silver miners) continue upwards over the next 3-5 years. You probably weren’t around back in the late 1970s and early 80s when gold went from $135 to $750 and silver went from $3 to $50 (thanks to the Hunt Brothers) There were plenty of corrections in those years, and there will be plenty in the next move up. Volatility is the name of the game. AG didn’t belong up at $19, but it is certainly worth more than $8 today and the future. The silver miners will do the best because there are so few of them. Also take a look at Hecla (HL). It went from $2 to $7 down to $5.25 and now back to $6. They also came out with spectacular figures for their 3rd quarter.
      Jim

      • thanks for the encouraging input as still long the miners.. but must admit im a nervous short and ag makes me on guard with regard to my long. One problem with the good earnings is that those earnings from last week dont seem to be driving the price upwards… guess wait and see.

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