LAWRIE WILLIAMS: More gold flows into GLD
What a turnaround. After the world’s largest gold ETF, SPDR Gold Shares had been seeing mostly outflows since July 6th last year – indeed, since that date, up until the end of January 2017 the amount of gold held by the ETF had fallen by a massive 183.65 tonnes. But, since the end of January this year, GLD’s gold holdings have turned around and increased every day, with the ETF having added 33.51 tonnes of gold so far this month. The latest day’s rise in the holding was 5.63 tonnes.
GLD’s current total gold holding, though, is still some 150 tonnes short of last year’s peak and a massive 520.8 tonnes below its all-time high of 1,353.35 tonnes achieved back in 2012. Whether it can reach that kind of level again is open to doubt as the peak liquidations out of GLD were largely countered by flows of gold into China, and virtually all that goes into China doesn’t come out again – at least not under current Chinese legislation.
But there is still scope for further increases at the kinds of levels we have been seeing of late. The latest figures out of GFMS suggest a supply surplus of around 1,176 tonnes in 2016 given a fall-off in Chinese and Indian retail demand during the year, but GFMS tends to ignore some demand elements – notably demand by the Chinese financial sector which could be as much as several hundred tonnes.
Net central bank purchases were also lower last year, in part due to a sharp reduction in announced Chinese central bank purchases, but also due to gold liquidations by Venezuela to provide funding to mitigate some of its foreign debt problems. Turkey was also a substantial net seller according to IMF statistics, but this could be seen as misleading as Turkey includes holdings of gold by its commercial banks in its official reserve figures and these are subject to some considerable fluctuation. Kazakhstan remained a consistent buyer with its central bank adding 32.9 tonnes over the year while the Russian central bank was the largest buyer again taking a little over 200 tonnes of gold into is reserves.
But the more we look at gold supply/demand figures as published by analytical consultancies like GFMS, the more we question their relevance in terms of the gold price as traded. While fundamentals should have an effect in the long term, it is apparent that short term and spot prices tend to be driven by sentiment and reflected in the COMEX, London and Shanghai spot markets. The enormous above-ground stock positions built up over the years by central banks and privately held hoards (like those of Indian Temples) could be seen as making year to year apparent supply/demand surpluses or deficits perhaps of little consequence, although the latest GFMS figure – the largest surplus so far this century according to the consultancy – should perhaps be of some concern.
What is apparent though is that the levels of gold flows in and out of GLD certainly has an effect on the traded gold price – or is it vice versa! Major inflows are generally seen as institutional purchases, and institutional purchases are seen as a sign of potential gold price strength. Surely the latest rises in GLD holdings and much followed hedge fund manager Stanley Druckenmiller’s comment that he has now reversed his opinion and is buying gold again following reports that he had liquidated his yellow metal holdings on the news that Donald Trump had been elected President of the USA back in November, cannot be coincidental? But whether it’s a case of an extremely smart call by Druckenmiller, or the cynical view that perhaps his statements alone have had a corresponding direct effect on the markets, cannot be known for certain! It’s probably a combination of the two.