GLD Reports A Year-To-Date Outflow Of Gold But Precious Metals Investors Should Not Be Frightened

by: Simple Digressions

 


- Big speculators in gold and silver futures are extremely pessimistic about precious metals prices.

- Interestingly, the US dollar delivers a similar pattern.

- Year to date GLD reports an outflow of gold from its vaults; however, the data delivered by IAU and SLV is totally different (inflows of gold and silver).

- In my opinion, the current bull stage in gold and silver should continue; the expected trend reversal in the US dollar is unlikely to stop it.

 
Last week, despite excessive pessimism in the precious metals sector, big speculators once again cut their net long positions in gold and silver futures. Here is the table summarizing the changes in net positions held by big speculators (mainly hedge funds) in these futures markets:
 
Source: Simple Digressions and the COT data
 
 
Gold, silver and mining stocks versus the US broad stock market
 
Perceptive readers have surely spotted that this time I have also plotted the S&P 500 and VIX futures.
 
The reason is very simple – I want to show that the precious metals market’s biggest competitor is not the weak Indian demand, decreasing sales of US gold / silver coins, etc., but the US stock market.
 
Simply put, the US equity market seems to be unstoppable. For example, last week the big speculators increased their net short position in VIX futures by 30.1 thousand contracts. Now they hold one of the largest net short positions in history (140.4 thousand contracts) indicating their extreme optimism about US equities. (A short position in VIX futures means that a trader is betting on lower VIX readings and higher stock prices.)
 
What is more, a weak US dollar makes US equities more attractive for foreign investors.
 
According to the Board of Governors of the FED, this year (between January and April) foreign investors increased their net position held in US equities by $45.7 billion.

That is why I am not surprised to see the money flowing out of the VanEck Vectors Gold Miners ETF (GDX), the most popular precious metals miners ETF. Since the beginning of July the number of GDX shares outstanding went down by 26.2 million (a decrease of 7.1%, compared to the end of June) indicating that investors were abandoning the ship called “Precious metals mining stocks”.
 
Futures markets
 
Big speculators trading in gold and silver futures are still very pessimistic about precious metals prices. For example, my gold and silver sentiment indices are close to 0%, which is indicative of excessive pessimism among big traders.
 
Another example - since middle July, money managers (hedge funds, private investment managers etc.) have been holding net short positions in silver futures. It is one of a very few examples of these traders being that pessimistic about silver prices (last time they held a net short position was in middle 2015 when the precious metals market was bottoming):
 
Source: Simple Digressions and the COT data
 
 
In my opinion - given high pessimism and the fact that big speculators, trading in silver futures, hold net short positions - now may be a good indication of a bottoming process in the precious metals market.
 
However, this process takes time, so short-term speculators should be cautious - because the signals I discuss above are not suitable for that group of traders. For example, big speculators trading US dollar futures have been very pessimistic about the greenback since the end of June 2017 (with the US dollar sentiment index close to 0%) but the US currency is still weakening.
 
So my advice for short-term traders is this: wait until big speculators hold net short positions.
 
This occurrence, together with extreme pessimism (this conditions is met now), should trigger a nice BUY signal for the greenback. As the chart below shows, each time big speculators were holding net short positions in the US dollar (green circles) the US currency was prone to start a new bull market stage:
.
Source: Simple Digressions and the COT data
 
 
Physical precious metals market
 
The physical gold and silver markets are sending mixed signals. In July the SPDR Gold Trust (GLD) reported an outflow of 38.7 tons of gold from its vaults (1.2 million ounces). As a result, this year’s total balance of gold flows is negative (a total outflow of 8.4 tons of gold or 270.4 thousand ounces, year-to-date):
 
Source: Simple Digressions and the GLD data
 
 
Fortunately for gold / silver bugs, another gold trust (IAU) delivers a totally different picture – year to date it reports the total inflow of 16.1 tons of gold into its vaults (516.9 thousand ounces).
 
However, the iShares Silver Trust (SLV) data is particularly impressive – this year investors added as many as 30.5 million ounces of silver to SLV vaults, the highest amount since 2015:
 
 
Source: Simple Digressions and the SLV data
 
 
It looks like US equities cannot discourage investors from hoarding silver at low prices.
 
Summary
 
In my opinion, the precious metals sector is in its initial medium-term bull market phase, initiated in the beginning of July. This bullish phase is supported by a weaker US dollar and a strong US Treasury market (with big speculators holding large net long positions in US Treasury notes futures).

This initial phase should last until the US dollar bottoms. (Watch the net position held by big speculators in the greenback futures to catch the US dollar’s bottom.) However, I think that due to extreme pessimism among precious metals speculators, gold and silver prices should go up in tandem with a strengthening US dollar. I know it sounds like heresy but the precious metals market and the US dollar are in a unique configuration now. I discussed this issue in my latest article on gold and silver and this article is a continuation of that discussion.

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