GOLD: ETF FLOWS AND SUPPLY SHORTAGES / MACLEOD FINANCE

ETF flows and supply shortages

We know that there is very little physical gold available. Central banks and related buyers appear to take out any loose stock. Physical ETFs are the elephant in this room…

ALASDAIR MACLEOD

The investment community and wider public stopped being net sellers in April, and since then have added a paltry 120 tonnes to their combined ETFs. 

Looking at net demand, in North America last month investors added 16.2 tonnes, Europe sold 1.7 tonnes and Asia added nearly 2 tonnes. 

Aside from US investors, Europe just doesn’t get the gold story, and Asians have been squirreling away physical in preference to ETFs so we can ignore them.

The big winner in America was the investment managers’ favourite, the SPDR ETF, representing 54% of all North American ETFs. 

It is the go-to fund for investment managers who are discouraged by their compliance officers from buying physical gold, which is not a regulated investment. 

The upturn in its holdings reflects the wider ETF picture:

It is interesting how these investment managers chased the gold price higher in the wake of covid (2020), no doubt contributing to the crisis in bullion markets at the time. 

Since that peak of holdings, they have continued to liquidate their positions and have only recently stopped doing so, despite the gold price soaring into new high ground.

Clearly, the alternative of the tech bubble has created a fear of missing out. 

But that bubble won’t go on for ever, and there are early signs of that momentum failing. 

The next chart shows how the NASDAQ 100 (the solid line) compares with gold since January.

Since July, relative to gold, owning NASDAQ has been a losing strategy. 

Given that investment managers always feel pressure from their underlying investors and even compliance officers to perform, we can foresee the day when there will be a strong switch in favour of ETFs. 

In fact, this is already apparent in HUI, the goldbugs index, which since March so far has outperformed NASDAQ by 65% to 16%:

It seems unlikely that ignoring gold’s outperformance will continue much longer, and I suspect that the rebuilding of ETF positions will be as rapid as the availability of bullion allows — that means driving gold (and silver) prices far higher. 

And don’t forget the Europeans, who are still net sellers. 

As the Germans would say of their own citizens, Dummköpfen!