Another 11 tonnes of gold exited the trust for the SPDR Gold Shares ETF (GLD) on Wednesday in what was its seventh consecutive decline, totaling just over 70 tonnes. This came after a brief stabilization in the ETF’s holdings earlier in the month, prior to the major sell-off in the gold futures market that began last Friday.
What’s interesting about these latest developments is that, unlike the prior two years when gold ETF flows had little relationship to the gold price, recently they do. This could mean that lower gold prices lie ahead.
In this story from early this year, it was noted that there has been only a weak correlation between the gold price and ETF flows in 2011 and 2012, a point that should be fairly obvious when looking at the graphic below.
The yearly correlation between GLD holdings and the gold price is shown in bold and it is clear that this relationship has changed rather dramatically in recent months, rising from 0.59 in 2012 to 0.79 during the first few months of 2013.
As you might deduce from looking at the chart, the higher correlation began in January and has strengthened since that time. Over the last six weeks, the correlation is now at about 0.90, rivaling the high seen back in 2007 when the two curves moved almost in lockstep.
As an aside, note that the only year when there was an inverse correlation between GLD holdings and the gold price was in 2008 when the financial crisis struck. Back then, gold holdings rose steadily at year end as the gold price was extremely volatile and investors looked to the metal in ETF form as a safe haven as traders in futures markets were liquidating long positions to meet margin calls.
In any event, recent developments are not good news for those who are long gold as there seems to be little letup in the selling of GLD shares. So far this week, nearly 24 tonnes of the metal have exited the trust and this came after the fund shed 47 tonnes last week in what was the biggest weekly decline since late-2011.
Of course, this relationship could change at any time, so, there are certainly no guarantees that continued outflows from GLD will be accompanied by lower prices.
Looking back to late last year as shown below, after the two tracked each other closely over the summer, GLD holdings moved counter to the gold price for most of the fall, the former rising as the latter fell.
In fact, GLD holdings increased by about 40 tonnes from September to year-end as the gold price fell by nearly $150 an ounce.
Is this important?
Well, it seems clear that GLD holdings have recently been reacting to a changing gold price rather than playing a part in driving prices and, lately, GLD investors seem slow to react.
In the case of late-2012, GLD holdings rose for three months as prices fell and it wasn’t until the gold price failed to react positively to news of more Fed money printing in December that GLD holdings made their first small move down from a record high.
Things changed rather dramatically in the new year as shown below and some credit is due to GLD holders for selling a portion of their holdings in late-February and March, prior to the price plunge that began less than a week ago.
To be honest, I think they got lucky on this one…
Either that or they were playing catch-up from the previous declines.
All this is interesting, but, is there really anything to be learned here? Well, aside from the recent price plunge that came after GLD investors had lightened up by about $6.5 billion (i.e., the decline from 1,325 tonnes in mid-February to about 1,200 tonnes in early-April), GLD holdings have been a lagging indicator. Don’t look for rising tonnes in the trust to signal the bottom.
Moreover, I’d guess that, with sentiment as poor as it is at the moment, we’ll probably see continued declines in GLD holdings long after a lasting bottom has been put in. If last year’s delayed reaction to price is any indication, gold might still be exiting the trust several months after the gold price hits its low. When that low will come is anyone’s guess, but don’t count on the tonnes in the trust at the world’s most popular gold ETF to give you any clues.