The Steady Gold Bull

Atlas Pulse Gold Report Issue 103;

The world is changing, and strategic investors are dumping the dollar in exchange for gold. In this issue, I revisit the crucial gold sentiment indicators and look at investor behaviour in gold, gold miners and silver.

As gold breaks $3,000 for the first time, some investors are getting the jitters. The price has nearly trebled since the low in late 2015, delivering a solid 12% per year since. Trebled sounds like a lot, whereas 12% p.a. doesn’t. The gold move is tame compared to great moves of the past.

Nothing Compared to the Great Gold Rallies

In recent issues, I have discussed how we got here. In late 2018, the call was that real interest rates had peaked. That drove gold into the pandemic to be met by the largest tsunami of newly printed money in history. Just as inflation was settling down, geopolitics kicked in with the invasion of Ukraine, asset confiscation, and, more recently, Trump. In short, the world is changing, and strategic investors are dumping the dollar in exchange for gold.

There’s not too much new to say that hasn’t been said, but the important point is that this is a slow and steady bull market and not a euphoric move as the Financial Times would have you believe. It should be noted that the FT never liked gold much, as the establishment generally doesn’t. Alternative assets are unpopular with the elite because they sit outside of the nation state and don’t earn much commission for Wall Street.

In 2004, the FT wrote an editorial about gold. Negative, of course. I liked the line, “Gold is on its way out as an investment and a reserve asset. Thank goodness for that.” The price was $400, and today, over $3,000. H/T @maneco1964.

FT Editorial 16 April 2004

I want to show a few charts to demonstrate how the current gold rally is underpinned and a long way from danger territory. The first and simplest point is that the price of gold is not particularly overbought relative to its trend. I measure that with a deviation from the 200-day moving average and the current reading of 15%. That is, the price of gold is $3,030 and the 200-day moving average is at $2,624, so gold is 15% above it. At the 2011 peak, that was 28%, and at the 1980 peak, 140%. Gold is not overbought on this basis. It is displaying the signs of a healthy bull market.

Is Gold Overbought?

It is important to watch the alternatives to gold for clues as to when things have gone too far. Generally speaking, when the gold market is red hot, expect the price of silver and the miners to go wild. That hasn’t yet happened, which suggests we are not close to a market peak.

Starting with silver, I have rebased the chart to a moment in 2010, when gold and silver were trading at the historical average spread. That time saw one ounce of gold worth the same as 66 ounces of silver. On this measure, silver needs to rally 45% just to return to neutral, let alone show signs of euphoria.

Gold and Silver

A euphoric run for silver, back to the gold-to-silver ratio level last seen in 2011, below 40, would today see silver trade close to $100, plus whatever further gains gold manages from here. Could silver touch $100 this cycle? It’s plausible.

Then there are the gold mining stocks, which are also expected to jump in front of gold during bull markets. I show the gold price against the flows into gold bullion via ETFs and the gold mining ETFs. The gold ETFs (black) have started to pick up but are still a long way below the 2020 high. I would expect a euphoric peak to see twice the number of ounces held as in 2011. That would need the ETFs to grow by over 80% from here.

Gold Price and Investor Flows

The relative flows into silver bullion have been similar to gold, but look at the miners (green). The gold price peaked in 2011, and yet investors continued to buy the mining funds for another six years, which shows you how gold mining investors like pain. The red box shows when the gold price was falling and the mining investors kept buying, and the blue box highlights when the gold price was rising and they kept selling. The gold mining ETF flows seem to work in reverse, like a contra indicator.

The Miners and Their Behaviour

Gold miner investors haven’t had a good experience. The US-listed Vaneck Gold Miners ETF (GDX) manages $14.9 bn, is the largest fund of its kind, and does a good job. For some reason, their investors haven’t done a good job.

Lifetime Profits

The chart shows how their investors have collectively fared since 2006. The total profit or loss of GDX is shown, i.e. the lifetime profits. Investors were briefly up $4 bn in 2011 before dropping to -$8 bn in 2015. They remained at a loss until 2020, and the recent price strength has seen them return to profit once again. ?Let’s hope GDX investors finally start to make some decent money.

Profit/Loss from Gold Mining ETFs

This data is not merely based on price but on the real money flows that are bought and sold on a weekly basis. That is, if a fund does well but remains small, then the overall profits are slim. But if the fund is large and the performance is strong, like gold, then the profits are vast. If the fund does badly, lifetime profits will fall, but less so if investors sell ahead of loss. Finally, if the fund does well but investors sell too early, the lifetime profits are limited.

I now contrast GDX lifetime profits with the gold bullion ETFs, which have $264 bn of assets, i.e. 15 times more than the miners. The gold bullion ETFs have lifetime profits of $175 bn from $264 bn of assets. In other words, 2/3rds of the value of the gold ETFs are pure profit.

Profit/Loss from Gold ETFs

While we are here, I’ll show silver as well. The ETFs are worth $24 bn with lifetime profits of $12 bn or 50% of the total. That’s not bad at all.

Profit/Loss from Silver ETFs

It’s curious that the gold mining ETFs have delivered much lower profits than gold or silver, but it’s not just the asset return but investors’ poor timing. The point is that gold and its allies are a long way from demonstrating euphoric behaviour because flows are modest. To show the chart from earlier again, you’d think the lower lines would follow the gold price at some point. That’s my view.

Gold Price and Investor Flows

Finally, I show Bitcoin, gold’s friend from modern times. I highlight how the gold flows are still lower than seen in 2020 and 2022, neither of which were historical euphoric bubbles. Note the inverse correlation of gold flows and Bitcoin flows. Bitcoin will turn up at some point, and gold will likely turn down at that time. While Bitcoin and gold prices are not perfectly uncorrelated, they have a low correlation, which makes for a good pairing. I love this chart, which only took us about three years to develop! It was worth it because it proves a point.

Bitcoin/Gold ETF Inflows in USD – Past 90 Days

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21Shares ByteTree BOLD ETF (BOLD)

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BOLD and Fixed-Weight BOLD - since BOLD ETF Inception

Read my latest rebalancing report for the BOLD Index.

Summary

I hope to have demonstrated that the price of gold is a long way from euphoria and looks more like a healthy bull market. To see a major top, we would need to see much more press coverage, huge inflows into the ETFs, and maybe even some positive coverage from the FT.

We’re not there yet.

Thank you for reading Atlas Pulse. The Gold Dial remains on Bull Market.

Charlie Morris is the Founder and Editor of the Atlas Pulse Gold Report, established in 2012. His pioneering gold valuation model, developed in 2012, was published by the London Mastels Bullion Association (LBMA) and the World Gold Council (WGC). It is widely regarded as a major contribution to understanding the behaviour of the gold price.

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