Gold ETF Money Flows Comments
Note: View the most recent daily money flows here (updated daily after market close).
An analysis of ETF money flows in 2015 suggests that the market sentiment for gold at the end of the first week of June is tilted towards bearishness.
A review of GLD and GDX money flows in 2015, as documented in the tables presented in the Observations section, shows:
When the price of gold is trending higher, as it clearly was at the start of 2015, money flows into both GLD and GDX.
When gold sentiment is strongly bearish, as November/December 2014 were, money flows out of GLD and GDX are reasonable expected.
When the price of gold is peaking after a run-up, as March 2015 might be viewed in hindsight, money flows out of GLD and GDX as a result of profit taking would be expected.
When the gold market is range bound, as it has been for many weeks going into the first week in June, the money flows between GLD and GDX are asymmetrical. That is, GLD can show an outflow while GDX shows an inflow. I believe the asymmetric flows are a sign of hedging activities and show an underlying bearishness for gold.
Strong money flows into both GLD and GDX are likely a direct consequence of a strong bullish sentiment by the smart money towards a rising gold price. There is money to be made in both equity and bullion ETFs. January and February of 2015 were widely recognized as decidedly bullish for gold and the GLD and GDX money flows matched this sentiment.
Strong money flows out of both GLD and GDX could be read as a sign of profit taking, as would reasonably explain the March 2015 flows.
Asymmetric money flows in GLD and GDX are probably a result of hedging activities and are an indicator of a range bound to bearish market sentiment with a weak conviction.
Consider the gold equities making up GDX -- typically these stocks have a beta of 4 or more relative to gold. For example, see AEM - au beta 4.44, ABX - au beta 5.2 and GG - au beta 3.39. Select other TSX equities in the GDX via any of the above chart links and you'll see similar gold betas (I am using gold beta in the sense of relative percentage changes in gold equity from October 2013 to present relative to the percentage prices changes in gold over the same time period).
Therefore smart money wanting to keep an exposure to gold in times of falling gold prices could move money out of GLD and put a small percentage into GDX as a hedge against an unexpected news event suddenly reversing any downward gold trend.
The asymmetric money flows out of GLD and into GDX in recent months and days intuitively suggests this theory as the flows out of GLD are roughly running in keeping with the the money flows into GDX after accounting the beta of gold stocks.
Therefore, a high percentage of funds allocated towards gold exposure (e.g. say 80%) can be moved safely to the sidelines in the time of falling gold prices for a planned repurchase once the gold down trend bottoms out. The small exposure in gold equities or gold equity ETFs (say 20%) provide an effective hedge against a sudden reversal in the price of gold due to some black swan event - the normalized relative price charts used to show the gold beta for gold equities, clearly shows a strong move in price of gold is highly likely to produce a correspondingly beta adjusted move in gold equities.
All comments are most welcome. I will be extending this analysis to earlier period in the see if this interpretation of money flow observations continues to make sense. There are of course many other factors involved in the ETF flows that need to be considered.
It is worth noting that the outflows from GDXJ, at ETF made up of higher beta gold equities (see AGI, au beta 10.16), while GDX is showing an inflow could be another indicator that smart money is bearish on the outlook for gold -- a review of GDXJ performance relative to GDX via your favorite stock price charting site clearly shows that in times of falling gold prices GDXJ will lose more than GDX. Therefore, if your expectation was for falling gold prices, but your overall investment strategy required an exposure to gold at all times, you would be better off to move money out of GDXJ and into GDX as that would minimize your losses in a bearish market.
Also physical gold shortages to support flows to the SGE market, via Switzerland is a prime example as it is often suggested that the GLD physical is periodically raided for its physical and would account for some of the GLD outflow. The additional evidence provided by SGE (Shanghai Gold Exchange) daily settlement volumes is the subject for a future blog.
Click here or on the images above to view daily updates in GLD, GDX and GDXJ money flows - the best back test of a market theory is its ability to reasonably predict the coming week's price action ahead of time.
On a daily basis, going into June, the trend of GLD money outflows and GDX money inflows continue.