Gold Price: Affected by Gold ETF Outflows?

Subscriber F.H. brings our attention to a comment made by a gold fund manager.  The manager suggested that the reason for gold’s weakness is primarily due to the liquidation occurring in gold ETFs.  This implies that if there weren’t gold ETFs, then the price of gold would not decline as much as it already has (possibly not at all).  However, our work on this topic is to check the data and show how easily this can be proven an incorrect analysis.

The chart below quickly demonstrates that gold outflows from ETFs is a symptom and not the cause in the decline of gold.

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What did we do to arrive at the outcome above?  First, we already knew that the price of gold declined -50% from the 1974 peak to the 1976 trough.  This simple fact, within what is widely accepted as the last secular bull market for gold (1971-1980), acted as our starting point.  In our myopic view, when comparing data, you must compare like to like, bull market to bull market and bear market to bear market.  Therefore, selecting a set of data from the secular bear market in gold from 1980 to 1999 would result in flawed analysis.

Second, we took the period when gold went from $100 to its respective peak in 1974 and trough in 1976 then compared that period (in trading days; 833 days) to the current period going backwards 833 trading days.

Finally, we noted the fact that each period was with and without gold ETFs.

  • Please note that when we analyze any data, we only seek the “big picture” view, something akin to the horseshoes and hand grenades analogy.

What is our interpretation based on this rudimentary and potentially flawed approach?

First, gold ETF outflows are not the reason why gold is declining.  Instead, gold ETF outflows are a mirror of the price of gold, albeit a somewhat distorted mirror.

Second, the decline in the price of gold has been normal within what we believe to be a secular bull market in gold.  So far, gold has declined “only” –35% from the 2011 peak.  This is contrasted with the aforementioned decline of –50% from the 1974 peak to the 1976 trough.  What would change our view that we are no longer in a secular bull market in gold?  Our highly biased view is that a bear market begins when gold and silver declines below our 1996 purchase price of the respective metals.  However, the real world analysis says that a secular bear market is confirmed when gold attempts to go above the $1,895 price but fails.  Lacking a qualified retest of the prior high, we will infer that we’re still within a secular bull market for precious metals.

Third, our view is that when a gold fund manager speaks they have only one message, gold related investments are always good and never bad.  This opinion is the same for technology, biotechnology, small cap, large cap and international fund managers.  There will never be a day when a fund manager says, “My fund is [I’m] not needed for the next several months or years.”

Our final interpretation is that when a gold fund manager uses the explanation that the outflow of funds from gold ETFs is the predominate reason for the price decline in gold, it demonstrates a significant lapse of analysis.

3 responses to “Gold Price: Affected by Gold ETF Outflows?

  1. NLO Subscriber

    Nicely done. In fairness to ____ ____, I think he would agree with you that etf liquidation is effect not cause. People piled into etf’s post gfc expecting an economic outcome which hasn’t occurred as anticipated. He also said the gold coming out of the etf’s goes through the bullion banks first and they may be using the futures market to benefit from this.

    I am looking forward to how your GSI reacts today to Bernanke’s comments.

    • Hi F.H.,

      Thanks for your comments. We have so much to say on the topics that you’ve just mentioned. We’ll try to cover the topics in future postings if possible.

      Your remarks illicit concepts or material that we’ve either taken for granted or felt would be considered heretical. We ask for your patience as we attempt to explain matters that might offend precious metal and stock market bulls, in spite of the fact that were are both.

      However, on another note, is it “Effect” or “Affect”? Always get those two confused.

      Best regards.

  2. NLO Subscriber

    the effect of her long soft hair, tan skin and gentle perfume was predictable. it affected him exactly as she had intended…