Gold & Silver Price Update — ETF Flows Capitulate
Gold and Silver market update by Guardian Gold Australia. Original Source: https://guardian-gold.com.au/gold-silver-etf-flows-report/
The precious metals complex continues to have lackluster performance of late, with markets clearly in a dumbed-down state of normalcy bias when it comes to both the geopolitical and economic landscape. Despite the war raging on in Ukraine, investors have now adapted to the ‘new normal’ as they become more focused on central bank rate hikes and seemingly unconcerned about the situation in Ukraine and Taiwan.
Also absent from the majority of minds is the potential for another GFC-like event, due to the rapid increase in global interest rates. The stock market is currently telling us that the majority of punters have no concerns about another credit crunch, despite almost all major market bubbles in recent decades being popped by a rate hike cycle.
For those wondering why gold hasn’t really reacted to runaway inflation yet, part of the answer lies in ETF flows and short-term speculation. In a nutshell, the gold market peaked shortly after the Russian invasion of Ukraine in February/March this year, as one would expect. Geopolitical based rallies are often short-lived, due to the motivations behind most of the people buying into them. That is: a short-term profit on the back of an unexpected event.
The gold price rallied in the lead up to the event, with larger speculators positioning to sell into the late comers when the final word would be announced. Sure enough, the market saw a major peak in volume in the days after the event, but as soon as the market went parabolic, there was a great deal of profit taking, just like any other ‘buy the rumour, sell the news’ event.
GOLD PRICE
Gold gave up $300 USD per ounce since then, after hitting a significant low of $1,684 USD. Short-term speculators have been exiting the market, most likely at a loss, after buying the news and not the rumour. We can see this in an ETF (Exchange-Traded Fund) flows report. Most short-term speculators and traders will buy and sell ETFs as apposed to physical metals.
In the following chart below, ETF inflows peaked in March this year only to fall into the negative at the end of June. This is an indication that short-term speculative market sentiment has deteriorated since the March peak in the gold price, as the war in Ukraine becomes the new normal and speculative traders go back to their state of ‘lets look for the next stock that’s going to rocket higher’.
GOLD ETF FLOWS
(Source: ByteTree)
The point to be made here is one that is rarely talked about in the gold community, and that is, you don’t really want to be buying when everyone else is panicking. Gold market tops happen when the masses are jumping over themselves in a panic to profit off the back of some news related event. Whereas market bottoms often happen on no news.
It is the capitulation of these short-term traders throwing in the towel that coincides with bottoms in the gold market. Significant lows usually happen when everyone gives up on that long position they entered previously in a panic.
GOLD ETF FLOWS + GOLD PRICE
If we zoom out on the above chart to look at ETF flows with the gold price behind, we can see that right now we are experiencing the most negative ETF flows since April of 2021, which is actually a good thing for those trying to time market bottoms. You can think of short-term speculators as the less intelligent retail traders that trade anything and everything under the sun, based on an emotional reaction to various breaking news events. These traders differ to long-term physical investors that are looking to structure their investment portfolio in a truly balanced and responsible manner.
A peak in the price often coincides with a peak in ETF inflow volume. We saw this in the March Ukraine rally, as well as during the Covid 2020 rally where inflows are literally off the charts. Conversely, market lows for gold often happen when those weaker ETF holders are liquidating all the gold positions that they bought at a much higher price, as they scramble to cut their losses.
If you are buying physical precious metals with a long-term time horizon, it makes a lot of sense to avoid the masses of short-term speculators, or to actually do the opposite.
Physical bar demand from Central Banks, India or China will not appear in the charts above, as they don’t buy ETF’s, they buy the actual metal. This is the kind of long-term sustainable demand that comes in when the price is low and which builds the foundations of a move higher off the lows. Indeed, we at Guardian Gold have continued to see very strong physical demand for both metals in recent weeks, even as prices have come lower.
SILVER PRICE
The same can be seen in the silver market. But the story is slightly different. The recent peak in silver ETF inflows coincided with the market peak of $30 USD in FEB 2021 and was bought about by the ‘silver short squeeze’ movement on investing forums. Due to the hype generated by this movement, and the price reacting accordingly, daily inflows into silver ETF’s rose to over 132 million ounces. In hindsight, of course this was the worse time to be buying silver as the price peaked on this volume and has come off significantly since.
SILVER ETF FLOWS
(Source: ByteTree)
Today we see the opposite. ETF inflows are deeply negative as we have the final capitulation of retail traders cutting their losses.
Investors who have a long-term horizon shouldn’t be too concerned about daily moves across precious metals, as we often see some really irrational behavior from short-term traders that does indeed move the price. You need a whole lot of patience to be a successful long-term investor in any market, and precious metals is no different.
One prudent strategy could be dollar-cost averaging; whereby you don’t wait and hope to pick the exact bottom of the market, but you spread your purchases over several days or weeks to get an average price over time.
Dollar-cost averaging can be especially powerful if you do it during periods where the market is heavily oversold, and avoid the moments when sentiment is exceptionally bullish and the crowd is jumping in. Averaging into periods where ETF inflows are deeply negative can help investors get lower average purchasing prices than those who act on breaking news.
Despite the recent short-term underperformance of the precious metals sector, we believe it will only be a matter of time before higher interest rates bring a significant increase in equity market volatility. The next rally for gold and silver will likely happen during a significant correction in the stock market, as higher rates pop the bubble in margin debt and companies without strong balance sheets starts to underperform significantly.
In the next few years capital preservation should be the number one goal for investors and not capital appreciation. It will be a very difficult period to navigate and one where gold and silver will likely play an important role in protecting and preserving wealth.
Until next time,
John Feeney. Guardian Gold Australia
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