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GLD Bull-ion


Sell-off is bullish, since ETF only coughs up metal at capitulatory lows.


The GLD gold ETF fell 2% yesterday and back to just shy of its April 6 low. Meanwhile, the ETF's bullion holdings fell just over 8 tonnes to 1,119 tonnes - which is a fairly rare event. Let me explain.

Click to enlarge

Now, obviously a bear would view that ETF sale of bullion as only the beginning of the coming avalanche of GLD sales. However, the behavior of GLD shareholders thus far would argue for the opposite. Consider that unlike the "hot money" that's often said to own gold and the GLD, the ETF has rarely made a sale since we entered the heart of the financial crisis back in September.

The fact is that those that own the GLD have acted more like long-term investors; they've been remarkably steady in their willingness to not only hang on to their shares -- despite wild swings in price -- but also to add to them on dips.

By no coincidence, you'll note in the "holdings" chart above that it was in late September (when the Fed first began to balloon its balance sheet by growing it over 50% in a mere 2-week period) that marked the beginning of the current steep trend of demand for gold by the ETF.

And this correlation (between the Fed ballooning its balance sheet and the demand for gold by investors) is the same reason I've suggested one would want to be bullish on gold - namely, the fact that the Fed's massive balance-sheet growth has made a tidal wave of inflation virtually inevitable.

You'll note that gold actually sold off to lower levels back in the fall -- after this balance-sheet growth occurred -- only to then rally to higher highs after the fact. Likewise, bulls shouldn't despair that gold has traded below the levels we saw before the Fed announced it would begin monetizing government debt back in mid-March - which is also obviously clearly bullish for gold. There's an old saying in this business: The market will always do what it's supposed to do, but not necessarily when you think it should do it.

Getting back to my point about the bullion sale by the GLD ETF, yesterday's sale of 8 tonnes by the GLD ETF marks the first such sale (other than a few sales of a third of a tonne or less) since October 23, when 8 tonnes were also sold.

What happened on October 23, you ask? That was the intraday low for spot gold during US trading back in the fall (although the following day's overnight intraday session was technically the official nadir).

In other words: The pattern since September -- when the ETF began to suck down metal at an increasing rate in the wake of the Fed ballooning its balance sheet -- has been that the GLD ETF tends to only cough up metal at capitulatory lows. Thus, it ironically may actually be a big positive for the bulls that this sale finally occurred yesterday and indicated that GLD shareholders finally capitulated - as long as they don't continue capitulating everyday next week, of course.

If gold can hold its April 6 lows today, history would suggest that buying this latest dip will likely pay off for the bulls.

In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.

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