And with ETF inflows showing new signs of life, JPMorgan now says bullion is a buy
Earlier this week gold
was still mired below $1,350 when a government filing showed that one of the most famous gold bulls, billionaire hedge-fund manager John Paulson
, had sold more than half of his gold ETF (GLD
) holdings in the second quarter, when gold corrected severely in April.
"Paulson & Co.
, the largest investor in the SPDR Gold Trust
, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter," Bloomberg reported
, with the firm citing a "reduced need for hedging."
That news came as a surprise given that in July, after his GLD sale, Paulson publicly reiterated his belief in gold during his first-ever television interview, conducted by CNBC
at the Delivering Alpha
conference. "We're in a pause period, but over time as we see the economy grow, and credit expand and inflation start to rise, I think demand for gold will start to increase again," he said. "If you're looking for a hedge against potential inflation in the future and have a longer-term view, I continue to believe that it's an important part of anyone's portfolio." Gold yawns, then surges higher
However, even more surprising than Paulson's GLD sale was the market's reaction: Gold finished the week ending Aug. 16 up more than 4%, breaking through stiff resistance at $1,350 and closing just under $1,380.
And now, even JPMorgan
is back in the gold fold. In a note
to clients Thursday titled "Gold and the Denver Play: Gold Shrugs Off the Paulson Sale; Buy the Bounce,"
its analysts John Bridges
and Anant Inani
detailed a number of bullish factors for the metal:"Gold shrugged off news today that Paulson & Co. had cut its exchange listed gold exposure in half and rose 2.2% to $1,365/oz. This may be delivering an exclamation mark to define the end of the 10-month, 25% fall in gold and 50% fall in gold equities, (while the S&P advanced 13%).
"The World Gold Council reported today that physical gold demand remains strong, questioning the price weakness seen in paper markets. Additionally, gold supplies could be constrained in September if labor strikes are initiated in South Africa.
There's typically some positive seasonality to the gold price in August/September helped by India, which is still the largest single (28%) gold market. ... Often this strength correlates with the Denver gold conference. The conference attracts many of the larger gold investors and given the other positives for the metal (and that the depressing effect of the Q2 results is past) we would not be surprised to see a stronger gold price in the run up to the show.
"We'd encourage shorter-term investors to consider getting long the gold space with a four to five week time horizon. This year the Denver Gold Forum will be from the 22nd to 25th September.
"China and India remain large physical buyers of the metal. We believe this highlights that enthusiasm for the metal remains strong amongst the majority of the world's population."Is the tide turning back toward the GLD?
Physical demand, especially from Asia, has been a huge support for gold this year, but it hasn't quite been enough to offset outflows from the GLD and its peers, plus from other forms of "paper gold" like futures and options, largely held by Western speculators. Why have they been leaving gold? Quite simply, the raging stock market, which has seen the Dow
and the S&P 500
both hit all-time highs. But now, with Federal Reserve
tapering talk growing, the major stock indexes have hit some turbulence, In contrast, tapering has largely already been priced into the gold market. Thus, gold has risen this week as stocks struggled, with the Dow posting its worst week of 2013.
And now the tide out of ETFs could be turning. The GLD "brought in $166 million in the week ending Thursday, Aug. 15, reporting positive weekly flows for the time since early February and contributing to the $547 million in assets added to commodity ETFs," reported Hard Assets Investor
"Looks like GLD is gaining some traction finally," said Adam Koos
, president of Libertas Wealth Management Group
. "The relative strength of GLD and GDX
is increasing for the first time this year, along with the precious-metals sector as a whole. With both trends starting to solidify and relative strength singing in unison, it's become more probable that these are good signs for the sector/sub-sector."
"The reason for the big drop in gold (in recent months) primarily was large scale selling out of exchange traded funds by big investors," said Ric Spooner
of CMC Markets
. "I think those big ETF outflows have finished for the moment. They got it right; they acted early."Adam Hamilton
of Zeal Research agreed
, blaming much of the 2013 correction in gold for ETF outflows that now seem to be reversing: "The bottom line is the incredible differential selling pressure GLD suffered in 2013 was radically unprecedented. Nothing even remotely close had ever happened before, its holdings were actually very sticky before this anomaly. It was spawned by the surreal stock-market levitation, which seduced capital out of GLD to chase general stocks. ... GLD is already seeing signs of a nascent reversal. As gold climbs for other reasons and general stocks fall, capital is going to come flooding back into GLD. This differential buying pressure will be shunted into underlying gold bullion, amplifying gold's upleg."
Don't bank on gold ETFs alone
Blanchard and Company
, of course, believes that every investor's core gold holding should be in physical bullion stored securely over a long period of time. The GLD or other gold ETFs should not be a substitute for physical metal under your own control when you need it. Gold ETFs do offer convenience for short-term traders who want to track the bullion price, but don't think that you actually own gold if all you own is an ETF. For more information on the difference between physical gold and gold ETFs, click here
However, the proliferation of gold ETFs have opened up the world of gold investing to thousands of investors who otherwise wouldn't have taken the trouble to buy physical gold. The success of gold ETFs has positively influenced the gold price when investors were piling into them. Conversely, the digital nature of ETFs has made unloading them as easy as clicking a mouse. Therefore, a fresh resurgence into gold ETFs also would help investors in physical gold.
So what to make of Paulson's GLD sale? Basically, "so what?" That's the conclusion of Michael Yoshikami
of Destination Wealth Management
. "The next time you read a headline that a prominent investor has adjusted a strategy after making previous statements about the wisdom of a particular course of action, remember that perspectives change," he wrote
. "Just because you read it or hear it doesn't mean it's permanent, and you should assume that every opinion that you hear is subject to adjustment prior to relying on that view when you make an investment decision."
Just because Paulson has sold some of his GLD shares doesn't mean he's changed his stance on gold. He has simply rebalanced his portfolio during the second quarter, and that's healthy for any investor. With gold suddenly showing new signs of vitality, it will be interesting to see what Paulson does in the third quarter.