Americans to Chase Gold

By Adam Hamilton, CPA

As gold’s extraordinary monster upleg keeps mounting, American stock investors remain conspicuous in their absence.  They have almost totally ignored gold’s powerful bull run, which is unprecedented in this modern gold-ETF era.  But sooner or later gold’s record levels and strong upside momentum will attract them back.  American stock investors’ overdue return is the single-most-bullish argument for gold today.

Since early October 2023, gold has soared 59.6% higher in an upleg that defies superlatives!  An upleg is a continuous bull-market advance without any 10%+ corrections, which slay uplegs.  While that is an old standard markets definition, I don’t consider gold uplegs monsters until they exceed 40% gains.  This one achieved that rare milestone way back in mid-September, and since grew into an extraordinary monster.

During these past 16.2 months, gold’s upleg achieved no fewer than 50 new nominal record closes!  In 2024, gold clocked in with phenomenal 27.2% gains handily besting the flagship S&P 500’s fantastic +23.3%.  Gold’s remarkable year with an enormous revaluation higher should’ve commanded some top billing in financial newsflow.  Yet that really hasn’t happened, gold’s monster upleg has marched uncelebrated.

In my quarter-century-plus in the financial-newsletter business, I’ve been blessed to watch and study the markets all day everyday.  Starting with early-morning workouts before heading into my office, Bloomberg and CNBC are on live about 11 hours a day!  Both have certainly covered gold more than in past years, but that still feels sporadic at best.  Despite its huge gains, gold remains nowhere near returning to popularity.

That’s sure evident in gold miners’ stocks, which have long acted like gold sentiment gauges leveraging gold’s upside.  Last year as gold blasted up that 27.2%, the leading GDX gold-stock ETF dreadfully lagged with miserable 9.4% gains!  That made for horrendous 0.3x upside leverage, far behind long precedent of major gold stocks amplifying their metal’s price trends by 2x to 3x.  Traders haven’t been very interested.

All that pales to the primary evidence that American stock investors have ignored gold’s monster upleg, gold-ETF holdings.  The world’s two largest and dominant gold ETFs are both in the US, GLD SPDR Gold Shares and IAU iShares Gold Trust.  Midweek their physical gold bullion held in trust for shareholders ran 1,260 metric tons, worth almost $118b at $2,902 gold.  GLD and IAU utterly tower over all other gold ETFs.

After every quarter, the World Gold Council publishes the best-available global gold fundamental data in its outstanding Gold Demand Trends reports.  These are essential reading for anyone interested in gold investing.  GDTs track and rank all the world’s physically-backed gold ETFs.  Exiting 2024, GLD and IAU combined to command a whopping 39.3% of all their gold!  A UK gold ETF was the distant-third at only 6.2%.

GLD and IAU have been around for decades now, birthed in November 2004 and January 2005.  As an easy and efficient way for American stock investors to allocate capital into gold, they quickly surged in popularity forever changing gold investment.  In this modern gold-ETF era since, gold uplegs could never grow large without American stock investors buying GLD and IAU shares faster than gold was being bought.

The mechanics of gold ETFs explain their outsized gold-price impact.  Their mission is to track the gold price, but the supplies and demands of their shares are independent of gold’s own.  Those mismatches always threaten to force GLD and IAU share prices to deviate from gold’s, failing their mission.  So their underlying share floats must be actively managed to absorb or offset any differential supply or demand.

If GLD and IAU shares are being purchased faster than gold, their prices will decouple to the upside.  Thus that excess demand has to be offset by issuing sufficient new shares to keep prices mirroring gold’s.  The proceeds from these gold-ETF-share sales are then immediately plowed into buying more physical gold bullion.  So rising GLD+IAU holdings reveal American stock-market capital flowing into gold, bidding up its price.

GLD and IAU essentially act like conduits for those vast pools of money to slosh both into and out of gold, a double-edged sword.  When American stock investors sell gold-ETF shares faster than gold, their prices disconnect to the downside.  This failure can only be averted by absorbing that excess share supply.  So GLD’s and IAU’s managers buy back shares, raising the necessary funds by selling physical gold bullion.

Monster-status 40%+ gold uplegs are rare, and modern ones required massive differential GLD+IAU-share buying to grow huge.  Gold’s last two monster uplegs both crested in 2020, before and after that year’s pandemic-lockdown stock panic.  Gold powered 42.7% higher over 18.8 months in the first, then skyrocketed another 40.0% in only 4.6 months in the second!  Enormous GLD+IAU-holdings builds fueled both.

During the first GLD+IAU holdings soared 30.4% or 314t, before launching another 35.3% or 461t in the second!  Gold’s massive gains were largely driven by American stock investors chasing the metal through these dominant gold ETFs.  Interestingly per those GDT reports, in plenty of quarters shifting GLD+IAU holdings alone often dominate, accounting for the large majority of gold’s overall global demand swings!

A year ago this week, gold’s current upleg remained young and small with 11.0% gains to $2,020.  Had you told me then gold would surge into monster territory without big differential GLD+IAU-share demand, I would’ve scoffed.  Yet that’s exactly what happened, defying all modern precedent!  Here the GLD+IAU holdings are superimposed over gold, an extraordinary monster upleg without American stock investors.

Before late 2023, gold prices closely followed GLD+IAU holdings reflecting American-stock-investor capital flows.  You can see that clearly in an older version of this same chart in a February 2023 essay “Gold Investors Still MIA”.  Particularly during gold’s last monster uplegs cresting in 2020, these US gold ETFs’ holdings and gold prices were joined at the hip.  But early last year, an anomalous gap started opening.

Despite gold consolidating high in January and February 2024 after achieving its first nominal record close in 3.3 years, American stock investors dumped it.  GLD+IAU holdings plunged to a shocking 4.5-year secular low of 1,203t in early March!  That was despite gold just blasting 6.8% higher in seven trading days, each with record closes.  Then as gold continued surging, GLD+IAU holdings barely budged.

Even though gold rallied another strong 11.2% from mid-March to mid-May, by mid-June GLD+IAU holdings had slumped back to 1,204t.  Despite gold’s then-mighty upleg soaring 33.2% at best then to $2,424, GLD+IAU holdings had inexplicably fallen 5.8% or 73t!  That begs two questions, why weren’t American stock investors chasing gold and who in the heck was bidding it higher with them missing-in-action?

You fellow students of the markets will recall June was when artificial-intelligence euphoria exploded into a popular speculative mania.  AI-leader NVIDIA’s stock shot stratospheric, rocketing from roughly $50 as 2024 dawned to $140 in mid-June!  Its revenues and earnings skyrocketed as demand for its GPU AI chips from hyperscaler mega-cap-tech companies was off the charts.  AI had captured investors’ imaginations.

With US stock markets soaring led by NVIDIA and other mega-cap techs, enthralled investors felt no need to prudently diversify their tech-dominated portfolios.  And for centuries gold has been the leading alternative investment, ideal for diversification.  Gold investment demand weakens when stock markets are high and exciting, particularly in speculative manias as investors increasingly crowd into the hottest stocks.

Given the global gold market’s vast size, it will never move as fast as bubble stocks.  Current estimates of gold’s worldwide market capitalization are way up near $19.8t, the largest single asset by far!  Apple and NVIDIA are next at $3.6t and $3.3t, while bitcoin and silver now rank 7th and 8th around $1.9t and $1.8t.  Gold’s massiveness leaves its price action comparatively subdued, and it shines brightest when stocks weaken.

All bubbles eventually burst, jolting investors into realizing all their investment eggs shouldn’t be held in that bubble basket.  And make no mistake, these US stock markets are a bubble.  Exiting January, the elite S&P 500 stocks averaged trailing-twelve-month price-to-earnings ratios of 31.5x, well into formal bubble territory which starts at 28x earnings.  That’s twice the century-and-a-half stock-market fair-value of 14x.

Odds are the primary reason American stock investors haven’t yet started chasing gold is they’ve been captivated and distracted by this AI stock bubble.  But its days are numbered, and it likely already burst.  The most-popular bubble stock crashing tends to herald their ends.  A couple Mondays ago, NVIDIA’s stock crashed 17.0% after Chinese AI startup DeepSeek reportedly trained an AI LLM on way-fewer older GPUs!

Building AI models potentially being way cheaper than thought could really erode the staggering demand for NVIDIA’s latest-and-greatest GPUs from the hyperscalers.  And trading at a crazy 58x TTM P/E before that crash, NVIDIA’s stock was priced for perfection.  Nowhere near regaining pre-crash highs, NVDA has a long way to fall if sales and profits growth stalls or reverses.  That would kill this overpowering AI stock bubble.

As the bubble-valued US stock markets inevitably roll over so valuations can mean revert and normalize, gold investment will return to favor.  As mega-cap-tech losses including NVIDIA mount, investors will look for alternatives.  The S&P 500’s last bear was minor, just 25.4% from early January 2022 to mid-October that year.  Yet the Magnificent 7 mega-cap techs more than doubled that averaging brutal 54.6% losses then!

So American stock investors will increasingly look for alternatives to diversify their burning tech-heavy portfolios in this next bear, and gold’s massive gains will increasingly attract them.  Sooner or later they will start chasing gold, propelling it much higher.  Astoundingly across gold’s entire 59.6% monster upleg, GLD+IAU holdings are still down 1.1% or 14t!  And American stock investors’ gold allocations are trivial.

A quick proxy for this compares the total value of gold bullion held by GLD and IAU to the S&P 500’s collective market capitalization.  Again the former was just under $118b midweek, while the latter is now running near $54,486b.  That implies American stock investors have only 0.2% of their capital deployed in gold, which may as well be zero!  They have vast room to reallocate and chase gold’s monster upleg higher.

Those last two 40%+ monster gold uplegs cresting in 2020 averaged 387t GLD+IAU-holdings builds to fuel them.  So American stock investors could easily do enough differential gold-ETF-share buying again to force another 400t-ish build.  Incredibly that would merely return GLD+IAU holdings to 1,660t, not much higher than April 2022 levels when gold was just near $1,950!  The all-time high was 1,801t in October 2020.

At that peak they were only worth $107b, not much lower than today’s levels!  That equated to 0.35% of the S&P 500’s market cap then, about 6/10ths over today’s implied allocation.  Just shifting enough capital to return to there would propel gold considerably higher, let alone if that hits 1%.  For centuries gold was considered essential for all portfolios, with 5%-to-10% allocations almost universally recommended.

Any way you slice it, American stock investors have vast room to start chasing gold again.  Its resulting gains as GLD’s and IAU’s managers plow that excess share demand into buying more gold bullion will accelerate gold’s return to popularity.  The higher and longer it climbs on balance, the more investors’ interest will grow and the more capital they will deploy.  Especially with the AI stock bubble’s enchantment dispelled!

Circling back to that second question, what fueled gold’s extraordinary monster upleg with American stock investors ignoring it?  The World Gold Council’s quarterly Gold Demand Trends reports helped illuminate that.  Chinese investors, central banks, and Indian jewelry buyers seized the gold-demand-leading baton from American stock investors!  I analyzed that in my final essay of 2024 marveling at gold’s remarkable year.

Chinese stock markets suffered a brutal secular bear, wiping out almost 2/3rds of their value!  Meanwhile Chinese real-estate languished in an ongoing multi-year bust.  Not allowed to invest overseas, Chinese investors increasingly flocked to gold.  Anecdotal reports of periodic frenzied gold buying in China over this past year have been fascinating.  And China’s central bank led the way, declaring big ongoing gold buying.

Just this week, Bloomberg reported that Beijing greenlighted ten large Chinese insurance companies to invest up to 1% of their assets in gold bullion!  That would amount to US$27b of buying, nearly a quarter of the current value of GLD+IAU holdings.  Overall world central banks added 1,045t of gold in 2024 per the WGC, their third year in a row of 1,000t+ buying!  2022 to 2024 averaged 1,059t of central-bank demand.

That more than doubled the preceding 2010-to-2021 annual average of 473t!  Central banks are wisely diversifying their US-dollar-dominated holdings, worried about the increasing dollar devaluation from Fed money printing and insane US-government overspending.  Some central banks worry about the dollar being weaponized geopolitically, hastening their shift away.  Central banks are increasingly flooding into gold.

Indians have always had a deep cultural affinity for gold, and are its shrewdest buyers.  Unlike Western investors, they don’t like to buy high.  But in late July, India’s government slashed its gold-bullion import taxes from 15% to just 6% to boost the important domestic gold-jewelry industry.  That was their biggest reduction ever, giving Indians an effective 9% price cut!  So they joined the Chinese in flocking back to gold.

The WGC’s latest Q4 GDT reports Indian consumer gold demand climbed 5.5% YoY in 2024 to 803t, the highest since 2015.  But that’s not extreme, as it ran 1,002t in 2010.  Chinese consumer gold demand last year actually fell 10.6% YoY to 857.1t!  That remained fairly-modest, far under 2013’s 1,450t.  So both of these dominant leading gold-buying countries still have lots of room for robust demand to persist in 2025.

Stated another way, last year Chinese consumer gold demand though strong merely ran near 90% of the prior-ten-year average!  Indian consumer gold demand ran 109% by that metric, far from mania levels.  And gold’s powerful bull market will continue if Chinese investors, central banks, and Indian jewelry buyers simply mostly maintain recent years’ strong demand.  Anecdotal reports so far in 2025 suggest they are.

And if gold soared from $1,820 in early October 2023 to $2,905 midweek with zero net buying from American stock investors, imagine what will happen when they start chasing it!  Their overdue reallocation into gold from near-zero levels added on top of vigorous global demand will be the icing on this gold cake.  This setup is totally unique, nothing like this has ever happened before.  Earlier investors will reap the biggest gains.

Everyone needs decent gold allocations, but gold stocks shouldn’t be overlooked.  Because gold didn’t grow popular last year, its miners’ stocks were largely ignored.  Lagging way behind their metal, they are temporarily mired in an extreme valuation anomaly.  Gold stocks are trading as if the great majority of gold’s monster upleg didn’t happen, yet enjoying record revenues and earnings with these high prevailing prices!

While gold’s gains should keep mounting on balance as American stock investors return, 2025’s greatest market story ought to be gold stocks revaluing higher to reflect their metal.  The upside potential of great fundamentally-superior smaller mid-tier and junior gold miners in particular is phenomenal.  Better able to consistently grow their production at often-lower mining costs than most majors, their stock prices should multiply!

The bottom line is American stock investors will almost certainly yet chase gold’s extraordinary monster upleg.  Incredibly they’ve missed it so far, enthralled by the AI stock bubble.  But that will inevitably roll over into a bear like all bubbles, and may have already burst with NVIDIA’s crash.  Weaker stock markets will force investors to remember the wisdom of prudently diversifying their tech-dominated portfolios with gold.

Gold’s huge gains over this past year or so were fueled by robust demand from Chinese investors, central banks, and Indian jewelry buyers.  Given the underlying drivers of each and no mania-like extremes, that should continue on balance.  Add missing-in-action American-stock-investor gold demand on top of that, and gold’s bull run is far from over.  And gold stocks still have colossal mean-reversion catch-up rallying to do.

Adam Hamilton, CPA

February 14, 2025
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