Blog

The gold market saw net outflows from its ETFs again in October. Global ETF outflows were some 59 tons or $3 billion for the month of October. The outflows put the total net holdings of global gold ETFs down 52 tons for the year. Gold ETFs began the year on the right foot, seeing significant inflows of 316 tons from January to April. Since that time, however, the dollar’s strength and an aggressively hiking Fed have deflated demand for gold to a large degree.

All global regions appeared to see outflows last month, with the North American and European regions leading the pack. Global demand for physical gold has remained robust at the same time, with central banks going on their largest buying spree on record. The 400 tons purchased by central banks during the third quarter is a figure that is often the amount purchased over the entire year. Since January, central banks have bought some 637 tons of gold, the largest amount on record since the gold standard was still in place.

The difference between gold ETF outflows and record central bank buying may point to one main theme: Those in the know are buyers and those not in the know are sellers. Although this is often the case, it appears to be very clear in this instance that central banks, the most powerful financial institutions on the planet, are buying gold for solid reasons. The investing public is getting out of gold due to a lack of performance. Central banks recognize and understand the value of gold and do not simply rely on its performance when deciding whether or not to own it. John Q investor, on the other hand, is likely far more focused on the “what have you done for me lately” narrative and is therefore dumping gold as it has lacked upside for some time now.

Central banks know that while the value of gold could go up, and rise dramatically, it also serves other purposes. Gold is the ultimate portfolio diversifier, adding much-needed diversification to portfolios of stocks, bonds, currencies, and other assets. Gold may also provide an important hedge against inflation. While stocks have seen some crushing days in recent months, the declines for gold have been much smaller and more “controlled.”

Once the Fed signals it will take its foot off the gas, the gold market may skyrocket. This is unlikely to happen until sometime early next year, but the day is coming. Once the era of aggressive rate hiking has come and gone, the path to higher gold may become abundantly clear. For the time being, gold may remain stuck in its recent trading range. The $1600 and $1700 levels are key technical support and resistance here. Once either side is breached, on a closing basis, the market may continue in that direction. Despite some investors dumping their gold ETF holdings, the central banks often referred to as the “smart money,” are loading up and patiently awaiting gold’s return to dominance.