On February 29, 2012, gold futures prices had a big one-day selloff, dropping by more than $100/oz at one point intraday. Normally a big drop in gold prices will send gold ETF investors heading for the sidelines, but there was nary a reaction to that big drop.
In fact, total assets in GLD and IAU, the two biggest gold bullion ETFs, actually rose slightly that day, and have continued upward in the days since then. It is as if investors viewed that selloff as more of a buying opportunity than a reason for worry.
What makes this interesting is that the crowd’s view of that as an opportunity does not usually work out to be true. This week’s chart is one I have shown before, looking at the total amount of gold bullion held by GLD and IAU. You can download that data yourself from the SPDR Goldshares and iShares web sites.
It turns out that the actual really good buying opportunities occur when these ETF investors hold the opposite view. When we see a very fast drop in ETF assets, that is the sign of public fear about gold prices that marks a good bottom for gold prices. But when you see these assets rise as gold prices are falling, those instances are typically followed by a further decline in gold prices, to more completely scare people away so that the next uptrend can begin.
After gold prices peaked in early September 2011, assets in these ETFs actually started to rise as gold prices were coming down from $1900/oz. But the bottom of that decline did not arrive until late September, when a big fast drop in ETF assets showed that investors were fleeing.
A similar response occurred in November 2011, when gold prices started downward again and ETF investors responded by buying more. Only when another big fast drop in ETF assets came in late December did we get a bottom for gold prices.
So now we are seeing gold prices starting downward, and once again these investors are responding to the decline by increasing their investments into these gold bullion ETFs. That is not a good sign for gold, and it strongly suggests that we’ll see a further decline in gold prices. At the point when we see investors start fleeing rapidly from these ETFs, then it will be a much better condition for seeing a bottom in gold prices.
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