The GLD ETF Will Shine as China Play Dims

Advertisement

The Chinese stock market is in a state of heavy turbulence. In less than a month, the Shanghai stock index plunged a brutal 20% from its recent peak. The market is overwhelmed with a stampede of sellers running as if from the bulls of Pamplona.

But China’s misfortune may soon lead gold by the nose to a change in its future.

Chinese Stocks vs. Gold Prices

In the past, one of the key drivers of gold prices had been the humongous appetite of Chinese investors. Their collective intent is, and has been, to buy physical gold as a way to protect their respective wealth from inflation.

However, according to the World Gold Council, the Shanghai stock market’s spectacular rally resulted in a diversification away from gold. Instead, Chinese investors poured into stocks. In the end, Chinese stocks vastly outperformed all other asset classes. At the same time, stocks outpaced China’s diminishing inflation rate.

GLD ETF
Click to Enlarge
Source: World Gold Council

Now, though, the stage is being set for a possible turnaround. Chinese investors who had flipped out of gold may have gotten burned in the latest stock collapse. With fears growing that the Yuan could depreciate, those investors could be pushed back into the precious metal. In that case, they could pile in while gold is still relatively cheap to buy.

This could effectively ignite the same herd mentality, but in the other direction. Fearful Chinese investors will pour back into gold to protect their wealth. As the price goes higher, the pressure to buy more will increase. This rather interesting correlation is seen clearly in the chart below (courtesy of the World Gold Council).

Dusting Off Strategy on GLD ETF

GoldDemand2
Click to Enlarge
For a while, being bearish on gold prices and, subsequently, on the SPDR Gold Shares (GLD) had been one of the hottest trends in the commodities space. But this trend, especially when it comes to gold ETF, is on the verge of a reversal.

The case for buying GLD (based on the return of a flood of Chinese buyers) is already building up. On the ground, the market has already begun to take some serious interest in gold ETFs, such as the GLD and its ilk.

  • Data from the World Gold Council on the demand for gold ETFs shows an important turnaround. Inflows to gold ETFs (in tons of gold) turned positive for the first time in Q1 of this year, after many quarters of outflows.
  • Since November 2014, the GLD ETF has been holding at support levels above 111, signaling a lack of sellers. This an important indicator sending the clear message that the bearish cycle for GLD has ended.

Consider the foregoing, i.e., the lack of sellers and the sound rationale for buyers to return in droves. That is the makings of a strong case for GLD to move higher and, ultimately, return to the glitter. Expect to see that allure continue, especially as the appeal of the Chinese stock market wears off.

As of this writing, Lior Alkalay held a long position on GLD.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/gld-etf-shine-china-play-dims/.

©2024 InvestorPlace Media, LLC