Making bets against the gold price and gold-backed assets like the iShares Gold Trust (IAU) has become the most precarious strategy on the markets. Before the calendar crossed over in 2016, the opposite was true: you seemingly couldn’t go wrong if you shorted gold.
However, the massive short interest against precious metals on Wall St that ha worked for so long is now getting drubbed. Repeatedly in 2016, investors have piled into physical gold and their exchange-traded counterparts just when everyone was predicting the price of gold would “fall back to earth,” so to speak.
While somewhat similar action has been seen in the gold mining sector, where share prices have skyrocketed of late, most modest-sized portfolios are just looking for diversification. This is what has animated the trading dynamics of gold ETFs like the SPDR Gold Trust (GLD) and IAU.
Shorts on IAU Get Squeezed
In a momentous swing, the iShares Gold Trust has been the beneficiary of widespread appetite for gold as a safe haven. It is the cheaper alternative to GLD, but is still one of the next-largest gold ETFs. It similarly acts as a holder of large amounts of physical gold bullion, of which each shareholder is entitled to a portion.
The number of short positions on IAU has dropped substantially over the course of the last two months. The shorts are scrambling to get out of the position after spot gold has risen nearly $200 per ounce since 2016 started. From mid-January to the beginning of February alone, short interest in IAU decreased by over 40%. This kind of swing means the bulls are firmly back in control of trading, while everyone else is caught in a “bear trap.” This has also coincided with a surge of institutional buying of IAU. In other words, large firms and financial interests have been building up shares to hedge their own vast, enterprise-wide portfolios with exposure to the gold price.
Big Net Inflows for iShares Gold Trust
Between the bullish reversal of fortunes and the influence of large institutional buyers, IAU has seen a corresponding inflow to its bullion holdings. Year-to-date, the fund has gained 5.5%—and outperformed the S&P 500 stock index by almost 17%! Consequently, IAU saw some 210,570 ounces of gold (6.5 metric tonnes) added to its stockpile in a single week in February alone, worth $260 million.
From a technical perspective, February was a fantastic month for the iShares Gold Trust. At the beginning of the month, the share price rose above a key technical level, the 200-day moving average. Moving averages are a good tool for quickly determining whether an asset price is in an uptrend or downtrend. Since crossing above the 200-DMA around $11 per share, the fund has continued to rally close to $12/share.
In general, a sustained move above the moving averages indicates a bullish trend in progress. This has proven itself true (so far) with IAU. Trading volumes have also risen sharply as a result. (See the bar graph below the price chart above.) The fund is not far from its 52-week high of $12.40/share.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.