It appears gold's recent decline just may be over and gold shares are poised to rally.

Regards - VHF

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GLD Already Hinting That Gold Is Sold Out?

Lance Lewis

October 8, 2010

Note that SPDR Gold Shares (GLD) puked up 13.4 tonnes (1.03%) yesterday to bring its bullion holdings down to just over 1,288 tonnes.

Now, that decline in the ETF’s bullion holdings is rather interesting because, as noted before, one-day declines in the holdings of this ETF have tended to be capitulatory in nature and have occurred near important lows in the gold price during gold’s secular bull market. In fact, we most recently used this indicator back on July 28 to identify what was then the summer low in the gold price with this very chart.

Click to enlarge

Consider that since the ETF’s creation back in 2004, it has seen 1%+ one-day declines in its bullion holdings only 40 other times. When one goes back and looks at where these declines in bullion holdings have occurred, virtually all of them occurred at or were clustered at important lows in the gold price.

When we update this familiar chart of the gold ETF versus its bullion holdings for yesterday’s decline, we can once again see where I've labeled the past ten 1%+ declines in the ETF’s bullion holdings (plus today’s decline) with red dots and then placed a corresponding white dot below the price of GLD to show where that decline (or clusters of declines, as was the case in 2008) occurred relative to the price of the ETF, which is obviously tied to spot gold.


Click to enlarge

The pattern you see emerge is that other than the December 8, 2009 decline in bullion holdings of more than 1%, which occurred after several days off of the December 3, 2009 peak, these “pukes” of bullion by the GLD ETF have always tended to occur at or very close to important lows in the gold price.

On the other hand, they've also tended to occur after declines in the gold price have been underway for some time. Thus, that leaves yesterday’s 1%+ decline as being somewhat of an anomaly because we've never seen a 1% decline in the ETF’s holdings literally right off of an all-time high, which we hit on the open yesterday morning.

Thus, it’s a somewhat tougher call than it has been in the past, but given that the psychology represented by the ETF’s “puke” of bullion is one of indicating panic and that the ETF is “sold out,” one could certainly argue that yesterday’s decline was of the one-day “panic” variety that should mark a low. If so, then this indicator would seem to suggest that gold is already at or very close to a corrective low.

One last thing to consider: Whether gold has a little further to correct or not, the gold miners never really rallied with the metal for the last $100 anyway, so one could argue that they're set up to rally regardless of what the metal does over the next several days.