ETF traders leave gold, pushing miners into bear markets

Gold has been struggling as stocks soar, and ETF traders have decided that they're not going to stick around.

According to Bloomberg calculations, the total number of ounces known to be held by ETFs has declined by 2 million ounces since it peaked in October. The worry is that ETF traders are one of the main factors driving the price of gold, and if they leave en masse, then it will push gold prices lower like it did in 2016.

That worry is a bit premature. So far, gold ETF holdings have only declined by a little more than 1.5% from their peak. We don't know yet if it will turn into a flood; all we know right now that it's a trickle, and there have been plenty of trickles over the past 7 years.

The other times gold holdings dropped by 1.5% from a 52-week high, gold did tend to struggle over the next 2 months, with a poor average return, win rate, and risk/reward skew. But after that, returns were quite good.

Because gold mining stocks tend to correlate highly with the price of gold, miners also showed weak returns but the time frame was pushed up a bit. Despite the poor overall trend in this group, forward returns were decent following these signals, though with a smattering of large losses.

On November 11, we saw that gold mining stocks were starting to crack, with the fewest uptrends in months. As they've sold off even further, more than 95% of gold mining stocks are now down at least 10% from their highs.

Even more notably, more than 75% of them are at least 20% off their highs.

This ends a streak of more than 6 months with fewer than 95% miners in corrections and fewer than 75% in bear markets.

After the other streaks ended, only one ended up leading to a big drop right away, and that one saw the losses made up in the months ahead. The signal in 2011 did end up morphing into a new bear market, but not before miners jumped double-digits in the interim.

If we relax the parameters to get a larger sample, then it didn't help too much as it only added 3 signals, 2 winners and a loser.

If ETF traders do decide to exit the market, then it seems clear that it will be a drag on the price of gold, and almost certainly the share prices of gold mining stocks. So far, there isn't enough evidence to suggest that they're likely to do so. And when gold mining stocks see the ends of this kind of momentum, they've typically been able to recover.