Investors Catch The Gold Bug Again

November 30, 2018

New York (Nov 30)  The "recent selloff in the S&P 500 Index was the largest monthly drop since September 2011," states a recent research note from Aberdeen Standard Investments. "During this heightened volatility, investors flocked to gold."

Investors found ETFs especially attractive, with 23 metric tons, or 739,466 troy ounces getting added to such investments, the report explains. These were the first inflows since April the report states.

Active month gold futures contracts were recently changing hands for around $1,228 an ounce on the CME.

The move into bullion came during the 8% October dip in the broader S&P 500 index of large capitalization stocks. You can read more about that here.

What's notable is that the price of gold rallied by 4% over the period while bitcoin, the investment flavor of the year, fell. In other words, gold holdings helped offset stock losses while Bitcoin holdings didn't.

The good news is that gold fulfilled its role as a safe-haven asset during tumultuous markets. With banal frequency, some commentators speculate whether gold continues to hold an essential role in investing. Also with mind-numbing regularity, reality proves that it does.

"Investors remain underweight gold and rising concerns of an equity drawdown could see investor demand rise," the Aberdeen Standard report continues.

In other words, investors may soon realize their exposure to gold is relatively low and that mainstream investments (stocks and bonds) are likely to remain volatile for the foreseeable future. As a result, some investors may decide to purchase more bullion as a hedge against riskier markets.

Whether the price of gold will fall or rise is highly correlated with high levels of investment demand. When investors buy a lot of gold, then prices tend to rise. When they don't purchase much, then prices fall.

A review of the CPM Gold Yearbook 2018 shows that when investment demand exceeds 20 million ounces a year, then prices tend to rise. When the investment demand remains below that level, then the price for the metal tends to fall. There has only been one year of net selling by investors since the gold market got liberalized in the 1970s. Put another way, as a group, gold investors overwhelmingly buy and hold.

At the beginning of the year CPM forecast investment demand to reach 20.3 million ounces this year, an increase of 6.6% versus 2017.

"A stretched U.S. growth cycle and the possibility of a short and shallow recession in the U.S. during 2019 could also have investors interested in adding gold to their portfolio this year," states the CPM yearbook.

Indeed, this looks like it is playing out as projected. The economy is slowing already, and some predict growth could dip below 2% soon, according to a recent report from London-based financial firm TS Lombard. That would be a sharp slowdown from 4.2% and 3.5% in the second and third quarters.

Caution: Purchases of jewelry tend to be higher when prices are lower, and vice versa. Historically, increased jewelry demand has an inverse correlation to price movements for the metal.

In simple terms, ignore what's happening at the jewelry end of the business and instead focus on how much gold investors buy. If they are buying shed loads of the stuff, then that likely augur's price gains.


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