Price-sensitive trading no longer an option after 6-decade record run in US equities...
AHEAD of this sharp drop in February, the US stock market enjoyed its longest winning streak in six decades,
writes Adrian Ash at BullionVault.
That didn't deter private investors from buying gold as a useful form of insurance,
spreading the risk from other assets.
But it did enable them to trade in and out, using the rallies and dips in gold to build their holdings steadily and cost-effectively.
Now this sudden plunge in world stockmarkets may break that pattern of price-sensitive gold buying among private investors.
Because for investors wanting the insurance which physical gold has historically offered during periods of stock-market stress, that strategy is no longer an option.
Compared with the number of private investors choosing to sell bullion in January, the number of people buying gold fell as prices rose in January.
That extended the pattern seen almost without pause since Donald Trump won the US presidential election in late 2016.
Prior to Trump's victory, the Gold Investor Index – built solely from private-investor trading on BullionVault, the world's largest online market for physical precious metals – moved together with prices in 45 out of 84 months on our data series (or 53.6% of the time).
Since Trump's win, in contrast, private investor sentiment moved in the opposite direction to month-average Dollar gold prices in 13 out of 15 months (86.7% of the time)
January 2018, for instance, saw gold prices rise at the fastest pace in almost two years in US Dollar terms, gaining 5.6% on the monthly average.
In response, the number of gold buyers fell 9.6% from the month before, while the number of sellers jumped by 58.9%. Together, that drove the Gold Investor Index down from 55.3 in December – the sentiment indicator's highest reading of 2017 – to 52.7 last month, its lowest reading in 5 months.
The S&P500 index meantime completed its 10th consecutive monthly gains – a bull run only matched or bettered once in modern history, back in 1958.
Based solely on private-investor trading on BullionVault, the Gold Investor Index tracks the balance of buyers over sellers across each month.
Peaking at 55.3 in May and December 2017, the index hit a series high of 71.7 in September 2011 (when gold prices topped at $1920 per ounce) and a low of 50.5 at New Year 2015 (when prices sank to multi-year lows).
It would read 50.0 if the number of people starting or growing their gold holdings across the month exactly equalled the number of people choosing to sell.
The Silver Investor Index also retreated this New Year as bullion prices jumped.
Month-average silver prices rose 6.2% against the weakening US Dollar in January, the fastest gain since February last year.
That saw the number of silver sellers on BullionVault jump 61.3%, almost matching the number of buyers as it fell 13.6%.
As a result, the Silver Investor Index fell from December's 5-month high of 53.9 to just 50.8 – its fourth reading near a perfect balance 50.0 since Trump's US election victory.
By weight, BullionVault customers' silver holdings were unchanged last month from New Year's Eve at a record 700.5 tonnes.
Gold holdings slipped by 123 kilograms from December's new record total, reversing one-third of that month's inflow (the heaviest of 2017) and cutting
the total stored in specialist vaults in London, New York, Singapore, Toronto and Zurich to 38.5 tonnes.
February's stockmarket slump has already seen trading and demand jump. Whether this month's total demand to buy investment gold breaks the price-sensitive pattern shown above depends on how long – and how deep – this equity crash proves.
Gold isn't guaranteed to rise when equities fall. Indeed,
it may drop amid a severe crash if fund managers sell to cover losses on other assets. But that's part of gold's role as insurance, because it offers a deep and uniquely liquid market of diverse buyers, from microchip makers to Chinese households celebrating next week's Lunar New Year and Indian jewelers stocking up for the spring wedding season.
And across longer periods, the historic data repeatedly show gold rising to offset losses from protracted falls in the stock market. Which is why demand from the least price-sensitive buyers – of central banks, hedge funds, banks, money managers and other private investors – tends to grow alongside stress in the financial markets.
