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Could Investors’ Extreme Bearishness on Markets Turn Them to Gold?

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Dec. 21 2018, Updated 7:30 a.m. ET

Renewed interest in gold

As we highlighted in the Can Gold Continue to Rise on Equity Market Weakness?, as volatility (VIX) increases and markets worry about growth prospects, gold (GLD) (GDX) investments usually increase. According to a report by the World Gold Council, holdings in gold ETFs rose for the second consecutive month in November to 21.2 tons to a total of 2,365 tons. The renewed buying interest from investors was on account of increased market volatility and the equity market sell-off.

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Restoration in gold’s safe-haven status

While gold prices have languished for the most part of 2018, October saw a resurrection in the metal’s safe-haven appeal. During October and November, gold prices gained 2.5%, while the S&P 500 (SPY) was down 5.0%, and the NASDAQ Composite (QQQ) fell 8.9%. The SPDR Gold Shares (GLD), the world’s largest gold-backed ETF, led the inflows with 7.7 tons in November, while the iShares Gold Trust (IAU) added 5.4 tons.

Risks leading investors to gold

The Bank of America’s latest fund manager survey shows that the bearishness among investors is increasing but is still not enough to trigger a “buy” signal for risk assets. Under such a scenario, gold could be a go-to asset for investors not only to preserve their capital from eroding but also to provide potential gains.

The factors that weighted negatively on gold prices in 2018 aren’t expected to remain bearish for gold in 2019. One key factor was the Fed’s rate (TLT) hikes and aggressive stance on future hikes. If the Fed’s recent dovishness materializes, it would be a huge positive for the non–income-yielding metal. The solid equity performance has been another factor weighing down gold in 2018. However, as volatility is rising and earnings and margin prospects are weakening, future gains could be limited.

You can read Could Market Risks Bring Investors Back to Gold in 2019? for a look at more factors that are driving gold and its outlook.

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