Jeff Clark, Senior Precious Metals Analyst
JUN 23, 2017
There’s an advantage to being well-connected in an industry: you can sometimes be among the first to spot a change in trend.
And that appears to be exactly what’s happening in the gold industry.
Retail demand for physical gold products has been strong over the past few years, and lukewarm from the institutional crowd. But now traders and dealers are witnessing a shift. Retail demand has gone soft—but interest from institutions and high net worth investors is spiking.
US Mint sales of gold coins—a reliable barometer of retail demand—were strong in January but otherwise are roughly half of normal levels this year. Meanwhile, holdings in GLD (SPDF Gold Shares, the largest gold ETF) just hit their highest level of the year. And hedge funds and other large speculators increased their bullish bets on gold by 37% the last two weeks of May, the most since 2007.
Why the sudden about-face?
For retail gold buyers, price tends to be the determining factor. If gold spikes, they’re likely to hold off on new purchases and wait for a better deal. If the price drops, they tend to load up. This has been a fairly reliable trend.
But why the sudden shift into gold from the institutional crowd?
“It was hard to tell the gold story in 2012, because the stock market wasn’t at all-time highs,” says Peter DiMaria, a trader at Gold Bullion International in Manhattan.
What Peter and his group at GBI have witnessed over the past several months is quite curious. They’re suddenly getting interest in gold from brokers, institutions, and high net worth investors. He says it takes half as many phone calls to schedule appointments, for example, as it did before. In some cases investors are cold-calling them. Purchases have picked up considerably.
“They’re nervous that underlying trends could reverse,” Peter explained. “So they want a hedge in place.”
The thing is, it’s not just the stock market at all-time highs that has led to renewed interest for history’s oldest form of money.
“It’s everything,” Peter stated soberly. “This group is nervous about a reversal in the stock market, but also the bond market, the real estate market, the dollar, inflation—you name it. Most everything is stretched.”
Here’s what “everything” looks like…
US Stock Market: At all-time highs.
US Bonds: The 36-year bull market in government debt could soon end.
US Real Estate: Frothy once again…
US Dollar: Reversing a 6-year uptrend?
US Interest Rates: At multi-generational lows…
US Inflation: Consumer prices have greater risk of rising than falling.
Length of Economic Expansion: The time between US recessions is now the 3rd longest since 1785…
Add it all up and no wonder the institutional crowd sees the need for a hedge.
The catch is, with so many assets at historic extremes, there aren’t many places to hide. Institutional investors see gold as one of those places for two reasons: one, despite some recent strength, the price is still off its 2011 high by 32%, so it represents good value relative to these other major asset classes.
And two, gold is a direct hedge against a reversal in virtually all of these assets. If any (all?) of their trends reverse, gold is likely to rise and help offset the decline.
There’s a final consideration: the institutional and high net worth crowd represent market-moving wealth. If their interest in gold picks up—which Peter thinks is likely to happen when these markets do inevitably reverse—the spike in demand could ignite the gold price and see it take off like Secretariat at the Belmont Stakes.
With so many major asset classes stretched, the need for a hedge is high. An increasing number of institutional and high net worth investors are using gold to give them that hedge relatively cheaply and easily. What about you?