Divine Capital CEO Dani Hughes and Heritage Capital Paul Paul Schatz analyze Warren Buffett investing in gold, the rise of day-trading apps such as Robinhood and economic and market recovery.
The 2020 gold rush in markets is even starting to destroy some longtime fans of precious metals. Gold futures are close to accounts and up about 28% for the year, while silver has more than doubled since a March hit in the low year. The movements are not entirely surprising, given the scale of the economic shock caused by coronavirus and the countervailing global stimulus led by governments and central banks. Many investors are worried about economic stagnation, an outbreak of inflation as one or the other combination of the two – a recipe for increasing demand for metals seen as a store of value in trying times. But with the rush for gold came an increase in volatility that many traders are not welcome. Both metals have hit about 6% or more of peaks hit this month and are recording larger daily swings than normal, suggesting that gold and silver have joined US tech stocks among the most volatile trades in markets – creating the risk that months of outperformance could disappear in a day if two of frenzied sales have to market as economic conditions turn. “Almost everyone talks about gold …. that’s a warning signal in a way,” said Luca Paolini, chief strategist at Pictet Asset Management, which holds more gold than its benchmark for markets, but may sell some if volatility continues. “At least until the US election, this volatility will continue.”
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Some traders blame the growing popularity of exchange-traded funds that make both retail and institutional investors cheaper, more easily accessible to goods such as gold, silver and other metals. They say that while ETFs such as the SPDR Gold Shares Trust sold by State Street Global Advisors have been part of the market landscape for more than a decade, the rise in ETF buying of gold and silver stands to accentuate price gains, potentially booming intensifying -bust cycle often seen in these and other commodities.
“Because of the very high level of interest in ETFs by retail investors, you may see swings that you have not had in the past,” said Ellen Hazen, a portfolio manager at FLPutnam Investment Management, which bought gold through an ETF in March. However, she believes that the metal provides an effective long-term hedge against inflation.
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Gold-backed ETFs are growing at the fastest rate on record, raising nearly $ 50 billion this year, well above the previous record for annual inflows, according to the World Gold Council. Assets managed by the SPDR Gold Shares and iShares Gold Trust have risen 60% this year, while smaller ETFs such as the GraniteShares Gold Trust are growing at an even faster pace. Investors tend to invest money in metals when they are nervous about the economy and believe that inflation will rise faster than interest rates. Rising inflation reduces the purchasing power of the dollar, which means it costs more dollars to buy the same amount of metal. Low interest rates make the metals, which holders do not offer regular payouts, more attractive relative to income-generating assets such as safe bonds. Low inflation-adjusted interest rates have also lifted equities by making bonds less attractive, forcing many investors to take more risk in equities. The trend explains how gold and equities have been running for months, with the S&P 500 breaking new records last week.
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Gold has averaged a daily movement of 1.2% over the past five weeks, almost doubling the typical swing since the beginning of last year. Silver moves on average almost 4% per day, about three times its normal daily change. The metals have also fallen sharply on certain days, without an obvious explanation – a sign in the view of many market partners that speculators are becoming a larger part of the market. On August 11, gold slipped about 4.5%, while silver fell 11%. And last Wednesday, both metals fell roughly 2%. Many precious metal ETFs are backed by physical gold and silver, but many traders say that inflows and outflows also affect futures markets because the ETFs have become so large that they represent a large part of the demand from investors. ETFs supported by physical gold held at the end of June around 3,620 metric tons, according to figures from the World Gold Council, more than any country other than the US Silver ETFs also represent a large part of the demand from investors. With physical demand for jewelery and bars and coins, ETFs accounted for about 40% of global gold demand in the second quarter, up from 6% in the same period a year earlier. When individuals buy shares of an ETF backed by physical gold or silver, they buy a stake in a trust. The asset held by that trust is metal. One of the ways that traders create a market in the ETF – typically banks and other traders like Virtu Financial Inc. – is physically purchased metal from open market traders, typically from banks such as JPMorgan Chase & Co. and HSBC Holdings PLC, which often trade precious metals. As a result, large inflows signal that the metals are in high demand from global investors, a trend that then helps to dictate sentiment in the futures market. The traders selling to the ETF traders might try to hedge against a price increase by buying futures contracts, thereby creating a different link between ETFs and metal prices.
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The trend may work the opposite way as money flows out of the ETFs. When precious metals tumbled past equities in March, traders said the fall was generally due to investors pulling money out of port metals to raise cash, and outflows from ETFs helped the decline in gold even harder.
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“I really believe this is pure speculation,” said Campbell Harvey, a Duke University professor of finance who argued that widespread use of gold ETFs could cause prices to plummet in the market. “There are some people who are playing the momentum trade … If there is a turning point, they will be crushed.” –Joe Wallace contributed to this article.
