What Happened Last November Should Be a Wake Up Call for Gold Investors

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The price of gold was up nearly 25% in 2020, using SPDR Gold Shares as a proxy. That’s an impressive gain for this precious metal, and helped to push shares of miners like industry giant Newmont Mining up 37%, and relatively tiny Eldorado Gold higher by 65%. So far, 2020 looks like an incredible year for gold and the companies that mined for it. But dig in a little bit and there’s a reason to be worried about the future — November 2020 may prove to have been a pivotal month.

The big advance

On the surface, the gold story in 2020 is pretty easy to understand. Gold is viewed as a safe haven asset, which investors have historically bought when they are concerned about the stock market and the world more broadly. Gold and bonds often compete for the safe haven trade, but with rates so low, one of the key attractions of bonds — their ability to earn interest — wasn’t as big an issue. So gold had a little extra wind behind it in 2020.

And there were plenty of reasons for investors to seek out safe havens in 2020. The most notable, of course, was the global coronavirus pandemic. With countries around the world effectively shutting down their economies to help slow the spread of the novel illness, the world entered into a forced recession. And while equity markets quickly rebounded from a swift bear market early in the year, the economic headwinds were basically as bad as feared when gross domestic product numbers came in.

However, there’s a more subtle issue that investors need to think about. One of the biggest drivers of gold demand in 2020 was from gold-linked exchange-traded funds (ETFs). These entities buy physical gold, allowing investors to trade the metal without having to deal with taking ownership of it. And the ETFs can be bought and sold all day long, something that’s a bit more difficult to achieve with gold bullion and bars. The numbers here are telling.

Less demand for gold?

Through the first nine months of 2020 gold demand actually declined 10% year-over-year, according to industry trade group the World Gold Council. That’s not shocking, given that jewelry is one of the main uses of the metal. So why did gold’s price increase when demand was down? The answer is that demand for physical gold through the first three quarters of 2020 increased by nearly 50%, with much of that increase coming from ETFs. Indeed, ETFs saw inflows hit record levels in 2020.

An ETF that is linked to gold basically has to buy gold when it gets new cash. Thus, these ETFs helped bid up the price of the so-called barbarous metal.

But there was a notable change in November that continued into December. Those strong inflows turned into outflows.

Inflows for the entire year were still strongly positive, but there could be a notable change taking shape. On that front, it is worth noting that gold peaked at a gain of 36% in 2020, so the price of the metal may already be starting to react to reduced investment demand — which is basically what ETFs represent.

What this could mean for gold stocks

Gold is a commodity, so there’s no way to…

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