The gold plunge in April was no secret. It shed more than $200 an ounce and suffered its worst moment in 30 years. If you heard about the historic fall through the major networks, you may have ascertained that investors had given up on gold and moved their money into stocks, dollars and other investments.
Contrary to the news reports and analysts, the diverse group of gold investors had their own individual motivations, either looking for the nearest exit or eagerly jumping in to add to their portfolio while prices were falling.
But why?
In broad terms, the gold market can be separated into two camps: short-term and long-term investors.
Short-Term Gold Investors
Short-term investors are generally financial professionals, and may include hedge and mutual fund managers along with institutional traders. They primarily play on momentum, jumping in and out for short periods of time. These investors tend to be sensitive to trends and rely heavily on technical analysis.
Short-term gold investors predominantly put their money in Exchange Traded Funds (ETFs), which is essentially a stock index that tracks the gold market. In other words, they’re not investing in physical bullion.
With their ears to the ground, short term investors also pay close attention to what big banks and institutions have to say. So when Goldman Sachs downgraded its 2013 gold forecast on April 10, gold ETFs saw large liquidations.
Many of these traders took notice of gold’s dramatic rise over the last decade, making bets accordingly. But with the stock market’s recent performance, many have pulled out of gold, seeking quicker profits elsewhere.
Long-Term Gold Investors
Long-term investors are generally private, individual owners of physical gold, including coins, bars, and even jewelry. They often place funds in ETFs, although not on the same scale as short-term investors.
Some of the world’s central banks are also long-term buyers of physical gold, amassing the precious metal for national currency reserves.
The primary motivation for long-term investors is store of value, as they have more faith in gold and other precious metals than fiat currencies like the U.S. dollar. So when the price of gold suddenly dropped in April, many long-term investors rushed in to purchase coins, bars and jewelry at extremely low prices.
According to ZeroHedge and the World Gold Council, demand for physical gold in China jumped 20% in the first quarter of 2013 while ETF holdings declined 7% during the same time period.
An Optimistic Outlook
In years past, owning a hedge against inflation motivated both short- and long-term investors. Yet with large institutions like Goldman Sachs claiming inflation is in check, many short-term investors have quit concerning themselves with inflation.
What’s emerged is a disconnect between short- and long-term gold investors.
While ETFs continue to experience outflows, and institutional investors continue to “short” gold, physical investors have stepped-up their purchasing in recent weeks.
It’s clear from sales data and overseas demand that physical, long-term buyers still have positive attitudes toward gold. That’s why many analysts — including us — believe that the tightened expectations, which have led to a sharp sell-offs, aren’t as widespread as so many thought.
Only time will tell where the gold market goes. Yet based on historical data and trends, it is poised to do well.
What Are Your Thoughts?
Are you a short-term or long-term gold investor?
Do you think gold will do well in the long-term?
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