2020 saw record gold investing demand. Now what?

TWO YEARS AGO last Friday, the World Health Organization made a statement about the new flu-like virus taking hold in Wuhan, China, writes Adrian Ash at BullionVault.

The virus had also been confirmed in a patient in Thailand.

But don't worry, the WHO said...

...doubling down on a statement it made 2 days earlier claiming "there is no clear evidence" that the (then) novel coronavirus was passing from person to person.

Yet barely a week later, and with the Chinese authorities admitting that 6 people had already died as a result of the virus, "Human-to-human transmission is occurring," concluded the WHO's first emergency committee meeting about Covid-19, at which "a preliminary R0 [reproduction number] estimate of 1.4-2.5 was presented" to staff.

"Of confirmed cases, 25% are reported to be severe...All countries should be prepared for containment, including active surveillance, early detection, isolation and case management, contact tracing and prevention of onward spread."

That was 23 January 2020. The world leapt into inaction.

"The current risk to the UK is considered low," the UK's public health chief declared the next day. (He was more worried about e-cigarettes and, get this, loneliness)...

...while the USA then declared a public health emergency 3 days later, but didn't actually do any more about it than it had about the "opioid crisis" first declared in 2017...

...and Italy suspended flights to/from China on 31 January after 2 confirmed cases in Rome.

The rest isn't history, not yet.

But if it feels hard to recall those happier, almost care-free days of 2 years ago...

...somewhere between the captain of the Titanic bidding his dinner guests a 'good night' and Europe sleepwalking to war in summer 1914...

...then take heart from the financial markets.

Because even as the Covid Crisis took hold, global stock markets would set a fresh all-time high in mid-February on the MSCI World Index...

...rising as Jerome Powell at the US Fed and Christine Lagarde at the European Central Bank both called for governments to borrow and spend! Spend! SPEND! if the virus hit the economy.

World stock markets then took fright... 

...crashing by one-third inside 6 weeks...

...only to recoup it all within the first 5 months of the pandemic as Powell, Lagarde and their major central-bank colleagues ran to print! Print! PRINT! in support of all that historic government spending and stimulus.

Equities haven't looked back. In fact, the MSCI World Index has set a new record high on very nearly 1-in-4 of all trading days since August 2020.

One. In. Four.

Back in early 2020, buying gold made sense to many people as the pandemic struck.

A record number of people in fact.

They bought a record quantity of gold between them during 2020...

...and those record inflows drove the precious metal up to fresh record highs of its own in terms of all currencies that summer.

But gold has since edged back as the Covid shock receded and stock markets kept rising.

Gold has also failed to jump even as inflation has jumped...

...driven first by the year-on-year "base effect" of crude oil prices going negative during the Covid Chaos of spring 2020...

...and then spurred higher again, jumping to the worst levels in two, three or four decades (depending on where you live, earn and spend) as sluggish post-lockdown supply chains crashed into pent-up post-lockdown demand.

Plainly this is very disappointing if you bought gold in 2020 as a way of making money.

Hindsight says you should have sold gold in August that year, taking the same 40% gain from the eve of the Covid Pandemic which global stock markets now offer today (as our chart shows above).

If you bought gold as a route to quick gains, then whether you now hold or sell depends on why and how far you think it might now rise...or fall...from here in 2022.

But what if you invested as part of a wider portfolio, buying gold as a form of 'insurance' for the other assets you hold?

That's the strategy which most of 2020's gold buyers appear to have followed.

And so far, the vast bulk of that money remains in place...

...including the big money of asset managers, family offices and other longer-term investment professionals. Which in the final analysis is what matters to prices.

Our chart above compares the 'hot money' of Comex futures and options traders (red) with the cash-price exposure of gold-backed ETFs (green).

Where gold derivatives don't involve any metal, they do offer super-sized gains (and losses) through the magic of leverage. Yet despite gold's infamous (if wrong) reputation for loving bad news, and so despite the out-sized gains which hot-money traders might have expected from a global pandemic and economic crash, the more boring ETFs have extended their dominance of "exchange-traded" exposure during the Covid Crisis...

...averaging 11 times the size of net speculative Comex positions since January 2020 against just 4 times during the global financial crisis of 2007-2012.

No, gold ETFs aren't a perfect proxy for all physical gold investment. Yes, owning vaulted gold as physical property adds legal certainty, and it can be cheaper, as well as more flexible (24/7 trading, a choice of global locations) if you use the world's No.1 online and smartphone provider.

But like our own data for BullionVault's customer behaviour, the ETF data are freely available, they represent actual investment (rather than being clouded by the collectibles-and-horrid-pricing issues of coins and small bars) and they track access to gold that is popular among "generalist" investors, not least portfolio managers who tend to turn to gold only when it matters, rather than building or holding a position whatever the weather.

Following the record-heavy ETF inflow of 2020, almost 80% of that ETF growth remained in place as 2021 ended. Hence the solid pricing as other sources of demand picked up, from China to India to central banks and coins. 

But what 2021 couldn't do, however, was repeat or beat the previous year's historic inflows of gold investment cash. Hence the disappointing price action for speculative buyers...

...not even in the face of surging inflation.

What comes next? 

Rising interest rates pose a potential threat to gold. It pays nothing remember, so better rates on cash or bonds...even if still below inflation...could sap its price strength from 2021's new record-high annual average.

But against that, an increasing number of analysts and pundits are worried about a "Fed mistake"...

...meaning that it pushes ahead with raising interest rates too late to fix last year's inflation bump, while at the same time hitting the post-lockdown economy...

...now more indebted both in the public purse and the private sector than even at the peak of the debt bubble bursting in 2007-2012...

...and with the US stock market in particular vastly more over-valued against corporate earnings than any time outside the eve of the 3-year Tech Stock Crash starting New Year 2000.

So which is it? Gold down on rising rates? Or gold up as the bull market in equities finally keels over?

Not knowing the future is why investors spread risk. And for the majority of gold investors that cloud of unknowing is why gold investing appeals.

Last year's disappointment in no way diminishes gold's longer-term use or history as a hedge against bad things happening to the other assets you own.

But that's not to say 2022 will see prices rise for certain. And holding gold as insurance starts with having a spread of other assets to insure.