The recent pullback in gold has certainly unnerved long-term investors. It has also seen a dramatic shift in market sentiment. However, recent data shows that this shift in market sentiment has primarily come from shorter-term institutional funds.
When considering gold as an investment, one must consider the timeframe as well as the underlying participants in the market. Market sentiment for every asset class oscillates from overly optimistic to overly pessimistic. The goal for the long-term investor is to use this volatility to accumulate during overly pessimistic times and take profits during overly optimistic times.
According to Barclays PLC (NYSE/BCS), gold-based exchange-traded funds (ETFs) are set to record the weakest month on record. Barclays notes that during the period of February 20–25, the net outflow of gold from exchange-traded products (ETPs) totaled 10 metric tons per day. The vast majority of gold redemptions stem from the SPDR Gold Shares (NYSEArca/GLD) ETF, with a decline of 58 metric tons for the month of February. (Source: Saefong, M., “Gold ETP flows set for weakest month on record: Barclays,” MarketWatch, March 1, 2013.)
While physical gold continues to remain in demand (as we’ve seen central banks around the world, including Russia and China, continuing to accumulate), market sentiment for paper gold has recently become negative.
The net level of institutions investing in long-term gold at the Comex is the lowest since December 2008, and new funds are going to short the gold market. This is becoming a classic battle between the bulls and bears regarding market sentiment for the gold market.
Physical gold is a slower, more long-term market than paper gold. Institutions favor the speed and low transaction cost of paper gold. This also means that volatility in market sentiment can be exaggerated due to the massive amount of funds that can move in and out of any market.
This also means that investors need to be aware that a market can move much further in one direction than may be expected. This isn’t only about gold market sentiment; it’s about every single market in the world. The housing market over the past decade is a great example of market sentiment becoming far too bullish, then crashing and becoming far too bearish.
Chart courtesy of www.StockCharts.com
This is a weekly chart of gold. While the recent pullback in gold prices has been substantial, gold is still above its 200-week moving average (MA). A similar occurrence for market sentiment in gold happened in late 2008. Gold suffered significant selling pressure at that time, before it bottomed and turned bullish once again.
Fundamentally, nothing has changed from the physical gold standpoint. While market sentiment has become increasingly negative regarding paper gold, central banks around the world continue to accumulate gold while they continue to print more money.
While no one can predict when the bottom will occur in gold, I would look to shifts in market sentiment from the large institutional investors. Because they are very fast to enter and exit positions, once they begin to shift their market sentiment for gold from negative back to positive, adding to the already strong demand for physical gold, this will have a very bullish effect on the commodity. Patience is a virtue, and one must wait for the proper opportunity.