What happened to Gold? Many woke up over the past few days to see the most recent FOMO trade take a hit. Now is a good time to reflect on the gold (and by extension, silver) market dynamics.
Historically, fundamental gold demand was generally accounted for by jewelry, bars/coins, and industrial applications via high-end technology applications. Annual demand by banking (including countries’ central banks) was negligible. 2004 introduced the first
gold ETF giving investors a new investment vehicle to attain gold exposure. Since 2004, the ups and downs have been driven by the ebb and flow of the ETF cash flows. Gold prices were driven down between 2013 – 2015 as gold ETF outflows consumed the market. On the flip side, gold prices advanced in 2016 and 2020 as gold ETFs saw net inflows. Gold prices fell again between 2021-2022 as ETF demand waned. Hence, gold ups and downs are influenced by investors, often based on fear or speculation disguised as investment.
Few have heard of the Basel Accords. These are international banking standards to shore up banks after the Credit Crisis. The most recent iteration, Basel III, recognized gold and silver as Tier 1 assets, placing gold and silver on par with cash to satisfy reserve requirements. Since 2022, banks started accumulating gold and silver, driving up demand. Many outlets and gold/silver purveyors suggested something nefarious was afoot as banks began hoarding gold/silver. The real reason was the Basel III agreement. (A typical Occam’s Razor dilemma, nothing nefarious was happening.) As banking gold/silver coffers are filled, demand will ease, at which time banking demand will be dialed back to a maintenance issue.
Since 2020, fundamental demand (jewelry and technology) has taken a back seat to banking and investor demand. As previously mentioned, gold prices are highly influenced by investor demand, primarily via ETFs. Over the past few years, gold ETF demand accelerated, resulting in skyrocketing gold prices.
Enter the FOMO trade (Fear Of Missing Out). Investors were prompted by gold vendors and articles (again, often without disclosing the real reason) that banking was accumulating gold. These spurred investors to request gold coins, bars, and ETFs (green bar in chart), which drove gold prices higher, which caused more interest… driving prices even higher. Rinse, repeat. At some point, finicky investors may determine gold prices are not representative of fundamentals and remain afloat by buy/sell transactional volume. What happens when investor interest dries up, and fundamental demand is not enough to support the prices? The recent vigorous pullback of gold and silver prices could be a canary in the coal mine.
Investor sentiment is always a good cautionary note. When investor interest overwhelms a market or trend, it’s always good to take a step back to determine if FOMO is in play. FOMO can be encouraged by traditional and non-traditional information sources. The problems with FOMO are 1) we can become enveloped in the spin, 2) lose focus of the big picture, and 3) it becomes difficult fairly ascertain risks. One clue could be charts. Be careful of parabolic charts like displayed above, often a FOMO warning sign.
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