Holdings of gold in exchange-traded funds (ETFs) hit record highs this week as investors sought to move their assets to safety. Total ETF holdings rose to over 2,570 tonnes, eclipsing the previous high set in 2012. This comes at a time when stock markets are still near their all-time highs, making it unusual that both stocks and gold would be gaining at the same time.
The disadvantages of investing in gold ETFs versus other gold investment vehicles such as a gold IRA are well known. But gold ETF demand is still a strong proxy indicator for overall gold demand among investors. And given the relative ease with which investors can invest in ETFs, the initial moves in demand seen among gold investors might be seen first by seeing increases in ETF holdings.
Even in the face of strong stock market moves, demand for gold remains strong. Much of the performance of stock markets in recent days has been due to massive amounts of liquidity injection by both the Federal Reserve and the People’s Bank of China, with both central banks trying to restore confidence in markets due to coronavirus fears.
With the Chinese economy all but shut down, companies reliant on Chinese parts and products grinding to a halt as they no longer receive their necessary inputs, and people around the world continuing to come down with coronavirus, investors around the world are looking for safety. The fear of an economic slowdown is now becoming a reality. If this health crisis persists, global growth could see a major hit in the first quarter of this year and beyond.
No one could have expected that something like this would occur. And no one would have guessed that a global recession would have been precipitated by a pandemic virus. But often it’s the unpredictable wild cards that spiral out of control and lead to the bottoms falling out of markets. This one may not be any different.
While investors may still be sitting on nice gains in their 401(k)s, those gains won’t last forever. Once the reality of the global economic slowdown sets in, stock markets will start to drop, and losses will start to add up. Investors who anticipate that and hedge their investments by investing in gold will be protected when that finally happens, while those who hope for central banks to continue bailing out markets will be sorely disappointed.