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Why January Gold Rallies Don’t Last

There’s something about January that brings the gold bulls out. In the past five years, the yellow metal has risen at least 3.3% during January. In 2019, it rose 3.5% in the first month.

January’s winning ways for gold extend even further back than that. Of the past 20 years, 14 have had Januarys in which gold ended higher.

It certainly seems that gold buyers like to make their moves when the New Year rolls around, and this year is no different. Physical gold ETFs are seeing solid inflows this year, including $1 billion for the SPDR Gold Trust (GLD), $639 million for the iShares Gold Trust (IAU), $187 million for the SPDR Gold MiniShares Trust (GLDM) and $133 million for the GraniteShares Gold Trust (BAR).

The amount of gold now held by ETFs, 73 million troy ounces, is at the highest level since 2013, according to Bloomberg data. That’s a 60% rise from the recent low point for holdings in 2015, but still below the all-time high of 82.7 million in 2012.

 

Total Gold ETF Holdings

 

Hedging Their Bets

There are myriad potential explanations for the sudden interest in gold. Slowing global growth, a dovish Fed, lower interest rates and financial market volatility are all plausible reasons investors are buying now.

Indeed, December was a rough and scary period for investors, as the S&P 500 flirted with a bear market, and uncertainty about trade and Fed policy weighed on the economic outlook. Stocks may have bounced back sharply in the past month, but with December still fresh in their minds, investors are hedging their bets by diversifying into gold.

Central Bank Buying Frenzy

What’s more, investors aren’t the only ones diversifying. Central banks have been some of the biggest buyers of gold recently, accounting for nearly one-sixth of global gold demand.

According to the World Gold Council, central banks purchased nearly 21 million troy ounces of gold last year, up 74% from the year before and the second-highest annual total ever.

The primary buyers were Russia—which completely sold its U.S. Treasury holdings to fund its purchases—as well as Turkey, Kazakhstan, Hungary, Poland and India.

“Heightened geopolitical and economic uncertainty throughout the year increasingly drove central banks to diversify their reserves and refocus their attention on the principal objective of investing in safe and liquid assets,” said the World Gold Council, which also noted that total gold demand increased by 4% in 2018, putting it close to the five-year average level.

Elusive Breakout

With ETF investors and central banks simultaneously buying gold, it’s no wonder the yellow metal has been rallying. But that doesn’t mean the price gains will continue.

There has yet to be a true breakout for the yellow metal. Demand has risen, but not enough to move the needle on prices, especially as supply has crept up too.

As gold demand flatlined for the past five years, so too have gold prices. In fact, five years ago today, prices for the metal were trading at nearly the same level as they are now, close to $1,300. That’s not necessarily a bad thing; gold has held its value, which is the only thing some investors want.

 

Spot Gold Price

Graphs source: Bloomberg

 

Others who are looking for a bigger move in prices may have to wait longer. Eventually, gold may break out—2019 could even be the year—but something has to fundamentally change before investors are willing to pay significantly higher prices for the yellow metal.

Until then, January spikes in gold are likely to be short-lived.

Email Sumit Roy at sroy@etf.com or follow him on Twitter sumitroy2

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