So far, 2014 has been a paradoxical year for gold. Many investors aren't even aware that it has rallied almost 8%. On the rare occasion that the financial media mentions the yellow metal, it is only in the context of comparing the recent rise to last year's decline.
In spite of this overwhelming negative sentiment, gold is experiencing a stealth rally as one of the best performing assets of the year. Let's look at some important metrics of the most under-valued sector in this market.
So many investors want to believe that last year was the death knell for the yellow metal that they've stop paying attention to the technical metrics responsible for driving the price down. These metrics have already started to reverse.
Last year, technical speculators - and everyday investors trading behind them - influenced gold's price more than anything else. Notably, 2013 was the first year since their creation in 2003 that gold exchange-traded funds (ETFs) experienced a net outflow of their gold holdings. This played a pivotal role in driving down both the gold price and investor expectations for the yellow metal.
Gold ETFs sold off their holdings by a whopping 881 metric tons last year. GLD, the largest fund, sold 550 of those tonnes on its own. This was influenced by, and then compounded, the effects of extremely bearish gold futures speculators, whose large net-short positions were responsible for some landmark drops in the gold price throughout the year. As is typical with markets, negative sentiment became a self-fulfilling prophecy.
For the previous decade up until last year, physical gold demand had driven the gold bull market. However, ETFs have over this time accumulated a greater and greater share of the market. Thus, last year's sudden ETF sell-off was enough to drive total global gold demand down 15% year-over-year. Even 28% growth in bar and coin demand - resulting in record-breaking total demand - couldn't counter the market's bearish turn. But ETFs are getting back in the game. GLD started adding to its holdings again in February, the first increase since December 2012. And by mid-March, COMEX gold futures contracts had the most net-long positions since November 2012.
Gold Versus Equities
Why are ETF and futures traders reversing their previously bearish positions?
Prices are up in every area of the gold sector. GLD and COMEX futures are both up more than 6% this year. GDX, one of the broadest gold-mining ETFs, is up more than 12%. Even with a sell-off in the last week of March, physical gold was up almost 8% in the first quarter.