Gold Traders Are Back to Loving Gold

Bloomberg reported Friday that gold traders are the most bullish they’ve been since the gold bear market began two months ago but that’s probably not what equities investors want to hear.

In its survey, Bloomberg found 19 analysts that believe gold price will rise next week. Eight others were bearish and six were neutral. This is the largest proportion of bulls since March 22 and gold ETFs are set to have their second lowest outflow levels since March.

When the gold market crashed in April, the demand for gold coins and jewelry soared. The U.S. Mint said that it would have record sales this year; so much that it only recent began reselling the One-Tenth Ounce Gold Coin for $195 after its supplies ran out. Demand is so high that the Mint, apparently, can get away with charging a 38 percent premium to spot gold prices. Demand is so large in India that the government is curbing imports.

So the physical market is strong but now the investment markets—the speculators—are jumping on board too. That’s great news if you’re long a gold ETF or futures but if you’re an equities investor, that isn’t what you want to hear.

You want to hear that gold is on peoples’ fingers—not on the buy list of speculators. Regardless of what some of the data show, the markets still see gold as a risk-off asset. There’s no reason to play the gold market if you can invest in equities but when markets are uncertain, gold regains its brilliance.

What’s causing the interest in the metal? All the things the bulls don’t want to hear. Stock markets have returned to volatility, the dollar is locked in currency wars with the yen and the euro, the world’s third largest economy, Japan, is plunging faster than investors can comprehend, and economic data is looking soft and unimpressive.

Add to that a market that looks poised to end the week lower, and the reason for the bullishness in gold becomes clear.

Looking at the charts, 2013 has seen a strong return to the reverse correlation of gold and the S&P. As the equity markets have gone up, gold has gone down. Thursday’s price action is a strong example of this trend. Comparing the SPDR Gold Shares GLD to the S&P, the inverse correlation is perfectly timed. When the market reversed course, so did the ETF.

One day doesn’t make a trend but six months does and if the trend is to be believed, the bullishness in gold this week may not be a good sign for the markets next week.

Disclosure: At the time of this writing, Tim Parker had no position in gold.