I have not updated my “sentiment” analysis on gold in nine months. With gold defying the skeptics yet again (I think this is at last the fifth year in a row of general defiance) with fresh highs, I think this is a great time to take a fresh look.
This analysis is relatively simple. I use Google Trends on the terms “buy gold” and “sell gold” to see whether any particular anomalies have occurred. This view has interested me mainly because two anomalies appeared in 2008 that seemed to flag large changes in the price of gold. In early 2008, searches using “buy gold” and “sell gold” spiked as gold surged toward $1000. That turned into a peak that lasted for another year. After the financial world collapsed in September, 2008, searches on “sell gold” remained flat but “buy gold” surged again. These searches spiked around October 10, 2008 and gold printed a secondary peak. Google provides a great headline from Bloomberg on that day: “Londoners Queue on Sidewalk to Buy Gold in Rush for Money Haven.”
Since those days of panic, these searches have maintained wide ranges. “Buy gold” searches saw brief surges in activity in early 2009 (that was really likely a continuation of interest from late 2008), late 2009 when gold broke through $1000 on its way to another temporary peak, and this past April as gold soared to fresh all-time highs before cooling off for another two months. Spikes in searches for “sell gold” occurred during the temporary peaks in gold in early 2008, late 2009, and in April. In other words, anomalies in searches on either term work as strong indicators of temporary highs in gold prices.
click to enlarge images
Searches on gold continue to move in a wide range. News references have occasionally spiked this year.
Source: Google Trends
Note that searches on just “gold” are not quite as informative as “buy gold” or “sell gold” given the lack of spikes in 2009 and 2011 and a false signal in early 2010.
Source: Google Trends
The first graph shows that news references using “buy gold” and “sell gold” have increased more than usual this year: twice for “buy gold” and once for “sell gold.” The resulting relationships are quite mixed. Gold hit a low for the year on the first increase in “buy gold” news references. The expected relationship was more consistent in 2009 when news references on “buy gold” surged with two strong rallies in 2009. The second run came as gold hit fresh all-time highs. The unusual increase in “sell gold” news references has occurred this month.
I am not quite sure what to make of the general disconnect between anomalies in searches on gold and news references for gold.
While these search trends may be useful for short-term trades in gold, it is difficult to get an overall picture of what this all might mean for a longer trend without creating a ratio. Google allows downloads of the data for the search volume index (but not the news reference volume). I divide the fixed search volume index on “buy gold” by the price of the SPDR Gold Trust (GLD) to create a “Gold Enthusiasm Index.” This ratio spiked in late 2008 as searches ran ahead of prices, but it has consistently trended downward ever since.
In other words, enthusiasm for gold has yet to catch up with prices although temporary peaks in gold have correlated with temporary surges in search interest. On a relative basis, enthusiasm for gold continues to wane. A typical contrarian view interprets this behavior as indicating that gold likely has plenty of upside ahead despite hitting fresh all-time highs this month. After all, major central banks around the world likely have a lot more printing of paper currency to do before we are finally on the other side of our current era of rolling financial traumas…
I discussed the limitations of this analysis in the last post. This time around I dropped the comparison with searches on “buy bonds” and “sell bonds” because the Google Trend data seem incomplete and uninformative. Google also appears to have adjusted its trend data for “buy gold” and “sell gold” in such a way that only data as of late 2005 is usable now. Finally, I made one change this time around by looking at searches and news references globally instead of just in the U.S. The trends appear dominated by the U.S., but I want to be able to catch an abnormal spike for any reason.
Recent gold-related links I have fond extremely helpful and/or interesting:
- “Why Gold Is Not a Bubble“
- “Central Banks’ First-Half Gold Buying Surpasses 2010 Total“
- “Fewer verbs and nouns in financial reporting could predict stock market bubble, study shows“
For archived commentary on gold, click here.
Be careful out there!