Insider Activity Illustrates the Value of Gold

The equities rally is still going strong. Despite a few setbacks the S&P 500 is up 9 percent since the U.S. Presidential election. However, there is one group that hasn’t joined the party: the people running the companies. Corporate insiders are purchasing shares of their business at the slowest rate in 29 years. Meanwhile, their selling activity is above average. If investors are having such fun why are CEO’s sitting on their hands?

“The fact that we’ve gotten more selling is a sign of concern that maybe the market has gone a little too far too fast,” remarked one strategist at investment research firm Ned Davis. His comment echoes the pervasive sentiment among insiders that valuations on equities are running high.

Today, the “Buy/Sell” ratio, which compares insider buying to selling, is at the lowest rate in 29 years. This metric illustrates that insiders have muted expectations about share price growth. Insiders frequently purchase shares of their company when they believe the price is undervalued. The recent data suggests insiders have little reason to believe the share price of their companies will increase.

Nine years into the bull market some are questioning how much higher valuations can go. These questions are leading some to bolster their gold holdings. As investors become concerned with hesitant insiders, there’s renewed interest in “safe haven” assets like gold.

The term “safe haven” is a bit misleading. No asset is always safe. A risk is inherent in any investment. However, this term is fitting in the context stock market declines. Gold has often rescued investors during periods of declining S&P 500 values. This phenomenon was most apparent between 2000 and 2002 and in the period ranging from 2007 to 2009. While equities dropped 43 percent and 50 percent respectively, gold returned 16 percent and 26 percent over the same periods. Investors should view gold as part of a whole. That is, gold works best as part of a cohesive strategy. The reason: the asset helps buoy a portfolio during a downturn in equities.

Investors are beginning to mirror trepidation from insiders. Gold is now at its highest level since November. Investor purchases have driven the price up more than 11% for the year. It’s not surprising that the behavior of ordinary investors would follow insiders. CEO’s are often the first to act on available information. As the total picture of insider activity starts to develop investors eventually take note and respond accordingly.

Meanwhile, measures other than insider trading illustrate a pullback from recent optimism. The CBOE Volatility Index (VIX) or “fear gauge” grew by approximately 14% this month. This increase has put the index considerably higher that the average seen in the first quarter of this year.

These various signals are broadcasting the same message: valuations are running high, insiders are staying put, and volatility is up. This confluence of events is a reminder of how gold can buttress a portfolio if, and when, a major market downturn occurs.