Gold reacted early in last week’s equity market sell-off as the “safe haven” asset one might expect.
As the equity markets fell on Monday, Feb. 24, GLD, the gold bullion ETF, spiked to a high of $158.53, close to 2.5% higher than the previous Friday’s close. The April 2020 futures contract for gold reached around $1,690.
According to MarketWatch, the 52-week range for gold’s continuous futures contract has been $1,267.30–$1,691.70.
Bespoke Investment Group said gold’s early move higher on Feb. 24, was the “first gap up of 2% or more since November 9th, 2016: the day after the 2016 presidential election.”
Source: Bespoke Investment Group
On Feb. 24, GLD hit its highest level since 2013.
Source: Google Finance
Something interesting then happened for the price of gold for the rest of the week.
Gold gave up much of its 2.5% intraday gain on Feb. 24, ending that Monday with an increase of just under 1%.
The rest of last week was volatile for all asset classes, and GLD, surprisingly, put in a weekly decline of almost 4%. Of course, this was far less than the double-digit losses seen by the major market indexes, with the Dow Industrial falling 12.4% (more than 3,500 points), ending its worst month since 2009. It was the fastest decline into correction territory from a record close in history, according to Dow Jones market data.
Many investors were probably asking, “What happened to gold’s ‘safe haven’ status?”
Several explanations have been put forward:
1. As seen during the last financial crisis, gold does not always have a short-term negative correlation to the equity markets. Indiscriminate market selling can hit all asset classes at the same time, especially during times of rapidly spiking volatility (as measured by the VIX), and heavy trading volumes.
According to CNBC,
Barron’s noted last week,
2. There was a good amount of media commentary that margin calls were widespread last week, forcing investors to liquidate holdings across the board.
MarketWatch interviewed Brien Lundin, editor of Gold Newsletter, who said last week,
3. There was also speculation that the lowered outlook for global GDP growth due to the fallout from COVID-19, especially in China, may impact both industrial and consumer demand for gold in the short and intermediate term.
MarketWatch added an interesting, though lamentable, sidebar to this side of the story:
4. Gold’s worst day last week was on Friday, Feb. 28, and the selling picked up heavily into the close as news was breaking that Fed chair Jerome Powell gave indications that the Fed might be shortly entertaining unanticipated interest-rate cuts. This was somewhat surprising, as lower interest rates should theoretically support gold prices.
According to Reuters,
Although there were still losses on the Dow and S&P 500 on Friday, equity markets came back into the market close, and GLD ended the day with about a 4% loss.
With widespread anticipation that there may be a significant response coming shortly by central banks around the world, the outlook for gold should be positive.
This is especially true if falling interest rates end up resulting in negative real returns for Treasurys, says a white paper by Flexible Plan Investments:
Note: Data covers 1973–12/31/2018. Definition: When the current total return of a 10-year Treasury bond minus the expected rate of inflation is less than zero.
Source: Flexible Plan Investments
Mr. Lundlin, quoted previously, believes interest-rate cuts will be very positive for precious metals:
The market action on Monday, March 2, with both equities and gold rallying strongly, would seem to affirm Mr. Lundlin’s outlook and the faith in actions by central banks to help to stabilize markets over the short term. But the market will likely respond more to actual progress (or a lack thereof) in minimizing the impact of COVID-19 than it will to monetary policy.
(Editor’s note: On Tuesday, March 3, Australia’s central bank cut its benchmark interest rate by one quarter percentage point to a record low of 0.5%, and the U.S. Federal Reserve made an emergency interest-rate cut of half a percentage point, reducing the U.S. benchmark interest rate to just below 1.25%.)
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