What. A. Drop.
I’m of course talking about gold.
After a rather peaceful sleep, I woke up early on Saturday morning to catch the close of the US market.
And what was I greeted with?
Check it out:
US dollar gold price — hourly chart
21 February–2 March 2020
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| Source: Goldprice.org |
That my friend, is a US$59 price fall — or some 3.4% drop in one session.
Up until last week, gold has enjoyed a spectacular rally, riding on the fear of the coronavirus.
While Friday’s fall was a large move in a short space of time, I’m not surprised.
In fact, I should warn you that I expect it to fall further.
At this stage another US$40 fall can be expected, bringing the metal down to US$1,540…
And as I pointed out at the start of this year, a fall to US$1,480 is possible.
Now, why is gold falling when the markets are getting smashed?
Think of the market behaviour right now as a duck and cover. Investors are panicking and dumping anything and moving into cash.
How long people cut and run for remains to be seen. I suspect this trend may have a few more weeks to play out.
However, before I hand you over to Jim, I just want to address one thing.
I’ve seen a lot of commentary talk about how gold had a big ‘fall’ in 2008 before starting an incredible two-year bull run.
After looking at the charts this morning, I’m not convinced that story stacks up.
My analysis leads me to believe gold is mirroring price behaviour from 2006…rather than 2008.
See, the percentage fall over 2008 was a much larger fall than what we are witnessing now.
I’ll show you what I mean later in the week.
For now, it’s over to Jim.
| Until next time, |
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| Shae Russell, |
Why Is Gold Tanking?
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The coronavirus continues to take its toll on the stock market.
If you were expecting a major recovery today after last week’s bloodbath, you are possibly very disappointed.
Last week in the US, stocks opened higher this morning but soon fell back into red territory again, where they stayed throughout the day.
The Dow ended up losing another 879 points on Wednesday, after Tuesday’s 1,031-point hammering.
The S&P and NASDAQ were also big losers today, down 98 and 256 points respectively.
For investors accustomed to ‘buying the dip’, this is quite a change. As noted macroeconomic analyst Mohamed El-Erian said earlier today:
‘I understand the inclination to buy on the dip. I understand that the path of least resistance in this market is to bounce up…but I stress, this is different.’
Meanwhile, the all-important 10-year Treasury yield fell to a record low this morning as investors continue to pour into safe-haven assets.
The 10-year yield dropped to 1.32%, falling beneath its previous record low of 1.325%, which it set in July 2016 following Brexit.
That means the bond market is projecting a poor outlook for the global economy. And over the long haul, the bond market has an excellent track record of being right.
Gold was down big today, losing $45.20.
But that’s not because of gold itself. It’s all about the falling stock market…
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It’s not about the fundamentals
When you think about it, it doesn’t make sense.
After all, if investors are fleeing for safety, which we’re seeing in the US Treasury market, why wouldn’t they be buying up gold as well?
Gold was up close to US$30 on Wednesday last week, before the price began dropping towards Friday.
Here’s the likely reason why gold is falling right now when it should be rising…
With the stock market plummeting, hedge funds and other institutional investors have had to suddenly raise cash to meet margin calls on their positions in the equity markets.
And they had to get the cash from somewhere.
Gold is a very liquid asset that can quickly be traded for cash.
They can either sell the actual gold bullion they own or they can unload their positions in gold Exchange Traded Funds (ETFs).
So my estimate is that they dumped their gold positions to raise the money. And that’s been driving the listed gold price lower.
It has nothing to do with gold’s fundamentals, which are actually very strong.
Demand is increasing, central banks are hoarding record amounts of gold, and new supplies are dwindling.
That’s a recipe for skyrocketing prices, and the bull market in gold is still very much intact.
The latest selling is just a quirk of the market, in which institutions have to raise cash in order to cover their positions when the market’s dropping.
Again, it has really nothing to do with gold itself. This is just a temporary blip.
For gold at least, it’s an ideal opportunity to ‘buy the dip’.
Perhaps you should take advantage of it while you can.
| All the best, |
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| Jim Rickards, |
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