The spot gold price doesn't yet reflect extraordinary demand for the precious metal and the Federal Reserve's breakneck monetary expansion.
Gold recently came off its worst week since 1983. Bloomberg concluded the crashing gold price strips the precious metal of its safe-haven asset status.
This week gold continued to fall. But Bloomberg also noted “the longer-term outlook for the metal remains bullish.” And the explanation for the plummeting gold price actually proves it worked as intended amid severe market stress and turmoil:
In the rush to raise cash and cover losses in other markets, investors are pulling their money out of bullion, typically seen as a store of value amid market volatility and global worries.
While the spot gold price is down some 13% since its Mar 9, 7-year high of $1,700/oz, stocks fared worse. The Dow Jones Industrial average is down over 18% since Mar 9.
Since the Dow peaked at its all tie high of 29,551 on Feb. 12, the spot gold price dipped just over 5%. Meanwhile, the Dow Jones has lost over 34% of its value.
Gold bugs didn’t get exterminated. Investors who trusted gold as a safe haven asset had a durable, liquid store of value to turn to for cash to cover their margins.
Of course the selloff caused the gold price to fall. But not as much as equities, because the demand for gold is insatiable.
Gold’s price hasn’t yet adjusted to the reality of feverish demand for the precious metal right now. The past two weeks have proven there will always be buyers for gold, especially in a major economic crisis.
Last week, Idaho-based Money Metals Exchange closed its online affiliate program “due to unprecedented demand in the precious metals market.” The company cited “significant supply stresses and delays developing in the wholesale market.”
Meanwhile, Ireland-based GoldCore announced,
All new order deliveries will be held in our secure vaults and delivered as soon as is feasible.
Likewise, they cited “unprecedented demand for precious metals” for the new policy.
The Pure Gold Company, based in London, reports:
…a 723% surge in people purchasing gold bars and coins in the past week, citing extreme concern over the risk of the Covid-19 virus which has some parts of Europe in lockdown.
It would appear gold is not yet pricing in extraordinary levels of demand. That could prove a narrow window of opportunity to acquire at value as gold futures climbed Friday.
Markets are seeing the gold price react the same way it did in the 2008 financial crisis. Investors offloaded gold for cash during the first few months of the crisis.
But as the Federal Reserve expanded the money supply by multiples in the following years, there was a decisive gold rally.
Bear that in mind as the Federal Reserve continues a regime of unprecedented monetary expansion to respond to the 2020 financial crisis.
With interest rates pinned to zero, $1.5 trillion more repo market injections (on top of the $70 billion a month since September), and now the Fed vacuuming up municipal bonds, gold’s inflation-free safe haven status is more secure than ever.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:40 PM