With global markets navigating the impact of the coronavirus, volatility has stretched across virtually all asset markets, including gold. But analyzing some of gold’s historic patterns in the context of current market turbulence and dislocation, data suggests gold is likely playing an important role for investors, providing a potential valuable source of liquidity during extreme volatility and diversification that can help mitigate portfolio drawdowns.
This post was written with contributions from Diego Andrade and Maxwell Gold, CFA. Diego is a Senior Gold Strategist in the Global SPDR Business and Maxwell is the Head of Gold Strategy with State Street Global Advisors.
In periods of crisis, conventional wisdom comes under even more rigorous scrutiny than usual, but it is often exposed as myth. For example, some investors believe that when equities go down, the price of gold always goes up – but recent evidence clearly disputes that, as we have seen stocks and gold falling together this year. More recently, the Fed cut interest rates by 1.5% in the past couple of weeks; so many people expected gold to go up. Yet the initial response of the gold price was to fall a further 8%1 immediately after the first emergency rate cut on March 3. Why? Investors are asking me why gold has not been soaring while equities and interest rates have been in freefall, so I think the issue is worth exploring.
Investors tap liquidity during critical times Essentially, gold has been doing what it is supposed to do in this sort of environment. There was massive selling across all financial markets as the rapid spread of COVID-19 raised the specter of a global recession, and gold suffered along with everything else. Based on my discussions, investors indicated that they were selling anything they could to raise money, often to meet calls for additional cash when stocks they had purchased on margin plunged in value.
Judging by my conversations with them, many seasoned investors were taken completely by surprise by the simultaneous decline in gold. But this is not the first time we have encountered this sort of situation. As the economic problems that eventually became known as the Global Financial Crisis gradually emerged during the course of 2008, stocks sold off dramatically, as the chart below shows, and gold lost almost 30% of its value between March and November of that year ─ for exactly the same reasons as in the past few weeks. But gold quickly recovered, and the price increased 32% by the time stocks found their bottom on March 9, 2009.