Saturday, February 10, 2018

Gold prices responded to last week's stock volatility in similar manner to 2008

One of the more interesting things about gold today is that it tends to act more as a last resort safe haven asset rather than as a primary one.  And by this we mean that during normal stock market selloffs, traders and investors tend to move their cash into shorter term liquidity plays such as in bonds and money markets over that of gold.

However once a trend to the downside for either stocks or the dollar comes in at full force, then this is often when gold shines as a longer term safe haven.  And in a comparison to how the gold price moved during the early days of 2008 leading up to the October crisis and subsequent Great Recession, the precious metal is acting in the same manner as a decade ago, before it would eventually become the go to asset and reach new all-time highs.

Total gold ETF holdings are at their highest level since May, 2013, and this could be due to a growing interest in commodities in general. 
Will Rhind, CEO of GraniteShares, told Kitco News that growing interest in gold is driven by two main factors: "weaker U.S. dollar, and more volatility and increasing fears of inflation in the market." 
Rhind compares gold's recent failure to rally in response to stocks dropping earlier in the week to what happened in 2008. 
"When you have a big shock in the market, what actually happens initially is that gold prices don't respond in a very positive way," he said, "and the reason for that is because the immediate risk-off trade is normally into the U.S. dollar and U.S. treasuries, and that's exactly what happened in 2008; gold actually fell first when [stocks] crashed, but only then really started to pick up." – The Street
Gold Prices and Chart from 2008 - 2010

You can see that gold had a big move just prior to 2008 when the markets gave out early signals and warnings that the financial system was soon to nearly collapse in a credit and liquidity event.  However gold prices then did little during the actual crisis of that year.  But once the trend was set for the stock markets to go lower during what would become the Great Recession, gold became the primary longer-term safe haven, especially as the dollar during that time fell to as low as 72 on the index.

Thus the real question going forward is whether last week's market chaos and volatility was simply an anomaly, or a signal that the Fed induced Bull Market may soon be coming to an end.  And dependent upon which side of this coin is correct could determine over the rest of the year how gold will move, with expectations for the short-term being better for more liquid assets, and expectations for the long-term being extraordinary for gold.


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