Why Is Gold Falling with the Stock Market?

Posted by Louis Teo on Mar 31, 2020 1:02:25 PM

Gold has always been regarded as a safe-haven asset. Ever since the introduction of centralised monetary systems, gold has been used as a primary standard and pegged to the strength of a currency. With the depletion of remaining gold reserves, countries can no longer follow the gold standard, resulting in the situation we’re facing today.

Before we dive into the reason as to why gold’s safe-haven status does not seem to be working this time around, let me explain why gold is deemed as a safe haven in the first place:

  • Gold has a track record of stemming fear. It provides a backstop in a portfolio against political risk, inflation and fear in the marketplace. In 2008, when the markets suffered the initial fallout from the financial crisis, gold was one of the few investments that showed a positive return.

  • Gold is a reliable security blanket. By providing protection in one’s portfolio, gold’s price remains steady — and often improves — when markets turn, economies struggle, and stocks fall.

  • Gold is trusted by Central Banks. The US Federal Reserve, for example, holds about three quarters of its currency reserves in gold, indicating that even governments see gold as safe assets.

Here’s probably what you’ve been waiting to find out: Why didn’t gold rise when the global stock market fell?

(At the time of writing, Dow Jones Industrial Average has fallen by 20.3% from its 12 February 2020 high to its 11 March 2020 low, launching it into a bear market.)

Let’s take a look at the biggest declines since 1976 and how gold and silver prices reacted to it:


From the table above we can see that in most cases, gold rose during the crises. Yet, during the 2008 crisis, gold did fall during the initial shock of the crisis before rebounding and ending the year with a 5.5% gain.

Another point to note is that during the 1980 crisis, gold experienced its biggest bull run with more than 2300% from 1970s to 1980. Thus, the decline was a broad adjustment to the overbought metal.

Lastly, silver never fared well in all the cases above.

Based on our analysis, here are four reasons why gold is falling with the stock market:

  • Short Covering

Short covering refers to buying back borrowed securities in order to close open short positions at a profit or loss. Due to the massive sell-off in the global stock market, investors are closing their gold gains to raise cash and cover losses in their positions. This correlation is being driven by the fear of margin call selling.

  • Panic Selling

Given the steep market declines, investors are rushing to sell anything with a bid and run for cover. This includes investors who are not in a rush to close their profits to cover their losses in other assets. Investors now prefer to hold cash than any other assets, given the extreme uncertainties in the market brought about by the COVID-19 situation.

  • Decrease in Physical Transactions

Due to the need for social distancing, physical gold transactions in India and China have come to a standstill which could cause the demand for gold to plummet. These two countries account for about 1,100 metric tonnes of demand annually which accounts for 80% of the world’s total gold demand. However, we feel the impact of this decrease could be limited given that it is market sentiments – not fundamental or technical data – that move prices now.

  • Disconnection between Physical Gold and Paper Gold

While paper gold of gold futures is falling, physical gold has been sold out everywhere, even with a 10-15% premium on top of its current prices. Paper gold is traded on COMEX gold futures and London Over-the-Counter (OTC) market. Both of them are derivative markets, and neither is connected to the physical gold market.

This means that the physical gold market is a price-taker, inheriting the price from the paper market, and that the derivative markets are the exclusive and dominant price makers. The entire market structure of this financialised gold trading is flawed.

Nonetheless, based on the history of crashes and gold movement, gold offers a reliable safe haven from the falling stock market but only in the long term. So, when do we enter? In our opinion, once the stock market starts to lose volume and with fewer occurrences of circuit breakers, we could see gold starting to rally again.

Gold is currently trading below its 200MA on the daily chart at around the 1475 price level. The 1450 price level could prove to be a strong support level and once we see prices moving above 200MA, we could be looking to go long.


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