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Q:Gold and silver prices have crashed along with the equity markets in recent days. I thought the precious metals were hedges against such market crashes. What is going on?
A. History shows that even hedges get sold when markets panic. But investors do turn to gold very quickly after the panic subsides, for its role as a safe haven, for preservation of capital, a hedge against monetary and consumer inflation, and for better relative performance at times of low interest rates during a recession. Some additional comments, without being too predictive:
- This is a market panic, investors are scrambling to sell whatever they can to generate cash, partly driven by margin calls on leveraged investments, partly based on quantitative algorithmic trading
- The result has been crash in every financial market worldwide on fears of a major economic slowdown/recession due to the novel coronavirus
- Everything gets sold in a panic and gold-silver are not exempt
- Once the panic subsides, and equities find a bottom, we will see a sideways consolidation before markets begin to recover
- Gold has been bouncing around the $1500 range for the last three days, which could be the first sign of a precious metal bottom
- Gold is historically one of the first sectors to rebound after an equities crash, after the 2008 crash, it way outperformed equities, rising 167% in 3 years
- Silver has crashed harder, down to $12 today, and the ratio is now over 120, in uncharted territory
- Silver should also bounce off bottom, but not as quickly as gold due to its industrial aspect
- If silver holds this $12 range, it should initially bounce off bottom, the retest bottom, then consolidate and rise in the coming months as the ratio starts to normalize
- This has been a worldwide financial markets “flash crash” and once bottom is found, and the COVID-19 incidents peak due to containment and the warming of springtime, both the market and virus crises should pass quickly
- There is already encouraging news out of China – This week, China closed its last special Coronavirus hospital because there are not enough cases to support them. China as of today had 80,881 reported cases, 3,326 deaths, 68,715 recoveries and 8,840 lingering cases. China closed down and initiated social distancing 6 weeks ago like much of the west is now doing, and it is already starting to reopen. If the Chinese model is correct, it seems we have another 4-5 weeks until the peak virus is behind us.
- The global economy and financial markets should then start to rebound with gold and silver leading the way
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