By Nathan Dennis
Historically, gold has always been viewed as a safe haven in times of uncertainty. From the beginning of the Great Recession in 2008 to the debt crisis of 2011, gold shot up from $869/oz to over $1,895/oz -- its historical peak. Whenever other investment vehicles such as stocks, bonds, or even cash; suffer losses, it has always been a prudent move to shift investments to gold and other metals -- as their intrinsic value has traditionally protected them from instability.
With the COVID-19 pandemic spreading rapidly across the world, a new global recession is all but assured. Deutsche Bank predicts China having two consecutive quarters of 30%+ contraction, while the US is anticipated to have a 12%+ contraction in the second quarter. As recession looms, it stands to reason that gold prices should be rising. Should being the operative word. Instead, we’re faced with a bit of a funky situation. Gold prices are falling. In the last month, gold has fallen nearly 7%. Granted, that is far less significant than the 9000+ point collapse of the Dow Jones in the same timeframe (roughly a third of its value). However, the drop is still surprising. Why is it that gold is falling?
One reason is sheer panic. The stock market is in free fall, oil prices are plummeting to around $22 a barrel -- its lowest price since the late 90s. Granted, oil’s falling price is clearly the byproduct of production ramp-ups by Saudi Arabia and Russia, along with lower demand due to global restrictions on movement; I am suggesting this the result of panic or skittishness. What I am suggesting is that these negative trends in multiple investing options could certainly contribute to a pervasive mood of “the party’s over; time to pack up.”
I’m not convinced this is the reason. A more logical option may be that gold is a less liquid way to hold value in a time of crisis. Unlike the Great Recession or other economic depressions, this projected recession is due to a natural disaster -- a pandemic. We are already seeing that this pandemic is breeding scarcity: toilet paper, N95 masks, ventilators, and even access to the outdoors are in short supply.
In a crisis like this, having cash on hand is critical, as it allows one to buy rare items as soon as they become available. While gold is a safe haven when the value of the dollar is uncertain, it is very difficult to trade in a sliver of precious metal for a twelve-pack of toilet paper. Other notoriously non-liquid vehicles, such as Bitcoin, have precipitously dropped in the last month, suggesting that a preference for liquidity is not an aberration
This, more or less, brings me to my last suggestion: the dollar is simply the safest vehicle. In the last month, the dollar has shot up $0.88 to the euro to $0.93. A strong dollar has historically pushed down the price of gold, as skittish investors (looking for a safe harbor) think of the dollar as that safe harbor. Near-zero interest rates from the fed should discourage this behavior, but rates have been low for so long that investors may have baked in this low rate of growth.
I’d like to expound upon my suggestion that the dollar is this safe harbor. This upcoming recession, caused by COVID-19, is going to depress nearly all levels of the economy. People are being quarantined for months on end, meaning that travel and entertainment have ground to a standstill. The US employment rate could reach 20%. These depressions (particularly in the travel and entertainment fields) are already leading to significant reductions in prices.
Reduction in demand leads to a reduction in price. Reduction in price leads to consumers delaying purchases as they anticipate further reductions in price. To be blunt, there is the possibility of a deflationary push on the economy. The dollar is strong (and growing stronger). Oil is falling -- as is demand. Illiquid vehicles such as metals and Bitcoin are falling as people turn to cash to weather an uncertain time filled with scarcity. The end result may be that gold (and other vehicles) fall simply as the dollar becomes the preferred vehicle of choice -- a vehicle that consumers and investors hold tighter as the value of other commodities continues to fall.
This isn’t to say that this is the concrete future. Year over year, gold is up 12%. While the stock market has faltered 18% since March 7th, gold has only fallen 13% since March 9th, suggesting that its value as a safe haven is still valid. As the Fed continues to do all in its power to make parking assets in cash an unattractive proposition, there should be significant pressure on gold prices to rise -- possibly mirroring gold’s dip and rally during the 2008 Great Recession.
It remains to be seen if the Fed can expand the economy enough to make holding cash unattractive. As rates were already historically low before this COVID-19 crisis, their available tools are limited. We are optimistic, however, that the Fed will work to stave off any form of deflation, leaving gold open to rise again.
One can only assume that once the quarantines are lifted and markets approach some semblance of stability, gold will reclaim its place as the safe haven asset and not only rebound, but surge as the rest of the world slowly puts itself back together financially.
Check back for updates on Gold price movement as the COVID-19 Pandemic unfolds.
Nathan Dennis is a freelance writer based in New York.
The views and opinions included in this article are that of the author and not necessarily that of the Gold Prospectors Association of America. Speak with your financial advisor before making any investment decisions.