The Simple Reason Gold Fell with Stocks Last Week

Although most assume that gold would have surged, this is not without precedent, with past cases resulting in massive upside for gold prices. See why here.

As the coronavirus crisis worsens throughout China and the rest of the world, the global market has seen its sharpest decline since the 2008 financial crisis. Virtually all equities plunged last week as traders rushed to dump their assets in favor of cash, with the Dow losing as much as 3,600 points within the week.

Some analysts found it curious that gold and silver prices also fell, with the metal dropping from about $1,640 to the $1,560 range during Friday’s trading session. Gold is known for its hedging properties and generally prospers as a consequence of stock selloffs, making the parallel action come off as unusual.

Yet upon closer inspection, one can see that a mutual selloff in both markets is not without precedent, and that similar cases in the past have resulted in massive upside for gold once the dust settled. Last year, much was said about the peculiarity of gold moving up together with stocks, considering the latter are seen as the metal’s biggest competitor. As gold kept climbing, however, it became clear that the metal’s numerous drivers and sturdy fundamentals were powering the gains as opposed to sentiment.

As various experts have explained, the precious metals selloff shouldn’t be of particular concern to gold investors as a massive wave of panic has taken hold of the markets. Peter Spina, president and CEO of GoldSeek.com, pointed out that some of the selling is a result of a general selloff by large funds, which recently increased their positioning in the gold market by a wide margin. Likewise, Peter Grant, vice president of precious metals at Zaner Metals, pointed out that the threat of contagion has significantly hampered physical transactions in China and India, two of the world’s biggest buyers whose bullion investors tend to favor in-person purchases.

Brien Lundin, editor of Gold Newsletter, noted that silver’s decline is also tied to diminished industrial demand, as the coronavirus has impacted both the commodity and energy markets. The already-skewed gold/silver ratio has now climbed above 95, exceeding last year’s peak and nearing its all-time high.

Despite the selling pressure from the past few days, there are good reasons to be excited about gold prices moving forward. Lundin pointed out that this kind of price action is part and parcel of any global crisis, as central banks invariably respond to damaged economies by introducing massive amounts of stimulus. The 2008 financial crisis, which ended up moving gold prices to all-time highs, was an example of investors recognizing that loose central bank policies are causing just as much damage to the economy as the crisis itself.

As in 2008, Lundin expects multiple rate cuts, quantitative easing and increased government spending in response to the crisis. Given gold’s tremendously positive response to successive and unexpected rate cuts in 2019, Lundin predicts that the coronavirus crisis will ultimately prove far more beneficial than detrimental to the precious metals market, adding that prices could retake their upwards trajectory with much greater vigor in the coming weeks and months.

These 4 Factors Holding Back Gold, Will Likely Start Benefiting The Yellow Metal

With all the speculation surrounding gold prices, one report claims that it likely has nowhere to go but up. Read why here.

These 4 Factors Holding Back Gold, Will Likely Start Benefiting the Yellow Metal

This week, Your News to Know brings you the most relevant news stories about the state of the gold market and the overall economy. Stories include: Why gold might finally be nearing a bottom, 3 reasons to be bullish on gold in 2016, and Lawrie Williams’ take on gold in 2016.

THE CASE FOR WHY GOLD COULD FINALLY REACH ITS BOTTOM

In a recent email interview with Myra Saefong of MarketWatch, George Milling-Stanley expressed his thoughtson the road ahead for gold. Milling-Stanley is no stranger to precious metal and its dealings, being the head of investment strategy at State Street Global Advisors.

Much of the interview revolves around a single question: Could gold finally be nearing its bottom? Milling-Stanley believes that it might very well be and provides some solid arguments in favor of this.

Ever since 2013, gold has been bouncing back and forth inside a price range of $1,050-$1,350. It has thus far been unable to break past the upper limits of this range despite record sales of bullion coins – Milling-Stanley believes four factors are preventing a breakthrough, each of them being equally effective: The dollar’s strength, the continued absence of inflation, the strength in U.S. equities and complacency in the face of risk. The latter became especially pronounced in the wake of attacks in Paris, as gold remained in the same spot despite its status as a safe-haven asset. For the time being, gold is locked within its range, but eventually each of these four factors will change favorably for the metal.

And what about the lower end of the range? Milling-Stanley doesn’t think the metal can go much further down, insisting it’s near its bottom and dismissing the possibility of an interest rates hike having any lasting impact: “There may be a short-term, knee-jerk downward move when higher interest rates become a reality, but I do not expect higher interest rates to exert any sustained downward pressure on gold prices,” he says. The main reason for this is simple: The current gold price already takes a rates hike into account as if it had already happened.

For gold to dip past $1,050 in any relevant way, significant weakness would have to occur in internal market fundamentals (the balance between supply and demand). “It is difficult to imagine where such weakness might occur,” Milling-Stanley notes, adding that any of the aforementioned four factors becoming more pronounced is similarly “hard to envisage”.

3 REASONS TO BE BULLISH ON GOLD IN 2016

Despite HSBC’s recent bearish stance on gold, the firm is now calling for a bounce back in 2016. As reported by Jonathan Ratner on Financial Post, chief HSBC precious metals analyst James Steel has given us three good reasons to get more bullish on bullion.

The first comes in the form of emerging-market demand: Together, China and India account for nearly two-thirds of global gold consumption and are expected to further increase their buying in the future. Steel reminds us that emerging-market investors are sensitive, staying away when gold nears $1,300 and flocking to it as it moves around $1,100.

The second reason is the expected rally of the euro versus the dollar, as gold has been known to have an inverse relationship with the greenback. Despite a possible rates hike, the dollar stands to weaken either due to a shortened tightening cycle by the U.S. central bank or a reversal of its tightening policies caused by low inflation or weak growth.

Lastly, Steel forecasts that gold exchange traded funds (ETFs) will become net buyers again after three years of selling, and also expects net positions in areas such as the COMEX to rise.

LAWRENCE WILLIAMS ASKS: WHAT WILL GOLD DO NEXT YEAR?

As retail holiday events take their turns ahead of the fast-approaching 2016, Lawrence Williams asks an important question: What will the yellow metal do next year?

On Sharps Pixley, he contrasts the view of analysts in a negative-tone within a Wall Street Journal (WSJ) article with any number of different situations that could benefit the metal. One important point to remember: The dull and pessimistic prediction seen on WSJ still isn’t bad for gold at all.

The bank analysts polled by WSJ generally agree that gold should have a flat upcoming year with an average price of $1,114 an ounce, but seemingly fail to acknowledge that this ‘bleak’ outlook is actually an improvement over the current situation and seemingly guarantees a slightly-better year for the metal.

But what if things take a turn for the unexpected – could gold go much higher than intended? Demand has certainly been on the increase, with both India and China (the world’s largest consumers of the metal) seeing record imports. Central banks further drive demand for physical gold up by buying what Williams estimates could be 400-500 tons a year. When coupled with low prices that are halting mining operations, this heightened demand from around the globe will have to cause a supply squeeze eventually, although this realization still isn’t doing much for gold prices.

Gold has been doing great in plenty of currencies other than the one it’s valued in by most investors: The dollar. For gold to rise against the dollar, the value of the greenback would have to fall, but Williams doesn’t find this to be such an unlikely scenario; given the big balance of payments deficit and the adverse effects a higher dollar would have on the domestic economy, the Fed might not want it increasing in value any further. Consequently, the Fed might actually take steps to keep its currency under control.

Other than the Fed acting against the dollar, any one out of a number of possible ‘black swan’ events could go off at any moment and cause bullion demand to spike: Another national debt default or a geopolitical conflict taking a turn for the worse are just some examples of possible catalysts for gold’s ascension. Whichever the case, Williams believes that gold should do just fine in 2016.


photo credit: Gold Bars in Golden Bullion Shop via photopin
(license)