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Some investors may be worried about the gold price. Conventional wisdom has always advocated buying precious metals at times of a crisis, be it economic, or in this case, the prospect of a global economic slowdown as the result of the coronavirus.

In the aftermath of the Great Financial Crisis in 2008, gold and silver prices both did very well. In Q1 of this year, neither has been able to hold its value for very long. Why is this?

Gold can be sold off during early stages in a crisis

But memories are short, and investors would do well to remember that in 2008 gold and gold-related equities were sold off as investors went in search of liquidity. Between August and November 2008 gold fell 10% while gold stocks lost 47% (1 August to 20 November).

The downward pressure on the gold price could also be caused by fears in the market of a deflationary spiral. While bond yields can go to zero or negative, they can still earn a positive rate of return if the yield is greater than the inflation or deflation rate. In the current environment, with US Treasury yields at record lows, the markets does seem to have deflationary expectations near the forefront of its mind.

Central banks always have plenty of ammo

Some journalists and other commentators have been concerned more recently that central banks like the Federal Reserve have played their hand too soon, but central banks around the world are never technically out of ammunition. Monetary easing will work eventually and in the last great financial crisis, it was when the US Treasury 10 year bond’s break even rate bottomed out that the gold price turned around.

Taking a further look at history and what happened with the reflation trade in November 2008, this is where gold prices really seemed to have taken off. Between November 2008 (two months after Lehman Brothers collapsed) and the end of 2009, gold prices soared by 46%. Gold equities did even better, climbing by 176%.

According to a recent research note from Canaccord Genuity:

“We expect monetary easing to continue to continue to ramp up with rates likely to be cut to zero and a resumption of quantitative easing and perhaps other fiscal or monetary programs…We acknowledge that initial stimulus may fall short of what’s ultimately required and that the market may get worse before it gets better, but we believe a determined central bank can ultimately raise inflation expectations and prevent deflation.”

Canaccord Genuity reckons that while gold can act as a safe haven, gold equities will tend to underperform the gold price during significant ‘risk off’ events like the sell-off we are experiencing at the moment. We have seen this in the discrepancy between the gold price and the various market gold sector stock indexes.

At the time of writing gold was at $1492/oz, down 1.4% on the day. The gold price has seen a steep drop from $1680 on 10 March to its current level, per the deflationary expectations currently persisting in the market. Gold investors should keep a close eye on central bank activities and the US Treasury market in coming days.

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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