Gold falls below $1,500 as it is dragged into the global market rout
By: Elliot Smith - CNBC
The coronavirus pandemic has created physical barriers impeding consumption. Monetary policy and government stimulus to boost consumption cannot overcome those physical barriers. The economic problems have not been caused by weaknesses in the business, financial, or banking sectors. The financial downturn is a result of physical impediments to consumption.
The sudden drop in consumption has caused a dash for cash. Trying to protect physical equity and capital has created an immediate demand for cash to cover immediate expenses and outlays. Investors need immediate cash, not safety as a hedge against financial losses. The business sector is trying to protect its operations, not its investments. Businesses depend on cash flow from consumption to maintain daily operations and the pandemic has created a physical barrier that reduces cash flow.
The government could avoid imposing social distancing measures to maintain consumption in the near term but that would prolong the economic effects of the pandemic. Prolonging the pandemic would ultimately result in labor shortages and we would end up in the same place.
Short term declines in growth can't be stimulated away because the pandemic has established physical barriers that prevent stimulating consumption. What is needed now are efforts to protect the economy. What is needed now are efforts to protect jobs and incomes. Once the physical barriers cause by the pandemic are removed, restarting consumption will require income. If jobs and income are allowed to collapse then it becomes much more difficult to restart the economy as the pandemic recedes. Demanding that short term profits be protected will result in a prolonged depression.
Gold has been swept up in the broad market sell-off to fall below $1,500 on Monday, down $200 from its peak early last week.
The precious metal hit a low of $1,456.8, its lowest level since Nov 27, and traded below its 200-day moving average level of $1,497.4 for the first time since Dec 20, 2018 on an intraday basis.
By mid-afternoon in Europe, spot gold was trading at $1,472.3, while stock markets around the world continued to tumble at an alarming pace.
Gold typically performs well during market sell-offs owing to its traditional role as a so-called “safe haven,” but it has not been immune to this past week’s global stock market plunge as the coronavirus pandemic takes hold.
Analysts are attributing the historic fall over the past week to a “dash for cash” as investors abandon all asset classes in favor of parking their money and cutting losses.
‘Dash for cash’
Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said in a note Monday that the past week has seen a shift in demand towards physical cash, which has benefited the dollar and hit the price of precious metals.
“That dynamic appears to be persisting at the start of this week, and there are few signs of this sort of flow ebbing,” he added.
Adrian Ash, head of research at online trading platform BullionVault, told CNBC on Monday that markets were seeing a “dash for cash” and projected further downward price momentum in the short term. He said the usual consumer demand for jewelry remained absent, and many funds and investors were closing out positions and take profits from the metal’s surge in recent months.
“In the past, when we’ve had volatility in pricing, that consumer demand is what has come in and put a floor under pricing. But I would suggest what we’re seeing at the moment is much more like what we saw during Lehman Brothers, where you had huge swings in gold prices and you had a lot of really shocked new investors who were moving into gold as a safe haven, who then saw the price swing,” Ash said.
However, he highlighted that there remained high demand for gold as a long-term value asset, with BullionVault experiencing the heaviest two-week inflow into gold since the aftermath of U.S. President Donald Trump’s election in November 2016.
Volatility in prices meant last week the platform saw the highest-ever Sunday-to-Sunday value of metal changing hands, up more than 300% from the previous 52-week average.
Ash said the trend was similar to during the financial crisis of 2008, when demand was hit in the futures market because people were forced to close out of positions.
“But on the other side, you’ve got strong and rising, really quite rampant, physical bullion demand coming in the other direction,” he added.