The Gold Price During the Stock Market Blood Bath

A Look at the Price of Gold During the Stock Market Selloff

In February we described a familiar market pattern in a stock market collapse.  Stock investors forced to come up with cash to meet margin calls or to cover other losses often turn to gold as a source for their liquidity needs.

In Blood Running on Wall Street!, we wrote:

“Traders in markets with perfectly sound economic fundamentals can sometimes liquidate their positions in other things to meet margin calls in collapsing markets.  It appears that in the general carnage of the stock market, large investors scrambling for cash to meet margin calls took profits in gold, the most liquid commodity of all.

“To repeat, we have seen this kind of action before, and we know what happened then.  Gold fell hard – but only briefly – in the fall of 2008 during the stock market carnage of the mortgage meltdown. 

“But that margin call selling opened a window of opportunity to buy gold at ‘sale prices.’  

“Of course, it didn’t last long.  Soon gold was racing to new all-time highs.  Three years later it was up well over 2 ½ times its October 2008 low.”  

Now. as the stock sell-off deepened, the pattern repeated itself last week.

On Thursday (3/12) an Investing.com story headline read, “Gold Loses $1,600 Support as Investors Sell to Save Bleeding Wall Street.”

“Gold lost its key $1,600 support on Thursday as investors cashed out their long positions in the yellow metal in a scramble to cover margins and losses on Wall Street amid the U.S.”

Bloomberg News wrote that gold selling showed, “how extreme the selling pressure has been in every corner of the markets.

The Investing.com story goes on to quote as an analyst who says, “Gold investors are scratching their heads as the fear trade is only seeing steady flows into Treasuries right now.”

We think moving into US Treasuries is an extremely bad move.  When the yield on the 10-year US treasury bond dipped to .5 percent last week we wrote that we think loaning money to the government is to guarantee to lose purchasing power.  That is because the Federal Reserve’s stated policy is to erode the purchasing power of the dollar at four times that rate.

We strongly advise against seeking safety in the bond market.  Bear in mind that if interest rates rise in reaction to events, the result is a fall in bond prices.  Furthermore, since the correction in gold prices is widely agreed to be a result of margin call selling by those suffering losses in stocks, we view the lower price as almost certainly temporary and therefore an attractive buying opportunity.

One final note:  The COVID-19 crisis has produced almost universal calls for the Fed and the government to spend money and defer or reduce taxes.  The Fed and the administration are complying with both monetary and fiscal policies.  This is a certain sign that policymakers here and abroad will be flooding the US and the global economy with new liquidity.  An enormous amount of liquidity.  

Money pumping.  Liquidity Operations.  Open Market Committee interventions.  Quantitative Easing.  We prefer to call it “money printing.”  It is the artificial expansion of money and credit by the central bank.  Juicing the markets.  By any name, it will devalue the purchasing power of the dollar and other currencies.  

And it will drive gold higher.  That’s why we renew our call for our friends and clients to take advantage of today’s lower gold prices…

While you can.