Goldex Heartbeats: The gold plunge halts

Goldex Team

Editorial content

Gold’s violent and volatile move from the all-time high of USD2,075 was a stark reminder to all holders of the yellow metal that any asset rarely goes up in a straight line. And thus the biggest daily fall in over 7 years was a shock to many. Yet this sort of price action is not uncommon as assets make new all-time highs. Gold dropped to USD1,863 before recovering to USD1,941 at the time of writing. In times like these it is important to make a note as to what has really changed, and if the move lower is the start of a new trend down, or just a blip in a secular bull market.

Gold’s Wild Ride Continues as Prices Bounce Back

Coronavirus: While there is an incremental return to a modicum of normality the virus is still the main even when it comes to economic activity. And as has been seen in Europe in the last few days, a return to normalcy, with regard to increasing tourism, has seen multiple countries increase protective measures, and add countries once again on banned travel lists. These sorts of rolling lockdowns will continue, with continued damage to the economy, until a safe vaccine is developed, tested and distributed. And that seems a long while off yet.

Politics: Beyond the coronavirus the same issues remain. The rise of China versus the West continues unabated. This week a newspaper owner in Hong Kong was arrested for “suspected collusion with foreign forces”. The Western response from US Secretary of State was quick and unequivocal:

“I’m deeply troubled by reports of the arrest of @JimmyLaiApple under Hong Kong’s draconian National Security Law. Further proof that the CCP has eviscerated Hong Kong’s freedoms and eroded the rights of its people.”

Hong Kong’s Apple Daily vows to fight on after owner arrested

Whether Donald Trump or Joe Biden with the upcoming US Presidential election is irrelevant on this most critical of issues. The global battle of ideology and ideas is only just beginning.

Central Bank Policy: With the ideas of Moral Hazard now long gone, and the Federal Reserve and other central banks becoming more daring with each crisis to expand their balance sheets only rampant hyperinflation will bring about an about turn of these once controversial policies. And in the middle of the greatest recession globally since the Great Depression such a policy change is extremely unlikely.

So what has changed to cause this sell-off? In the medium and long-term not a lot. Many investors would have taken advantage of the sell off to add to positions. The reality is that Gold is up approximately 30% this year and the move breaking through USD2,000 was extremely quick. It is only human nature that some investors took some profits. And the news that Russia has a Covid vaccine was just the excuse. Indeed, on Tuesday, the SPDR Gold Trust, the planet’s largest gold-backed ETF, stated its holdings fell just 0.3 per cent to 1,257.93 tonnes – hardly panic selling, capitulation or liquidation.

The sell-off certainly has a technical feel to it. And after today’s US inflation numbers (core prices rose the most in three decades) there is another momentum inducing reason to add gold:

U.S. Inflation Quickened in July on Costs of Vehicles, Apparel

Because if all the issues of Covid19 are solved, and Globalisation once again continues unabated like it did twenty years ago then demand is going to sky-rocket. Any policy response will be slow in reaction to any stronger than expected surge in economic activity. Authorities at central banks and governments will want to wait and see if any recovery is self-sustaining before rushing to reduce balance sheets or stimulus. This could create a huge policy error of being too late to return to normalization or being too quick and putting the economy back into recession. Either way Gold should profit from both scenarios. Only if the powers that be get it exactly right, something that has rarely ever happened, will Gold go lower.

Short-term price movements have more to do with portfolio rebalancing, technical selling and over-extension of price rather than any fundamental change in the investment thesis and story. As discussed today, the core tenets of the secular bull market in gold remain. And those who still believe in it will be using such price drops as opportunities to buy more.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.