The worst week for global capital markets since the financial crisis of 2008 was brutal. And it touched almost everything – gold included:
But why did gold also decline? During the beginning of such crises, it’s worth examining the buying and selling data. Last week the only sellers were the institutions who had gold on margin, meaning they had borrowed capital to take their position. While their long positions in other assets declined, they were forced to sell some of their assets to meet their margin requirements or to make up losses. This is usual behaviour in such times and once these positions are unwound then the constant demand for gold should return the price higher once again. Especially, when ultimately, peak Gold production was reached last year and is only forecasted to decline. In a world where globalisation is retreating (especially now with how these viruses can spread so quickly) Gold will continue to be a well-bid safe haven.
The central bank behaviours were predictable as they were futile. Lots of stories and messages leaked to the press about coordinated responses of more monetary easing, multilateral support programs and the like were not enough to stabilise markets. For over a decade now, every problem the economy has had has been plastered over with these policies. But if populations refuse to work, get infected, panic buy rations then the entire edifice of society starts to look shaky. And in these situations, quantitative easing does nothing to restore an economy to health, nor does it inject confidence into the system either. If this is all policy makers have, then electorates will turn to more extreme policies such as border closings, longer flight suspensions to outbreak areas and even forced quarantine of suspected virus-carriers. None of these are positive for economic growth but should benefit gold regardless.
In the chaos and panic of the market drawdown the other main story was missed: the Democratic party turning even more so against Bernie Sanders. Three of the moderates – Buttigieg, Klobuchar and Steyer – dropped out and will more than likely back Joe Biden. Mike Bloomberg seems to have blown his chance before even beginning, while Elizabeth Warren just can’t seem to regain any momentum. At the moment it looks a straight contest between the left-wing Bernie Sanders and the moderate Joe Biden. Trump would clearly prefer Biden and would probably comfortably beat him in November. Most elite Democrats, fearful of real left-wing policies would hold their nose and back Trump over Sanders. But Trump fears Sanders the most, and with good reason. The grass roots campaign is huge and if there is a chance that the DNC (Democratic National Committee) can see Bernie as being useful, and tone his rhetoric down, then Trump is in trouble and so are markets. Very few said Brexit would be voted for, let alone happen, and it did. Very few said Jeremy Corbyn would come so close to being elected, and close he came. Very few said Trump would be elected, and he was.
The lesson here is that what consensus thinks will happen is rarely correct all the time. And the consequences haven’t been thought of. What would the Fed do in a Sanders administration? What would the Dollar do?
Trump’s success or failure dealing with this virus will also determine the next president. At the moment it has been a proper shambles. The Fed’s reaction today, to cut 50bps as an emergency response to the Coronavirus does nothing to shore up confidence in the situation. It looks like a panicky move that smacks of desperation. Trump has nailed his colours to the market’s performance. If this virus really dents the economy, then the market will be in the doldrums the next few months. This will create a self-fulfilling prophecy where markets go down, the odds of Trump’s re-election go down, and thus the odds of a Sanders Administration rise, again sending markets lower and lower on a loop.
Sanders becoming president would be the biggest policy shift politically and economically since World War 2. A socialist, nationalist, protectionist US president has never happened before, not even been close. The policy implications are immense. Would the US still want to be the global superpower? Would industries be nationalised? Or more likely, which industries will be nationalised first? It may not happen but hoping it won’t is not an investment strategy.
Time and time again markets underestimate the change that is afoot across the world. The last 40 years will not be repeated. Profound changes are happening in politics and technology and they will reconceptualise the understandings of globalisation actually means. This retracement back to national borders, whether on the right or the left, is a slow structural shift that will leave markets in total confusion. Only Gold, without the human hand tainting it, will shine.
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.