The U.S market collapsed last Friday over coronavirus concerns. The global health epidemic continues to showcase its danger as it proliferates into more countries. The Dow Jones lost 357 points to finish off the worst week since 2008. In addition to the market sell-off, gold was also dramatically sold as it plummeted as low as $1,568. However, gold has rebounded today, for the most part, as it is trading over $1600/ounce again.
You might be wondering why gold would have plunged when historically, it typically shines in environments when the market is in turmoil. Don’t worry; we still believe the gold market is going to outperform in 2020, but there will be plenty of volatility along the way. A straightforward explanation as to why gold was down so sharply on Friday was due to margin calls, just like what happened in 2008 when there was a major liquidity problem, gold was sold to raise capital. As we all know, gold eventually rebounded and eventually tested all-time highs following the last financial crisis.
It also seems central bank easing is undoubtedly going to happen shortly. CME Group’s FedWatch translates Fed funds futures pricing into traders’ monetary policy expectations. As of Friday morning, it was pricing in a 72% chance of a quarter-point rate cut at the Fed’s March meeting, and better than even odds of two more such rate cuts by the end of July. And futures are beginning to point to an even bigger 50 basis-point cut in March.
Federal Reserve Chairman Jerome Powell up expectations with an unusual move Friday, releasing a note saying the central bank will “act as appropriate” to support the economy, raising expectations we could see another cut as early as the March meeting. The Bank of Japan also issued a statement saying it will “strive to provide ample liquidity.”
Interestingly enough, even though the gold price was in free-fall on Friday, Global ETF investors were not sellers. They added eight tons to the biggest stockpile in history.
So please don’t panic, the rush to liquidate gold was a way to raise cash as it has been one of the best-performing assets in 2020. The rebound today indicates the safe-haven status is still very much in effect, and gold’s fundamentals are still overwhelmingly strong. With the coronavirus beginning to increase, central banks starting to dramatically ease, and the chances of more and more governments bonds trading with negative yields, gold is positioned to break out in the coming weeks.