The shine has come off of precious metals as the current equity sell-off hits extremes, writes Joe Perry.
The way stocks have been selling off lately, one may have thought that a safe place to park your cash is in precious metals, such as gold and silver. These have always been considered great “flight to safety” instruments, as they are viewed as a store of value—particularly in a fear induced sell-off such as a global pandemic.
Gold bugs have been promoting the idea that just such a cataclysmic event was inevitable and would lead to a massive gold rally for decades. When there is a financial crisis, there is always the possibility that some assets “may not be around” when it’s all said and done. However, throughout history, precious metals have always provided a home for cash when other assets were failing.
However, during the current sell off in risk assets, cash has not necessarily rotated out of stocks and into precious metals. Just one week ago, gold put in a near term high at $1,703.60. Over the course of the next five trading days, including today, gold sold off 14.8%, but held just above prior support near $1,445.8.That level also coincides with the 161.8% retracement level from the lows on Feb. 5 to the highs on March 9 (see chart).
Source: Tradingview, FOREX.com
Silver put in a high of $18.929 on Feb. 24, pulled back and bounced to $17.58 on the same day that gold put in its high. Over the next five trading days, including Monday, the price of silver sold off 36% to Monday’s low of $11.22 before bouncing to $12.85. Monday’s price action broke through the lows from May 22 at $14.34 and fell to near the 161.8% Fibonacci retracement from the May 22 lows to the Sept. 4 highs near $11.08.
Source: Tradingview, FOREX.com
On the other hand, the S&P 500 put in its highs on Feb. 20 at 3397 and has been pulling back since. Since the highs on Feb. 24, price has pulled back 29.4%. However, since March 9 (when gold and silver had peaks), price is only down 19%. Previous lows from December 2018 held so far (see chart).
Source: Tradingview, FOREX.com
What does this mean? It means that when the crisis started, money was flowing in the usual flight to safety pattern out of stocks and into gold. However, as the Coronavirus spread throughout the world and stocks continued to move lower, precious metals had to be sold so that cash could be raised. The cash was needed for two reasons: 1) to meet margin requirements, and 2) to build a cash reserve in case of “worst case scenario” (which is also one of the reasons stocks continued to sell off).
It’s important to be aware that just because stock markets around the world are being sold, that doesn’t always mean there will be a rotation into precious metals. While many gold enthusiasts see gold as the only “true” money in times of crisis, it is difficult to buy a stockpile of Charmin with gold coins. Sometimes, cash is the best position to be in!
Joe Perry holds the Chartered Market Technician (CMT) designation and has 20 years of experience in the FX and commodities arenas. Perry uses a combination of technical, macro, and fundamental analysis to provide market insights. He traded spot market FX and commodity futures for 17 years at SAC Capital Advisors and Point 72 Asset Management.
