Is It March All Over Again?

It looks like March all over again.

Pretty much everything except dollars sold off yesterday. The Dow Jones was down 943 points. The S&P 500 dropped by 3.53%. The Nasdaq plummeted by 426 points.  It was panic selling as markets fretted about the rise in COVID-19 cases, new lockdowns in Europe, and the lack of progress on a stimulus deal in the US.

Given the worries and the uncertainty surrounding the presidential election, you would think gold would catch a strong safe-haven bid.

It didn’t.

The yellow metal dropped by over $40, falling well below the $1,900. Silver also took a plunge and is below $23 an ounce.

So where did panicked investors go?

The dollar. Bond prices jumped and the dollar index rose.

We’ve witnessed this song and dance before. In the early days of the coronavirus pandemic, everything sold off. Stocks tumbled. Commodities plunged. Gold crashed through the $1,600 mark and plummeted as low as $1,568.

At the time, people were asking, “What happened to gold? Has it failed as a safe-haven?”

Of course, it hadn’t. As the pandemic drug on, and the Federal Reserve pumped printed money into the economy, gold went on a big run, eventually breaking its all-time record and pushing above $2,000 an ounce.

The dynamics yesterday looked eerily similar to early March and it may well be gold is setting up for a similar pattern.

But why would gold sell off along with stocks?

An article published by Forbes provides some insight. In a nutshell, gold is liquid.

Many investors buy stocks using borrowed money known as margin. When the stock price declines by a significant percentage, then the investors often need to provide their stockbrokers with more cash as collateral on the borrowing. So what do some of these cash-strapped investors do? They sell some of their gold to get the cash needed to send to the stockbroker. There is always a ready market for gold even when other markets dry up as happened during the financial crisis of 2007-2009. So in many ways, investors should expect gold prices to take a tumble when the stock market dips.”

Indeed, we saw the same pattern during the Great Recession. Gold dropped about 20% in a single month in the early days of the 2008 crisis. That set the stage for its record run to $1,900 by 2011. Once investors understood the scope of the money printing that was coming down the pike, they poured into gold and silver.

We saw the same pattern this year. Gold dropped below $1,600 before running up to $2,000.

Now we’re seeing another drop. But there is no question more stimulus is coming down the pike. That means more money printing. The Fed has already committed to holding interest rates at zero for years. It has already told us it won’t worry about price inflation. And we can be sure that once we get through the election cycle, there will be more stimulus.

Here’s a question you should ask yourself: given all of the dollars the Fed has created in the last nine months and given all the dollars the Fed will likely create in the coming months, do you really believe the dollar is a “safe” haven?

I’m not inclined to panic over this sell-off. Nor will I buy the hype of record GDP growth. There are too many underlying factors undermining the “great recovery” narrative. The fundamentals look fantastic for gold. In fact, this might be an excellent buying opportunity.