Gold prices plunge amid Covid-19 crisis
Traditional safe-haven suffers as funds sell to stem losses
Two weeks ago billionaire investor Jeffrey Gundlach told CNBC that gold will surge as the Federal Reserve weakens the dollar by slashing interest rates. The so-called “Bond King” criticised the central bank’s “hubris” and predicted that the Fed would bring rates all the way to zero to counter the economic impact of the Covid-19 crisis.
Following Sunday’s cut of the federal funds rate to between 0-0.25 per cent, the largest emergency reduction in the Fed’s history, such a prediction now seems prescient.
However, Gundlach’s predicted gold surge has not yet materialised. Indeed, the yellow metal has plunged. In the past week, LME spot gold fell from an eight-year high of $1,684.50 per troy ounce, to as low as $1,450 on Monday.
While the gold’s downward trajectory has stopped in Tuesday trading, to trade up at $1,476 at midday, many investors and gold bugs have been scratching their heads.
The yellow metal is a traditional safe-haven. As a physical commodity with limited supply and fungible characteristics, gold has long been seen as a useful hedge against inflation and the mistakes of government and central banks.
Amidst one the largest market sell-offs on record, investors have flocked to other traditional safe-havens. Both 10-year and 30-year US Treasury yields have recently sunk to record levels, while the Japanese yen (JPY) and Swiss franc (CHF) have also enjoyed strong weeks.
Gold’s recent plunge can arguably be explained by the downside of one of its key strengths, its liquid nature. As financial institutions and funds see their investments wiped by plunges across the market they have sold gold as it is quickly sellable. A hedge against future inflation may be one thing, but immediate margin calls are another.
There is also growing concern that central banks around the world will liquidate some of their gold reserves in order to fund the relief measures required following the coronavirus outbreak. Some would argue that the significant intervention of central banks and governments in recent days has further depressed the gold price and deterred investors.
With Larry Kudlow as the director of President Donald Trump’s National Economic Council, the metal faces significant institutional opposition. In a 2001 interview Kudlow stated: “I don’t want gold to be a hot investment. The minute it is, I know the rest of the story is going to fall apart.”
With the virus still spreading and the markets still in turmoil, only time will tell as to whether Gundlach is vindicated and Kudlow disappointed.
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