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The turmoil in the financial markets is causing huge movements in stocks, bonds, currencies and precious metals. On Thursday, stock prices fell by about 10%, the biggest drop since 1987. It was the third week in a row in which the stock markets were hit hard, resulting in a new Bear Market.
Despite stimulus measures by governments and central banks, investors still don't know what to do with the coronavirus. The virus, which is spreading faster and faster throughout Europe, threatens to bring daily life to a standstill. People are already starting to hoard, as a precaution for possible Italian conditions. It is also busy in the gold trade, because a lot of people now want to buy gold and silver.
Against this background, it is extremely striking to see that the prices of precious metals are also falling. On Friday, the Gold price by 3.5% to €44,209 per kilo, while silver fell almost 8% and closed at a price of €426 per kilo. Platinum and palladium also fell hard, as a deteriorating outlook for the global economy could also hit the manufacturing industry.
Last Friday's decline was remarkable, as the precious metals held up reasonably well earlier this week amid falling stock prices. But on Friday, the selling pressure was so strong that investors also sold off their positions in precious metals. Due to the strengthening of the dollar and a slight recovery on the European stock exchanges, hedge funds sold their positions in gold again.
The AEX fell hard again this week
In recent weeks, the financial markets have been very turbulent and we have seen large rises and falls in all asset classes. Even traditional safe havens do not appear to be immune to these kinds of shocks in the market in the short term. Last Friday, the gold price also fell sharply, as investors sold everything in a flight to liquidity.
At the beginning of this week, a record amount of gold was traded worldwide. According to the London Bullion Market Association (LBMA), for the first time in history, over $100 billion of gold traded through their platform. In various currencies, the gold price rose to record highs earlier this week. That makes Friday's big price drop even more striking.
Bloomberg writes in a article that gold has lost its status as a safe haven. That's rather premature, as the precious metal has always managed to retain purchasing power throughout history. Certainly in the long run, gold has yielded good returns. Over the past twenty years, an investment in gold has yielded an average of 7.8% per year. Silver did less well, but gained an average of 4.7% per year over the same period.
Also, price drops like this are not exceptional, because we saw a similar movement in the 2008 crisis. Even then, the gold price fell in the midst of all the panic, only to quickly find its way back up. "Gold looks like a pretty good medium-term investment. A 10 to 15 percent rally in the short term is very possible," Daniel Hynes of the Australia & New Zealand Banking Group told Bloomberg.
Nevertheless, we must not lose sight of the overview. Since the beginning of this year, the AEX index has fallen by about 30%, while the stock markets elsewhere in Europe show similar losses. In the United States, the S&P 500 is still down 17% after Friday's strong recovery rally than it was at the beginning of the year.
The price of oil has even fallen by 45% this year, while Bitcoin is down about 25% this year. Silver is down 18% due to Friday's price drop year to date. Compared to these sharp price drops, gold is not doing badly, because the gold price is on balance back to the level of the beginning of this year. In other words, gold was able to hold on to its purchasing power better than many other investments.
Gold price back below €45,000 per kilo after worst week since 1983
This contribution was made from Geotrendlines
