By Sean Kelly
Why Gold in Times Like These!
Before we go any further, let us stipulate what everyone in America already knows: we’re headed into a very turbulent period.
It’s not as though thing have been tranquil to begin with. Between the Coronavirus, and the lockdowns, deaths and defaults, unemployment and a stock market that has been bumpier than Mr. Toad’s Wild Ride; riots and demonstrations, looting and arson, 2020 has been quite unlike any other year.
It is not over yet.
Things were already bad in the stock market – especially in the tech sector – before Monday, (9/21) when it looked like the bottom was about to fall out. By last Friday, the Nasdaq index was down 13 percent just since the beginning of the month.
It’s always interesting to see what the press makes of big moves like this. When there is a huge move in the market, the headline writers and reporters look around for a story they can hang it on. It can be anything. It doesn’t even have to be true.
So we sampled reports on the stock market sell off, and depending on what you read, found it was attributed to: an unexpected spike in European Covid-19 cases; Judge Ginsberg’s death and the battle over her replacement; falling oil demand; nightmare election scenarios with armies of lawyers already on standby to duke it out for months over the results; failure of the Fed to move more aggressively; failure of Capitol Hill to move more aggressively on a new stimulus package.
Somewhere along the line someone may even mention that the entire stock market has been lifted by the biggest money creation adventure in history. Or that the US is in the untenable situation of having the lowest interest rates in history, even as it is the biggest debtor in history. The dawning realization that things like that can’t go on forever may also be behind a fourth week of stock market losses.
In any case, you get our point. There is plenty of turbulence ahead that will play out against a backdrop of already raw social and rough economic conditions.
With all of that going on, it is important to remember that you have a haven of safety in troubled economic times. Gold has been tested over and over and around the world during the rockiest and the bloodiest episodes in human history: the French Revolution and the Reign of Terror, the Civil War, the German Inflation, the Great Depression, the Russian Revolution, Mao’s take-over in China… And not just in the biggest events in the history books. Gold has been tested in lesser dislocations as well, including the Stagflation Decade, and the Mortgage Meltdown and Housing Bust.
Finally, we note that the Wall Street Journal account said that the stock market “spurred anxiety for some investors and traders who fear a repeat of the market turmoil of March.”
That reminded us to remind you what did happen in March. It is a predictable pattern in a stock market collapse. Suddenly faced with margin calls for their leveraged stock positions, Wall Street traders and hedge funds liquidate assets with perfectly sound economic fundamentals to meet margin calls in collapsing markets. Last spring, as the pandemic panic grew, Wall Street professionals, scrambling for cash to meet margin calls, took profits in gold, the most liquid commodity of all.
They turned to gold for the liquidity they needed in the moment, but it was a brief affair and they wasted no time reestablishing their gold holdings.
This is, to us, a familiar pattern. In the fall of 2008 during the stock market carnage of banks closing and the popping of the housing bubble, gold fell hard.
Of course, it didn’t last long. Soon gold was racing to new all-time highs. Three years later it was up well over 2 ½ times its October 2008 low.
Last March as the pandemic story grew, an Investing.com story headline (3/12) read, “Gold Loses $1,600 Support as Investors Sell to Save Bleeding Wall Street.”
“Gold lost its key $1,600 support on Thursday as investors cashed out their long positions in the yellow metal in a scramble to cover margins and losses on Wall Street amid the U.S.”
Also in March, Wall Street COVID-19 margin call selling briefly pushed silver below $12 an ounce, but by May it had recovered convincingly to over $18.00. By July it was trading above $20. And, like gold, headed higher.
The same pattern appears to have emerged on Monday. Faced with tumbling stock prices, margin call selling on Wall Street opened a window of opportunity to buy gold and silver, the world’s go-to safe-haven in turbulent times, at “sale prices.”