The price of gold did not react significantly after the last Black Monday. Did gold fail as a safe-haven asset?
August 24 was an extremely turbulent day for the global and U.S. stocks. The Dow Jones plunged 1,000 points at the open and closed with a 3.5 percent loss, while the S&P 500 lost around 3.9 percent. The London price of bullion rose that day, however, only by $10, or less than 1 percent. What does it mean? Did gold lose its safe-haven status?
Well, gold’s performance after the Black Monday is indeed worrying. Although the lack of significant response during the Greek crisis and China’s stock market crash in June could be explained by the minimal risk of contagion, now the spillovers were evident. Stock markets all over the world, including the U.S., plunged, while the price of gold did not soar amid the panic in the financial markets.
However, it does not necessarily mean that there was no safe-haven buying. Actually, the price of gold has been performing best among the precious metals. So what caused the weak price action in the face of seemingly bullish catalysts? First, gold serves also as a store of liquidity, so investors could sell gold to raise cash. Second, the shiny metal remains in a bear market with weak technicals, therefore the reaction was subdued. Prices of precious metals, just like practically all assets, move from extreme optimism (tops) to extreme pessimism (bottoms) and vice-versa. The trend is unlikely to reverse until very strong emotions (either extreme joy, mixed with greed, or fear) are seen. The precious metals market didn’t fall low enough to trigger massive panic and thus, we can expect the decline to continue. Until that happens gold will likely still react to bullish events, but only moderately. Investors and traders will prefer to focus more on the negative factors. In this case, we can say that it might have been the rising real interest rates that outweighed the safe-haven demand. As you can see in the chart below, the real long-term interest rates have been rising since May. This is a bearish environment for gold prices. Therefore, it seems that for a sustained and significant rally, gold needs to fall low enough for enough people to panic and throw in the towel.
Chart 1: 10-year (blue line) and 5-year (red line) Treasuries indexed by inflation from 2014 to 2015.
To sum up, the price of gold did not react significantly after the Black Monday, but it does not necessarily mean that the shiny metal has suddenly lost its safe-haven appeal. It likely indicates that the bearish factors, such as rising real interest rates, are still present or even dominant in the gold market and that’s what investors and traders will likely prefer to focus on until gold falls low enough.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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