Gold Still Beating Much of the Market Despite Sell-Off
The comments below are an edited and abridged synopsis of an article by Mining.com
Like most asset classes, gold is affected by the unprecedented economic and financial market conditions in play around the world. Its recent volatility has been driven by massive liquidations across all assets, and likely magnified by leveraged positions and rule-based trading, the World Gold Council (WGC) said last week.
Gold has likely been used to raise cash to cover losses in other asset classes, because it remains one of the best-performing asset classes year-to-date.
Selling is more concentrated on derivatives in exchanges and over-the-counter. While gold-backed ETFs have experienced outflows recently, volume remains positive for the year. Funds across all regions have seen $3.6 billion of net inflows in March, giving a collective total of $11.5 billion year-to-date.
The deceleration in economic growth will affect demand for gold, and volatility may remain high. However, high-risk levels combined with widespread negative real rates and QE will be supportive of gold as a safe haven asset. Gold remains an effective portfolio hedge as a source of liquidity and collateral, as well as a safe haven.
There is historical precedent for these types of pullbacks in gold. Gold plunged at the onset of the 2008-2009 global financial crisis, but by year end, it was one of the few assets to post positive returns.
As stock indices around the world have fallen sharply, gold’s performance has been positive in many currencies, including the pound, euro and rupee. It has only been flat to slightly negative in the renminbi, dollar and yen.
As for what’s to come, gold’s performance was intertwined with its unique nature as a consumer good and investment asset, while being linked to key drivers: economic expansion, risk and uncertainty, opportunity cost and momentum.
So far this year, many central banks have cut rates and implemented additional QE measures.
Additionally, governments around the world are pledging trillions of dollars in support of their citizens and economies, but ballooning budget deficits, negative real rates and debasement of currencies will present structural challenges to asset managers, pension funds and personal savings.
It may take time for financial markets to stabilize. Amid high volatility, gold may experience additional swings, but the long-term implications of high risk and lower opportunity cost should support investment demand for gold.
Historically, investment flows in periods of uncertainty tended to offset weakness in consumer markets, the WGC contends.