Why The Gold Slump in a Bear Market?
The comments below are an edited and abridged synopsis of an article by Forbes
Gold is considered a way to protect your portfolio at times of market decline. Academic studies generally support this; research by Baur and Lucey broadly supports this conclusion for investors in the US and Europe.
However, gold performed poorly in the recent market crash. Over the past month, the S&P 500 has fallen approximately 30% and gold has lost 10%. That’s not what we’d expect. Gold losing value during a market panic is unusual. So what’s going on?
One feature of the crisis is the stress on balance sheets from such an abrupt slowdown in activity. This time, many businesses have been forced to close or severely limit operations. While a decline in revenues is never pleasant, a drop to zero income is a different problem. This means that businesses need money right now. That is reflected in the markets: There is such a broad need for cash, all available assets are being sold, gold included.
The other piece of the equation is the strengthening US dollar. Gold can be thought of as a currency, like the euro or the pound. To understand the currency exchange rate between the dollar and the euro, you need to look at trends in both. The same is true of gold when priced in dollars.
The final consideration is that any hedge or safe-haven asset is never guaranteed for any given crisis. For example, in certain crises, oil has been a great hedge. However, this time oil’s decline has been even more abrupt than stocks’ decline.
The price moves described here will be different tomorrow. It is certainly unexpected for gold not to rise in a stock market crash, but it is not impossible. Since this crisis is still playing out, the price action of gold appears unusual in a historic context, but the abrupt decline in economic activity and extreme focus on cash is somewhat unusual, too.