In 15 days, the price of an ounce of gold in euros has risen from €1555 (first fixing on February 24 in London) to €1443 at the time of writing. With a low of €1437 per ounce, this represents a drop of 7.59%. And, since March 6, the price seems to have started to fall again. Should we be worried about this?


Gold price in euros since January 1


As the title of this post suggests: not at all!!

But you may prefer a reasoned response. Let's start by placing the last movement of gold in its global context.


After a calming 2019 in which the next day's scenario was more or less the same as the previous day's scenario on the equity markets, 2020 is proving to be the best year since 2008 in terms of entertainment.



In particular, Monday, March 9 set a series of all-time records, which contrasted somewhat with the near-weekly historical records of the previous year, at least in the US equity markets. Just look at that.





It must be said that the previous week, which began with the Fed's catastrophic 50-basis-point cut in key rates (on March 3), had already been quite busy.


"*So, to sum up the weekend: 
- Chinese exports dropped 17% in the first month of the year; 
- Russia and Saudi Arabia, *historically*, are taking actions that will drive oil prices down;
- the Coronavirus epidemic intensifies in Europe;

*- Italy is quarantining 15 million people in some of the most economically powerful regions;
- Lebanon defaults on its external debt (Turkey would also be unclear on this point);
Don't worry, Monday's gonna be fun in the markets."



In other words, this exceptional decision by the great American financier did not particularly convince the markets.



"Wall Street's opening at -7%. Futures markets are still under the influence of circuit breakers. You are experiencing a stock market crash live."


At the end of the day, the media were even dusting off their whole panoply of financial disaster hashtags.



The trend has yet to be confirmed but, in just a few days, the S&P 500 has broken through the symbolic 20% drop that characterizes a bear market, showing market participants that when markets forget the stairs and take the elevator up to the heavens, they can descend at the speed of a meteorite.



Monday's shock was such that some commentators have hinted that a remake of 2008 could be unfolding before our very eyes...



... forcing Jérôme Kerviel to specify that he had not set foot in a trading room all day.


"I was home all day eh... sometimes..."


Let's start by recalling that despite the bearish attacks of February 28 and March 9, the yellow metal is still up by more than 8% since the beginning of the year, while the S&P 500 is down 15% and the CAC40 is down 23%.

In addition, the ounce always sails above its bracket in the €1,387-1,414 area.

However, in the equity markets, we are still a long way from the losses recorded during the 2008 crisis. Between its high in October 2007 and its low in February 2009, the S&P 500 fell by more than 53%, and the CAC40 collapsed by 58% between July 2007 and March 2019. We are still a long way from such underperformance.

As for the yellow metal, it had gone through this period in a jagged fashion, losing in particular about 20% of its value between March and September 2008.


Gold prices between July 2007 and March 2009


You know the rest of the story: the price of an ounce would then hardly stop rising to reach € 1380 in October 2012.

But what had happened at the time for gold to lose 20% in just over 6 months? Roughly the same thing that is happening today.


As I mentioned in the introduction, between its high of €1555 and its low of €1437, the ounce fell by 7.59%.

This raises the following question:



Answer: it's simply the mechanics of 2008 that are being repeated. During the severe falls in the equity markets, caught short, market participants dipped into their liquid assets to replenish their portfolios.



Holger Zschaepitz doesn't write otherwise:



On Zero Hedge, Michael Maharrey relates in more detail the fall in the price of gold on February 28th:  "Traders and investors were scrambling to liquidate assets to raise capital for margin calls. In other words, they were selling gold to keep afloat. As one analyst told MarketWatch, “Investors are selling anything with a bid and running for cover, and that includes typical hedges like gold.”

We’ve seen this same thing happen before – in the early stages of the 2008 crash. As the MarketWatch article pointed out, there was a rash of gold-selling as the stock market began to tank in ’08.

Once investors understood and appreciated the scope of central bank stimulus coming down the pike, they began buying gold.”

An additional explanation is that the fall in equity markets led market participants to rush into US government bonds, which led to a sharp drop in the dollar against the euro. This relative strength of the euro did not, of course, contribute to the influence of the yellow metal expressed in the single currency.



So gold has by no means failed as a safe haven asset. But it is true that the situation is ironic: while there is widespread panic and equities are becoming illiquid, the ultimate safe haven asset is temporarily sold off because of its liquidity.

So don't panic if gold should fall again; even more so. As Bruno Bertez reminds us, it is only when the mother of all bubbles - the government bond bubble - is pierced that gold will shine in all its glory. Until then, there will be ups and downs.



Patience is the mother of all virtues.

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The information contained in this article is for information purposes only and does not constitute investment advice or a recommendation to buy or sell.