At its low, the price of gold was down 3.2 percent before rallying later in the day to recover the $2,400 an ounce level. Nevertheless, the yellow metal finished down 1.3 percent on the day.
Silver got pounded even harder, dropping as much as 7.2 percent at its intraday low. Worries about an economic slowdown and an ensuing decrease in silver demand hammered the silver price down.
You might be wondering why gold – supposedly a safe haven – dropped during the broader selloff. Shouldn’t a good haven do well amid market chaos?
In fact, the plunge in the price of gold was perfectly normal given the market conditions. Gold often sells off early in a bear market for stocks.
In 2020, gold had a 3 percent decline multiple times in the early days of the pandemic selloff. In October 2008, gold plunged by more than 7 percent in the early days of the financial crisis.
But why?
Precisely because gold serves as a hedge.
Investors often liquidate winning gold positions during a sharp downturn to cover stock losses. But gold generally falls less sharply and recovers more quickly – exactly the scenario that played out on Monday.
Here’s how an analyst explained it to Bloomberg:
“Virtually every time there is marked equities weakness, investors who hold gold as a risk hedge will liquidate part of their holdings to raise liquidity against any potential margin calls. When the dust settles, they almost invariably buy it back.”
Margin calls are a big problem for investors during a sharp stock market downturn.
When an account falls below a certain threshold, brokers demand additional deposits of money or securities to bring the account balance up to a required minimum level.
Given gold’s liquidity, investors can quickly sell to raise the cash necessary to cover margin calls.
It’s important to put Monday’s gold selloff into perspective. Even with the downturn, gold hit a record just a few weeks ago, and the yellow metal is still up well over 15 percent on the year with bullish factors firmly in place.
A recession would likely mean deeper and quicker interest rate cuts. As a non-yielding asset, the mainstream tends to view lower interest rates as positive for gold.
And of course, a return to easy money is a surrender to inflation. In other words, the inflation dragon will likely be resurrected (if you actually believe he is dead).
As far as silver, an economic downturn would temper industrial demand, and the white metal is much more volatile than gold.
But silver is fundamentally a monetary metal, and it tends to track with gold over time. In fact, silver has historically outperformed gold in a gold bull market. For example, during the pandemic, gold increased by about 40 percent, while silver increased by 141 percent.
Whether Monday’s selloff was just a tremor before the earthquake, or the beginning of the great unwind, there are plenty of reasons to be bullish on both gold and silver.
These price dips could be viewed as a buying opportunity.
