A Quick Gold Correction?
Six years ago this month we rushed out a message entitled, “A NOTE ABOUT THE GOLD PRICE DURING THE STOCK MARKET BLOOD BATH!”
We are republishing some of it now, even some that cited a still earlier message to our friends and clients.
It describes a syndrome in the markets we have observed before, that in times of stock market chaos, gold performs as a quick source of liquidity for those with their backs to the wall.
The same appears to be true in the current war chaos. Imagine those in some of the targeted Gulf states, governments and financial institutions both, in desperate need for liquidity. We suggest you apply to following description of a troubled stock market to a world suffering devastating oil shocks and economic dislocations in this war:
In February [2020] we described a familiar market pattern in a stock market collapse. Stock investors forced to come up with cash to meet margin calls or to cover other losses often turn to gold as a source for their liquidity needs.
In Blood Running on Wall Street! we wrote:
“Traders in markets with perfectly sound economic fundamentals can sometimes liquidate their positions in other things to meet margin calls in collapsing markets. It appears that in the general carnage of the stock market, large investors scrambling for cash to meet margin calls took profits in gold, the most liquid commodity of all.
“To repeat, we have seen this kind of action before, and we know what happened then.Gold fell hard – but only briefly – in the fall of 2008 during the stock market carnage of the mortgage meltdown.
“But that margin call selling opened a window of opportunity to buy gold at ‘sale prices.’
“Of course, it didn’t last long.Soon gold was racing to new all-time highs.Three years later it was up well over 2 ½ times its October 2008 low.”
Now. as the stock sell-off deepened, the pattern repeated itself last week.
That was then and this is now, of course. But the syndrome is familiar. Gold fell from roughly $1,700 per ounce in March 2020 to below $1,500.
This was a quick “dash for cash” during the onset of the Covid panic. Firms sold the world’s most liquid commodity, gold, to meet a flood of margin calls and client redemptions.
But, typically, it didn’t last long and in less that five months gold was well over $2,000, and reached an all-time high of $2,074 that August.
The current dash of cash is not the result of a pandemic. It is war-induced and it is global. Gold’s chief virtue in a panic is liquidity. It looks to us like the same pattern being reenacted, especially because the war will prove to be highly inflationary. This is not just apparent to us, but is widely evident. Fuel costs, damaged infrastructure and supply chains figure in, as does increased war spending (Trump is asking for a $200 billion supplemental war appropriation in addition to our existing $1 trillion war budget).
There is more. Bonds are down and interest rates are up. Farmers are in planting season but looking at high fertilizer costs not to mention that the diesel that powers their machinery is up some 44 percent.
All those things spell stunning price inflation headed our way. And that makes gold more important than ever.
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