It is said that a recession is confirmed when we see two consecutive quarters of negative GDP (Gross Domestic Product). The U.S. posted two consecutive quarters of 2.1% GDP growth of 2.1% to end 2019. The last time the U.S had two consecutive quarters of negative GDP was during the 2008 financial crisis. Time will tell regarding the impact of the coronavirus on the economy but lower growth this year seems unavoidable as mass non-essential business shutdowns and social distancing remain in place amid the Covid-19 outbreak.
We know investors have traditionally used gold as a safe-haven destination for their cash during political or economic uncertainty but how did it actually perform in some of the more recent market crises? Did gold actually live up to its safe-haven expectations during the financial crash of 2007 where stock markets around the world crashed and entered a bear market period?
The price of gold is influenced by many factors. The main factors are Supply and demand. Gold is seen as an inflation hedge. Paper money loses value as more paper is printed while the supply of gold remains relatively the same. It is important to note that not all money printed leads to inflation. A growing economy and population require more money to be printed in order to meet the greater demand for money. As there are more people, there are more customers which require more goods to be produced which require an increase in the amount of money in circulation to buy these goods. If the money supply is not increased it could actually impede growth. Inflation does not seem to be a concern at this point. In a stock market panic, every asset gets sold as investors turn to cash. On the 10th of March, Gold started to decline along with the S&P 500 as equity levels broke below key support. The chart below shows the SPDR S&P 500 Index ETF in green falling with the SPDR Gold Trust ETF in red.
Looking back at the 2007 financial crisis, the S&P 500 peaked at a record high on October 09, 2007. The index declined approximately 54% finally hitting the low on March 09, 2009, lasting 74 weeks or about a year and a half. Comparing this to the current market situation, the S&P 500 has declined 35% from its record high this past February in only 6 weeks. Could this be the shortest bear market in history? Time will tell.
Here is a ratio chart of the SPDR Gold Trust ETF (GLD) vs SPDR S&P 500 Index ETF (SPY). Gold clearly outperformed the S&P 500 Index during the 2007 financial crisis. Gold was up approximately 25% while the S&P 500 declined below 50%.
Gold (GLD) vs S&P 500 (SPY) October 9, 2007, to March 09, 2009, gained 25%:
Gold does not always go up in bear markets, but it has certainly been a safe-haven and decent store of value during times of equity market uncertainty.
Gold is currently reacting to demand as investors turn to the metal as a safe-haven during this time of economic uncertainty. Gold has once again started to outperform the S&P 500 as the S&P 500 index ETF (SPY) in green declines, the Gold ETF (GLD) in red moves up showing gold is acting as a valuable hedge in the current market decline.
Looking at Trading Central Analyst Views below, Gold has rebounded off key support at the 1450 price level. Price remains supported by its 50-week moving average (in blue). Gold is back in an uptrend shining once again after a consolidation period that began in late 2013 until the upside breakout of the 1365 level back in June of 2019.
Gary Christie is head of North American research at Trading Central in Ottawa.
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