WisdomTree: In the week of the 9th to 16th March 2020, gold prices fell 10%. In that week the S&P 500 fell 13%, the DAX fell 18% while the IBEX 35 fell 20%…..
By Nitesh Shah, Director, Research, WisdomTree
Gold hardly looked like the defensive asset its widely recognised as when looking at these headline figures. However, scratching beyond the surface, we can see that gold was playing its traditional role.
In times of extreme market volatility, when there are lots of margin calls on risky assets, investors often scramble for liquid assets to meet those margin calls. Gold and Treasuries are two important assets in that category. They were both being sold in order to provide liquidity for other purposes. Gold and Treasuries prices fell in tandem. Treasury yields, which rise when Treasury prices are falling, moved in lock-step with gold.
Source: Bloomberg, WisdomTree, data available as of close 25 March 2020. Historical performance is not an indication of future performance and any investments may go down in value
We expect a similar pattern in 2020. Already the injections of liquidity and the fact that equities are not in free-fall, has eased selling pressure on gold. The largess of central bank and fiscal authority action in of itself is likely to drive a gold price rally. Gold, is seen as the antithesis to fiat currencies. The fact that its supply can’t be expanded at will means that it should hold its value better than the value of the currencies issued by the central banks that are expanding monetary policy.
Despite all the stimulus offered by central banks and fiscal authorities, the length and amplitude of the current COVID-19 shock is largely unknown. Therefore, it is hard to judge whether the stimulus will be enough. We have developed a number of scenarios for gold based on how long the crisis and therefore policy easing lasts.
In a “v-shaped” economic recovery, where the damage to economic growth is largely in the first half of the year and policy can be tightened in the second half, we see gold prices rising initially to US$1965/oz by June 2020, but to fall thereafter to US$1370/oz by December 2020. In a “u-shaped” economic recovery, where the global economy needs continued stimulus during 2020, gold prices are likely to surpass US$2090/oz in June 2020 and stay close to that level for the rest of the year.
In the “v-shaped” economic recovery investor sentiment toward gold starts to wear lower, as “riskon” mindset dominates in the latter part of the year. Whereas in the “u-shaped” recovery sentiment toward gold remains very high reflecting the uncertainty in the economy and the longer-term implications of a loose policy setting.
In the “v-shaped” economic recovery Treasury yields rise as monetary policy is tightened. Whereas in the “u-shaped” Treasury yields rise as monetary policy is continuously loosened.
Ours scenarios are based on our model of gold price behaviour, calibrated on data between 1995 and 2017. However, we acknowledge that many aspects of today are vastly different to the past. As we move so far out the historic sample there is potential for gold to surprise either on the upside or the downside.