Is gold still a safe haven?
Is gold still a safe haven? by
There have been moments in recent months when many gold owners, myself included, have asked themselves whether gold might have lost its safe haven status, at least in the western world. Was it enough for two generations, who grew up in a paper money system, to forget the history and the 5000-year-old status of gold as real money?
And yet, just as these doubts began to arise, reality struck back and decisively dispersed them. A few hours prior to writing this, a surprising number of physical precious metals traders suspended their operations, as a result of the overwhelming wave of new orders. The supply of physical gold, disrupted by the various coronavirus measures and restrictions, has in many cases failed to keep up with the ongoing gold rush that shows no signs of slowing down any time soon.
Separating the signal from the noise
First off, we should begin by understanding the difference between what we saw in the gold market so far and the price uptrend that captured mainstream headlines, with what we begin to see now, for these are very different beasts. The rise in the price of gold that we witnessed in the previous months was not due to physical trading, but primarily to the comparatively massive increase in the paper gold demand on the part of institutional customers. In the physical market, on the other hand, I noticed that around 60-70% of trades were liquidations and only 30-40% bought additional gold. The experienced investor and long-time owner of physical gold did not yet trust that price increase and secretly expected a downward correction, a chance to add to his position.
On the other hand, it can also be taken as a confirmation that before the physical boom, paper demand always rises first. The reason for this is the rising uncertainty and dwindling confidence in the current system by institutional clients. This only solidifies and boosts the strength of the next stage of the bull market in gold.
To put it this way, it should be understandable that in a stock market crash, many will have to sell everything in order to stem the margin calls, or, in some cases, to even pay their bills. The market is thus flooded with paper gold, which pushes the price down. I have often said in the past that the paper price of gold could go to zero and it still wouldn’t really say anything about physical gold. It seems logical that the price of a debt security on a commodity is not the same as the price of an ownership title on the physical metal itself. It would therefore also be unsurprising if the price of paper and the price of physical gold were to move in opposite directions, especially in times of extremely heightened anxiety. I am already observing this phenomenon on a small scale at the moment, but who knows how it will develop in the weeks and months to come.