By David Forest, editor, International Speculator
Let’s talk about gold. It’s one of the big stories right now.
And I know a lot of readers want to know more about its ability to protect them in a crisis like the one that’s unfolding right now.
So far in this crisis, the S&P 500 has seen a maximum “drawdown” (peak-to-trough fall) of 34%.
And gold wasn’t spared in the panic, either. It saw a maximum drawdown of 12%.
Now, I know which loss I’d prefer to take.
But there has been some disappointment about the gold price falling when stock markets crashed. And that’s understandable. Folks are worried their “disaster insurance” might not be working.
But here’s the thing… temporary selloffs, like the one we just saw in gold, are pretty normal. I’ll explain more below… and I’ll also tell you about the catalysts that will send gold higher soon…
If you look back to past stock market crashes, gold usually falls with everything else before it runs higher. It happened after the dot-com crash in 2000.
It also happened after the 2008 financial crisis. Gold initially dropped by as much as 29% before it rallied 166% to its last bull market peak of $1,895 in September 2011.
Why these initial drops for gold?
When these market crunches hit, overleveraged traders sell everything they can to satisfy margin calls. In other words, they need to come up with extra cash as collateral for shares they borrowed.
They basically sell everything that isn’t bolted to the floor. This includes gold and “paper” gold – stuff like exchange-traded funds (ETFs) and futures contracts that give you exposure to the gold price without actually being gold.
In many cases, it’s not people selling physical gold. It’s people liquidating paper gold to raise cash.
However, physical precious metal supply is incredibly tight right now.
And this “gold crunch” is something I’ve been picking up from my global network of contacts in the gold industry.
For instance, I got a note from a bullion dealer I know in Singapore recently. He told me he had no gold – or silver – left to sell. Anything that is moving is selling at premiums of 20%, 30%… even 40%… above “spot” price (the quoted gold price).
Bottom line: Demand is strong for physical precious metals. And that’s exactly what you would expect during a crisis like this.
Gold – along with silver, platinum, and palladium – is doing what it’s supposed to be doing. It’s just going to take some time to flush the selling in the paper market out of the system.
We’re seeing some massive spikes in volatility in the gold price as a result of this “gold crunch.”
We’ve been seeing hundred-dollar swings. That’s going to continue.
We could also get another few dumps in the gold price if we have another stock market drop… which I believe is likely.
Gold Mines Are Closing Down
Stocks have been mainly reacting to the coronavirus panic.
The next issue investors are going to have to grapple with is the impact of the pandemic on the economy.
I’m talking about border closures, government orders to go into lockdown, businesses closing, folks losing their jobs. That’s probably going to bring more “unexpected” news… and some more moves lower for stocks.
Plus, another effect of the coronavirus pandemic is a lot of mines are shutting down.
There’s been a lot of news, particularly the last few days, about governments ordering non-essential businesses to close.
That includes gold mines.
South Africa is a top-10 gold-producing nation. Its government has said it’s closing all of the nation’s gold mines. These shutdowns alone will reduce global gold supply by 4%.
There have also been mine closures in the Canadian provinces of Quebec and Ontario. Peru and Argentina have also shuttered mines nationwide.
Add that to more limited closures in Russia, and we’re seeing a global fall in the gold supply of 14%.
Below is the map view of these closures.
The black numbers show each country’s percentage of total global production. The red numbers show the percentage of national supply lost due to coronavirus closures.
You don’t need me to tell you that this is good news for the price of gold bars and coins. Supply is disappearing just as demand ramps up. It’s only a matter of time before that’s reflected in the gold price.
Here’s what you need to know… Gold could see more temporary falls if we get more big down days in stocks.
If it does, stay the course. There is no need to panic.
As we’ve seen already, these are temporary drops. Gold dropped to $1,460 an ounce on March 16. But it shot back up to nearly $1,640 an ounce in a matter of days.
And with the catalysts I’ve outlined above, gold’s next run is just around the corner.
Keep walking the path,
Editor, International Speculator
Editor’s note: As Dave said above, gold is still your best bet during these uncertain times. That’s why we urge you to check out our “Gold Investor’s Guide.” It’s our free primer on gold… and a great resource for readers who want to start building their exposure to the metal. Go here to check it out.