Why Are Gold Prices Struggling While Equities And Bond Yields Are Tumbling?

This narrative may have some merit, but there are several counter-arguments to it.

For starters, if the yellow metal was subjected to selling pressure under these circumstances, it is unlikely to happen again. Traders usually aren’t in the habit of covering profitable positions to support losing ones. It goes against every commonly known trading adage on the matter.

In fact, any experienced trader would do the opposite. Cover losing positions in equities to buy gold, an asset that has been in a strong uptrend even before the Coronavirus chaos hit the equity markets. In other words, the same narrative used to describe weakness in precious metals can be used to make a theoretical argument for strength.

If the argument is that retail traders, who often don’t follow the same practices as professional traders, are to blame for the margin-call related activity, a counter-argument can be made there as well.

Consider the number of retail traders that are invested in broad equity market ETF’s like Vanguard funds. These ETF’s typically are not leveraged to begin with. Further, it begs the question, how many of these Vanguard investors have sizable positions in gold?

The bottom line here is that the margin-call related weakness is a tough argument, especially considering that positioning data that stands to support the argument gets released well after the fact.

The Impacts of Fiscal Stimulus

An alternative view of why gold prices have seen unusual downside pressure in the face of a market crisis is related to fiscal stimulus.

Up until now, precious metals have rallied on the prospects of lower rates. Recall that the price of gold made an important technical breakout just as the Fed shifted to a dovish stance over the summer of 2019.

Legendary investor Ray Dalio wrote an article this week that discussed the importance of a correlated effort with both fiscal and monetary policy easing, and how it historically proved effective in similar situations that the markets are currently facing.

There was an interesting point made in the article – “The scale of the support should be in line with the scale of the crisis. It will increase the deficit which, all else being equal, will raise interest rates.”

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Gary Anderson 3 months ago Contributor's comment

Gold seems to act as a hedge against inflation, but not against deflationary pressures.

Backyard Hiker 3 months ago Member's comment

I would think that in days of #COVID19, people would be flocking to #gold.

Gary Anderson 3 months ago Contributor's comment

Maybe they will but we could be in a deflationary period which makes the dollar soar.