Gold's Swoon Echoes Financial Crisis Blip

(Bloomberg Opinion) -- In times of coronavirus panic, even havens can be unreliable.

Gold closed off February on a tarnished note, ending last week with its steepest daily decline since 2013. As financial markets panicked over the spread of the pneumonia-like illness, stocks tumbled and dragged gold and other precious metals lower. That's a rare phenomenon for a metal that tends to shine brighter when everything else looks gloomy. It will also be a brief one.

Back in 2008, spot gold fell by more than a quarter between July and late October, before embarking on an unprecedented run toward $1,900 an ounce, once global rate cuts began in earnest. This time too, preconditions are set for prices to keep rising. Already on Friday, Jerome Powell, chair of the U.S. Federal Reserve pledged to act as appropriate to soften the impact of the virus on the economy, paving the way for multiple interest rate cuts, perhaps even before mid-March. Expect a combination of rock-bottom yields, volatile markets and appetite from exchange-traded funds to keep gold's prospects bright.

It's been an impressive run for the yellow metal. It has added almost a quarter to its value from the start of 2019 to reach a seven-year high early last week, as investors sought protection from lofty valuations, an uncertain outlook and, eventually, falling stocks. Bullion has kept climbing just as fading confidence in the global economy drives down industrial metals like copper.

There are few encouraging signs for the global economy, starting with grim numbers for Chinese manufacturing. That doesn't mean Friday should be a shock, or indeed a threat to bullion's reputation as a haven. Investors, by all accounts, were offsetting losses elsewhere, and sold gold, where net long positions have been hovering near record levels. By Monday, gold was already back above $1,600.

The importance of the drop, then, is to note how gold will regain its shine. The stage is set for more than a simple recovery.

First, consider that even before the outbreak of coronavirus in China, stock market volatility had already increased the appeal of gold. In the age of policy via Twitter, a hedge against such swings becomes more attractive. That raises the base for a metal where sentiment has always mattered more than fundamental factors like supply and demand.

Add to that the rise of exchange-traded funds, which, as my colleague David Fickling has pointed out, are increasingly determining how gold behaves. Those remain largely unruffled by Friday.

The real driver determining how far and how fast gold rises, though, will be central banks, and how quickly they turn to monetary easing to combat the economic impact of the coronavirus, which has shuttered entire regions of China, battered supply chains and now spread well beyond Asia. Gold doesn't earn interest, so tends to lose appeal when bond yields are high and gain a shine in times of lower borrowing costs. The global stockpile of negative-yielding bonds is back above $14 trillion. Some U.S. Treasury yields now  look set to drop below zero.

It's true that gold tends to do better after financial crises than after other kinds of disasters, such as wars. Yet Powell and peers are preparing to use monetary tools to battle this crisis. That makes the rate at which Covid-19 spreads in the U.S. a determining factor of just how fast gold will rise, and for how long.

The rally is unlikely to be a smooth ascent; margin calls may hit the price again. Just not for long.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

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