Why are stocks and gold both under so much selling pressure?
Over this entire trading week analysts, traders and investors have remained bewildered not so much at the extent of the selloff, but analysts and investors were even more perplexed at the major selloff that occurred in gold in tandem with an asset class that traditionally carries a negative correlation. With so much warranted selling pressure in global equities many have been perplexed as to why gold found no support and not only sold in tandem with risk on assets, but had deep and severe drawdowns at a time when many believed investors would flock to the safety of gold.
Over the last two days I have been speaking about the last time market participants witness this kind of carnage in both risk on and safe haven assets simultaneously; that was 2008 immediately following the financial crisis created from the banking crisis. I remember that during the 2008 – 2009 financial recession we witnessed the simultaneous mass liquidation in both equities and gold.
In 2008 analysts explained that the unique phenomenon was a result of mass liquidation of all assets to cover margin calls as well as a major component of fear resulting in the liquidation of any investment vehicle that wasn’t bonds or cash.
That being said today’s dramatic $55 decline in gold futures is extremely hard to fathom in light of the first real correction in U.S. equities since 2008. This week the markets lost approximately 13%, with the Dow Jones industrial average down 12% on the week. This kind of selling hysteria has not occurred for over 12 years.
Before gold began its historical climb to the record high of $1900, gold first hit an all-time high of $1000 per ounce, before retracing a full 30% to $700. It was only after that deep correction occurred that market participants interest in gold accumulation and investment interest reemerged.
Which brings me to the following assumption, this most current selloff is much different than the financial crisis of 2008. Unlike a recession caused by a fragile economic scenario, the world has never experienced a full-blown pandemic since 1918. Although there were isolated and smaller pandemics in 1930,1940, and 1950, they all pale in comparison to the influenza pandemic which is considered the most severe pandemic in recent history. The 1918 pandemic resulted in an estimated 500 million people, or roughly 1/3 of the world population becoming infected by the virus. By the conclusion of this pandemic at least 50 million individuals worldwide died including 675,000 deaths occurring in the United States.
The similarities between then and 1918 are shockingly similar in that there is no vaccine to protect against this type of influenza.
The only silver lining to any comparison of 1918 pandemic to the potential of the current epidemic becoming a full-scale pandemic is that modern science and medicine is grown by leaps and bounds over the last 100 years. That allows the world population much more hope that it is still possible to contain this formerly unknown contagion.
However, until a vaccine is developed the current fear of a potential pandemic is alarmingly real, and completely a viable outcome. So, we hope for the best and prepare for the worst and realize that in between the markets could experience continued extended volatility and deeper price corrections.
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Wishing you as always, good trading,
By Gary Wagner
Contributing to kitco.com