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IS GOLD STILL A SAFE-HAVEN ASSET?


Some traders questioned the age-old premise that gold is a safe- haven asset when in late February, March 12 and on March 16 S&P 500 futures plunged, and unexpectedly so did gold.


This in-tandem plummet in stock index futures and gold futures caused traders to question their strong belief that in times of economic and market turmoil investors will turn to flight to quality vehicles such as gold. So why did this relationship fail so miserably in recent days? It appears that, as stock markets fell around the world, investors were forced to liquidate, and in some cases, sell all assets in an effort to meet margin calls. That included gold.


ACCOMMODATIVE CENTRAL BANK POLICIES There is more to the bullish side of gold than just its safe-haven quality, which often has a short term influence. What has a long term influence is the interest rate situation. Currently interest rates are very low, at zero and even negative in many countries. These low rates, which are likely to get even lower, have underpinned this bull market for gold futures that started in December 2015. As growth in the global economy slows due to the negative consequences of the coronavirus, central banks around the world are rushing to add more liquidity to the banking system. For example, at the rare U.S. Federal Reserve inter- meeting announcements on March 3 and on March15, the Federal Open Market Committee lowered its fed funds rate by 50 basis points to between 1.0%


AS GROWTH IN THE GLOBAL ECONOMY SLOWS DUE TO THE NEGATIVE CONSEQUENCES OF THE CORONAVIRUS, CENTRAL BANKS AROUND THE WORLD ARE RUSHING TO ADD MORE LIQUIDITY TO THE BANKING SYSTEM.


and 1.25% and then again to basically zero. These were the first interest rate moves between regularly scheduled FOMC meetings since the 2008 financial crisis. Earlier the Reserve Bank of Australia cut its key interest rate by 25 basis points to 50 basis points, which took the official cash rate to another historic low of 50 basis points. And the Bank of Canada on March 4 slashed its key interest rate target by half a percentage point, dropping it to 1.25% in what economists saw as a rapid response to the growing economic shock from the coronavirus outbreak.


Other central banks are likely to follow suit with easier credit conditions, including the European Central Bank and the Bank of Japan where negative interest rates are probably going to become even more negative, as additional economic stimulus is needed in Europe and Japan.


The European Central Bank will likely cut its key short-term interest rate by 10 basis points from the already record low level of negative 50 basis points. The Bank of Japan is in an accommodative mood, as well. Officials have recently said the central bank won’t hesitate to “consider” easing, if Japan’s economy loses momentum towards hitting its price target. Low interest rates globally will remain an underlying supportive influence for gold for a very long time.


Chart 1: Gold Futures – Monthly


Source: Chart from QST


12 | ADMISI - The Ghost In The Machine | Q1 Edition


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