The way stocks have been selling off lately, one may have thought that a safe place to park your cash was in precious metals, such as gold and silver. These have always been considered great “flight-to-safety” instruments, as they are viewed as a store of value. When there is a financial crisis, there is always the possibility that some assets “may not be around” when it's all said and done. However, throughout history, precious metals have always provided a home for cash when other assets were failing.
Yet during the current sell off in risk assets, cash has not necessarily rotated out of stocks and into precious metals. Just one week ago, gold put in a near-term high at 1703.60. Over the course of the next 5 trading days, including today, the price of gold from high to low has sold off 14.8%, but held just above prior support near 1445.8.That level also coincides with the 161.8% retracement level from the lows on February 5 to the highs on March 9.
Source: Tradingview, FOREX.com
Silver put in a high of 18.929 on February 24, pulled back and bounced to 17.58 on the same day that gold put in its high. Over the next 5 trading days, including today, the price of silver sold off 36% to today’s low of 11.22 before bouncing to 12.85 today. Today’s price action broke through the lows from May 22 at 14.34 and fell to near the 161.8% Fibonacci retracement from the May 22 lows to the September 4 highs near 11.08. The RSI in silver is also in extreme oversold conditions.
Source: Tradingview, FOREX.com
On the other hand, the S&P 500 put in its highs on February 20 at 3397 and has been pulling back since then. Since the highs on February 24, price has pulled back 29.4%. However since March 9 (when gold and silver had peaks), price is only down 19%. Previous lows from December 2018 held so far.
Source: Tradingview, FOREX.com
What does this mean? It means that when the crisis started (before we knew it was a crisis), money was flowing the usual flight to safety pattern out of stocks and into gold. However, as the coronavirus spread throughout the world and stocks continued to move lower, precious metals had to be sold so that cash could be raised. The cash was needed for 2 reasons:
1) to meet margin requirements
2) to build a cash reserve in case of a “worst-case scenario” (which is also one of the reasons stocks continued to sell off).
It’s important to be aware that just because stock markets around the world are being sold off, that doesn’t always mean there will be a rotation into precious metals. Sometimes, cash is the best position to be in.