Why Gold Price is Cratering Along with Stocks

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Gold is traditionally seen as a safe haven asset in terms of crisis. However, as the stock market bloodbath continues, gold and silver prices have also been falling precipitously. I will explain why here.

In our January 2019 newsletter, I explained what drives the gold price you see in the market. It is not pure physical demand. It is a combination of the cost to mine by the major producers plus a factor of inflows into the major gold ETFs. In other words, gold technical traders are the margin of demand in the gold price market, above the cost to mine it by the major miners.

ETF Demand vs Gold Price
Data sourced from WGC and Yahoo Finance

So, curious to see where GLD ETF demand was amidst the growing market panic over the coronavirus, I checked the most recent data on GLD ETF fund flows.

GLD Daily Flows
Source: ETF.com

Investors are selling off their GLD shares as the panic in the market continues. Indeed, here is a longer term chart from Yahoo Finance.

GLD Chart
GLD Chart, Yahoo Finance

The dynamic where paper traders determine market price for gold has not broken due to the outbreak. The above GLD price chart mirrors exactly the gold trading price.

Gold Price Chart
Gold Price Chart, Goldprice.org

 

This tells me a couple of things. First, it means that we have not reached the true crisis yet where the gold physical market price is expected to diverge from the paper traded price shown above. This will happen during a real financial crisis where investors flock to gold at nearly any price. Right now, we just have fear driving a massive market selloff in absence of a financial meltdown.

Should You Sell Your Physical Gold

No you should not. Physical gold is a true safe haven asset when financial meltdown occurs. It will hold value when everything else is crashing. When you cannot get to your cash in the system, you will have your physical gold. Look at this as a buying opportunity for gold, and not to take profits by selling your physical.

 

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