Is Gold the Financial Inoculation Your Investments Need During Flu Season?
It is already well established in the financial literature that gold is an effective hedge against market downturns. The precious metal has remained a prized asset for eons and will continue to retain its appeal as the perfect bulwark against poorly performing stock markets and general economic malaise. In this regard, gold really is in a class of its own. Experts have extrapolated gold prices over time, with startling findings emerging from the statistical data.
For example, gold was priced at $236.07 an ounce in December 1970, and spiked to $1,766.39 an ounce by March 1980. Over the next decade, gold prices retreated towards $827.96 an ounce by January 1990, before the inexorable march to current levels at $1,523 an ounce by December 2019. The performance of gold cannot be understood in isolation.
There is simply too much whipsaw pricing in the mix to make sense of bullish and bearish sentiment without juxtaposing macroeconomic variables into gold price charts. Once stock-market performance is factored into the equation, a trend emerges. Although not absolute, the correlations are strong enough to justify the consensus that gold performs well when stock markets are under pressure, and gold performs poorly when stock markets are thriving. A few important correlations are worth highlighting:
- In May 1934, the gold price was $676.24 an ounce. It also marked the high at the time. The stock market was actually running rampant at that time, with the Dow Jones at a level of 100.36 (January 2, 1934) and 144.13 on January 2, 1936. Clearly, the correlation held true.
- In July 1970, the gold price was $240.89 an ounce, near a multi-decade low. On December 31, 1970, the Dow Jones was at a level of 838.9, and up markedly from a level of 809.20 on January 2, 1970. By December 31, 1971, the Dow Jones was at 890.20, and climbing fast towards the 1000 level. In this case, the correlation also holds true. One can see that the gold price increased sharply after that, which is also followed by sharp selloffs on the Dow, which plunged towards a low of 632.04 on January 2, 1975.
- After the 2008 Global Financial Crisis, the gold price shot up towards $1,977 per ounce +/- as investors and traders sold their equities and ploughed their funds into safe-haven assets like gold bullion. From around 2012, the US economy (owing to quantitative easing under President Barack Obama) started a robust recovery and the gold price tapered off accordingly. The stock market has been booming for approximately 8 years, and the gold price has retreated towards the $1,570 mark an oz.
Of course, there are many outliers in the statistics. There are periods where the stock market was booming and the gold price was booming. Given that gold is dependent on so many more factors than the performance of the stock market, this is to be expected. Gold is a USD-denominated asset. That means when the dollar is strong, owing to exchange rate mechanics, demand for gold decreases. The rationale behind this is simple: foreign buyers of gold can afford less when the gold price is high in USD thereby decreasing demand for the precious metal. When the USD weakens, this is generally seen as a negative for the US economy in some quarters, and this increases demand for the precious metal.
As an analyst, there are many ways to assess the performance of gold bullion. One of the most commonly used techniques is that of candlestick patterns which reveal bullish and bearish movements in the gold price as represented by the candlestick patterns. These graphical representations on a gold chart are particularly useful in easily identifying different trends and price fluctuations around the mean.
Take as a case in point the pricing of GLD SPDR Gold Shares as listed on the NYSE. The gold price has been steadily rising throughout 2020, owing to the poor performance of the stock market as a result of the outbreak of the deadly coronavirus. This is a classic case of how candlestick patterns can be used in the analysis for trading and investing purposes.
Macroeconomic Variables That Can Impact the Gold Price
As evidenced from the performance of stock markets and the gold price over time, it is possible to identify trends and patterns that are likely to develop. While the literature on the impact of flu season on the gold price is perhaps spurious at best, the economics behind the theory is sound. If we hypothesize on the proviso that the flu season is particularly devastating as is the case with the current coronavirus, we can liken the impact of this global health hazard to that of any other geopolitical shock.
Given the facts, the World Health Organisation (WHO), and the Centers for Disease Control (CDC) have designated the current coronavirus outbreak as severe, life-threatening, and in need of urgent containment. We have already seen the impact of the coronavirus outbreak on stock markets, with large-scale selloffs taking place on the Dow Jones, the NASDAQ, the S&P 500, and various international bourses.
In times like this – flu season – it is safe to say that traders and investors will typically shift their funds away from volatile equities (which are now being threatened by lower levels of productivity and a downturn in economic performance) towards safe-haven assets like gold bullion. That’s precisely why, we can expect the gold price to rise or at least consolidate, ceteris paribus during a contagion of the flu. Typically, flu season will not have much bearing on the gold price, or stock markets.
This year – 2020 – is particularly poignant. Hundreds of people have died, tens of thousands have already been infected and the mass-media coverage of the current coronavirus during flu season is having an outsized impact on gold price predictions. If the outbreak is contained quickly, the prediction is for a limited effect on the gold price to the upside. If this is a protracted containment, predictions are that the gold price will rise accordingly.
Investors have a variety of options vis-a-vis what to do with their money. The threat of a global pandemic is bad for business and results in money shifting from equities to bonds, safe-haven currencies, and commodities like gold. That’s precisely what is happening during this flu season.