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Why are Gold & Silver Crashing?

Jeff Clark, Senior Analyst, 
FEB 28, 2020

Gold is down over 3% today as we write. Silver is down over 6%. The gold/silver ratio has soared to 95, its highest level since March 1991.

Why is this happening? Aren’t gold and silver crisis hedges?

One of the biggest reasons has to do directly with the stock market. It’s the same reason gold and silver crashed in October 2008.

Because of the rout in stocks, there is a sudden need for liquidity. Cash is desperately needed to meet margin calls and offset losses elsewhere. To a large extent, gold is being sold to meet those liquidity needs.

A number of other analysts are pointing this out as well.

  • “While gold has rallied amid both risk-on and risk-off episodes, gold could suffer from further profit-taking as gold is utilized to meet margin calls, as a liquid asset, amid sharp declines across equity markets.” Standard Chartered
  • “While bullion has rallied amid both risk-on and risk-off episodes, it could suffer from further profit-taking as it’s used to meet the calls amid the sharp declines in stocks.” Precious metals analyst Suki Cooper
  • “There is an old saying in trading markets that when times get really dire and anxiety is high, you don’t sell what you want, you sell what you can. Such is likely part of the reason safe-haven gold has seen downside price pressure this week.” Precious metals analyst Jim Wyckoff.

In other words, it’s not because there’s something wrong with gold. It’s because of needs elsewhere, and gold is available to help. It’s also the last day of the month, so some traders are locking in gains or getting losses off their books.

I know this doesn’t necessarily help us feel any better, but it does explain why the metals are selling off.

Is it almost over? We obviously can’t answer that with any certainty, but based on a similar event in 2008, the selloff in gold and silver is likely to stop when the urgent need for liquidity stops, which could occur before stocks are done falling.

For example, in 2008, gold stopped falling by the end of October, while the stocks continued to decline for the next five months. But gold re-exerted itself as a safe haven almost immediately: from November 3 until the following February 20, gold rose 35.6%. By the following November, one year later, gold had risen 45.6%.

Gold rebounded in this manner because of its safe haven status. Once the urgent need to find liquidity began to ease off, investors rushed back into gold. Importantly, the gold price never revisited the October 2008 lows. Still to this day.

So while we can’t tell you when things will reverse, we are confident that gold will resume its safe haven status.

For those that want more bullion, based on history this is likely to be a short window to snag prices at these levels. This is just my opinion. But I am personally looking to capitalize on it, especially silver given the extremely stretched ratio.

Hang in there friends, our big picture thesis for gold and silver remain intact.