Chart of the day: Gold extends losses as equities continue to fall
We all know gold’s a safe haven, serving as a form of insurance against economic adversity. So from this perspective, you would expect gold to surge when stocks fall. Well, when US stocks plunged yesterday to their largest daily decline in over 30 years, gold curiously took a substantial hit as well. The precious metal fell US $56 on the day and has extended its losses today. There are a few theories why.
Treasury yields tick positive
In the flight to safety, the face value of bonds has skyrocketed, reducing the nominal yield. US 10-year treasury yields dipped so low on Monday - closing at a record low 0.54%, that when you take inflation to account, the real yield was negative. But as plummeting oil prices drive inflation expectations lower, the real yield on bonds moved back into positives this morning, just.
Generally, 10-yr treasury yields have an inverse relationship with gold: as yields go down, gold goes up. So as yields ticked positive again, gold moved lower, as investors moved to an asset with a positive yield.
USD cash grab
It wasn’t just gold that curiously sold off alongside equities. Even safe haven currencies weakened modestly on the day. The JPY was down 0.28% and CHF -0.56% in USD terms.
As investors panic, the theory here is that they’re taking refuge in what gold offers - that’s cash. The need for cash could be due to margin calls, paying off debt, or moving into an asset with yield such as government bonds. Whatever the reason, the surge in the USD shows an increased appetite to hold cash amid the sell-off.
Selling-off as an emergency cash raise amid the global panic, gold’s doing its job as a safe store of value.
Despite the drastic sell off in gold, the precious metal is trading almost 3% higher than the beginning of the year and continues to trade above its 200 day moving average (black line). There’s support around the 1547.00 level, which will likely be reached if the downtrend continues in the European and US sessions later today. A close below here will indicate continued downside.
Gold was also down against the euro yesterday and continues to drop today. Notably, the weakening Australian dollar saw gold in AUD terms appreciate yesterday, although has since followed trend and is moving down today.
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