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Why is gold price dropping and not making all-time highs?

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Recently we have seen gold price pushed down alongside equity markets and many investors now ask why the price of gold is going down and not up? Regarded as a safe haven and in this previous article labelled as a 'recession proof' investment, should gold not be going up now?! Going back to the 2007-08 financial crisis, it seems the same thing happened then. Let's take a look.

The global financial crisis of 2007-08, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s.

Sub prime mortgage depreciation started the crises in summer 2007 in the US, and developed into a full-blown international banking crisis with the collapse of the Lehman Brothers on September 15, 2008. Large bail-outs of financial institutions and other monetary and fiscal policies were employed to prevent a possible melt-down of the world financial system. The crisis was followed by a global economic downturn, the “Great Recession”. The Asian markets (China, Hong Kong, Japan, India, etc.) were immediately impacted and volatile after the U.S. sub-prime crisis. The European debt crisis, a crisis in the banking system of the European countries using the Euro came after.

Whilst all this was going on Gold prices in USD terms dropped 34.13% in 2008 from $1,009 to $681.00 having risen on the initial stages of the crises before the 2008 peak. But looking what happened thereafter was the massive rally in Gold to new all time highs as Central Banks and faster money such as hedge funds and professional investors built up Gold holdings to see a rise of 182% to all time highs of $1,920.60.

The current virus concerns has seen Gold dip right now from $1,700 to $1,450 thus far and $1,155 would be the drop needed to match the 2008 percentage decline. This is not likely to happen as this is a very different scenario: a health crisis with a banking response.

The reason gold was dropping at the onset of the crash in 2007 is the same as now: highly leveraged players are selling gold (and any other liquid assets on their books) to raise cash to make margin calls on their equity positions and cover trades. This happens during severe sell-offs in equity markets. 

So when will gold start going up?

In 2007 it took a couple of months before gold shot right back up and then proceeded to new all-time highs. Of course we don't know how long the virus threat will persist but China has already passed its 'virus peak'. Regardless of how long it takes for the stock market to calm down, Central bank activity is the most powerful driver behind gold price. The lower the Gold price goes, the more Central Banks such as China and Russia will buy the dip. China wants a Gold to GDP ratio equal to the US of 8,133 metric tons; 4,500-5,000 metric tones to buy in the next 4-5 years. This along with other central banks' mandate to increase their gold holdings will inevitably get the upper hand.

The weekly Gold chart in USD below shows what happened in 2007-08 and thereafter. 



 

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