Since February 24, the Dow Jones Industrial Average is down about 30% and gold is down less about 9%. Why does Gold go down in crisis because it is meant to be a safe haven?
The best explanation is the following: Many stock market investors buy stocks in leveraged, so-called margin accounts. They take on some risk by borrowing against their investments in order to increase their returns. A great concept for the investor as long as the stock market is going up.
However, when there is a significant short-term sell-off in the stock market or worse a crash, the value of the investments falls below the loan amount. As a result, the investor needs to inject cash into the account to cover the margin call.
The private individual investors usually look at better-performing assets. One of them is gold. They sell highly liquid gold, which has been sitting on the sidelines to fund their badly performing stock position, in the hope that the move down is just a short term correction.
Usually, gold recovers when bargain hunters come in to buy undervalued gold. exactly the same happened during the financial crisis of 2008 to 2009.
Reasons for Gold to go higher from here:
1. Fear takes over and Gold will emerge as a safe haven.
2. Real assets should appreciate as a result of quantitative easing.
3. Negative interest rates will encourage to store money in gold.
4. Potential political and social unrest will unsettle investors and markets.
Gold is an important part of your portfolio. Gold doesn’t generate interest and dividends but Gold means wealth insurance. Long term, the price of gold should continue to rise as the value of the fiat currencies fall in value. Gold will protect your wealth as it has for 5,000 years.
Sven Franssen