High volatility in financial markets observed during the past two months is a result of the COVID-19 outbreak and extremely low oil prices. VIX, the market’s preferred gauge of broad volatility, is trading at the highest levels since 2008 due to the extra-large buying and selling across all markets.
In essence, a higher VIX reading usually indicates a higher degree of uncertainty surrounding the markets. It is exactly during the times of uncertainty and worsening risk sentiment that the safe-haven assets are the safest bet out there.
The safe-haven king, gold, is known to be the “go-to” asset during troubled times, due to its ability to protect investors against a possible catastrophe. If you look back historically, gold has always been a traditional hedge bet for market downturns, as it is generally perceived as a store of value.
“Investors are flocking towards gold in spite of a spike in equity markets, mostly because of long-term uncertainties like political insecurity, probable equity market volatility…, weak earnings expectations and ultra-low interest rates,” Commerzbank analyst Eugen Weinberg said.
During the first weeks of COVID-19 selloff, gold price was (surprisingly) moving lower along with the equity market. The initial selloff just made the gold more valuable as it became cheaper.
This proved to be a fantastic buying opportunity, with stockbrokers reportedly coming under stress from the volume of customers looking to take advantage of the market conditions. If you had bought gold just four weeks ago, you would be sitting on a +15% return today, which for the safe-haven (a low-yielding) asset, presents a great return on the investment in such a short timeframe.
“The main factor supporting gold at the moment is the extraordinary amount of stimulus from central banks. I don’t think it’s been fully priced in yet,” OANDA analyst Craig Erlam said.
“The record highs hit in the aftermath of the global financial crisis, and even higher, look perfectly reasonable, under the circumstances. The $1,800 level does not seem very far away.”
Palladium is another precious metal that saw its price skyrocket in the previous weeks. Results from a recent study published in Applied Economics Letters, show that platinum and palladium have historically acted as safe havens against the falling US equity prices.
Palladium prices gained 60% in the two closing weeks of March on the heightened fears of global recession, while platinum surged more than 40% in less than four weeks. Hence, don’t be surprised if precious metals continue to gain amid the rising uncertainty in the context of a post-virus rebound.