Gold has failed to rally in the face of China’s stock market crisis as investors, scorched by a brutal end to the market’s 12-year bull run, chose cash and bonds for safety over bullion while they seek clarity on the timing of a US rate increase.
While at first glance, the failure of a “safe-haven” asset to respond may seem odd, this behaviour is by no means unusual.
As a broad rule, bullion tends to benefit from stock market weakness as an alternative asset, but previous equity crashes show the initial price response can be to fall.
“In 2008, when Lehman Brothers collapsed, we saw a two-week decline in gold prices, despite having a perfect storm for gold,” LBBW analyst Thorsten Proettel said.
As investors worldwide scrambled for low-risk assets on Monday, benchmark US Treasury yields fell to four-month lows, while the euro and yen climbed. Gold failed to hold its ground.
“You have to think of gold as a range of different things – as a commodity, as a financial asset, and as a form of insurance or safe haven,” said Mitsui Precious Metals analyst David Jollie.
“We’re in a market where commodities have generally come under pressure, particularly those with exposure to China; as a financial asset, there’s a temptation to take some money out of that to cover losses elsewhere. There has been some positivity surrounding gold as insurance, but that can’t outweigh everything else.”
Where the current crisis in stocks differs from those seen in 2008 and 2011 is in the perception of the US economy’s health. Both earlier drops were fuelled largely or in part by a concerns over US growth.
This time around, the US economy is considered to be more robust than in previous crises, with the Federal Reserve still expected in many quarters to press ahead with its first rate rise in nearly a decade.
That is worrisome for gold, which has benefited from ultra low interest rates in recent years. These cut the opportunity cost of holding non-yielding gold, while weighing on the dollar.
There is scope for gold prices to rise again once the market perceives more clarity on the pace of rate rises. If these are, as many expect, gradual and small, gold may see fresh interest as fears of stronger measures wane.
But for now, investors remain wary of moving back into the metal. Gold backed exchange-traded funds have seen some inflows this week, but the holdings of the largest have risen only 2% since hitting seven-year lows earlier this month.
“The ETFs have seen only minor inflows, so there is no rush yet into gold,” Julius Baer analyst Carsten Menke said. “For that to happen, we would need much more of a systemic financial market crisis.”
“There are clearly some really severe problems in China that could affect the whole global economy, so the picture for gold has improved somewhat, but not to the extent that we need to reconsider our longer-term stance.”