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Why are safe havens falling?

By Eliman Dambell

 

When the markets panic, the normal reaction is for investors to find shelter in assets of stability. However yesterday saw Gold prices suffer one of the biggest intraday drops ever recorded. The metal moved from $1576 – $1446 in one trading day, completing wiping out all notion of its title of safe haven status, as the tornado storm completely collapsed the shetler currency. So why did this take place? After recently trading as high as $1700 due to the panic caused by the Coronavirus, why has the price dropped so rapidly, even with the markets still in panic?

What has caused the panic?

The reason behind the initial panic leading to Gold prices rising has ultimately been the rapid and global spread of the Coronavirus. As nations panicked, this fear translated onto the consumer, which then translated to consumer lead businesses, who saw a sharp decline in revenues. Airline companies have been some of the most heavily impacted, with several the likes of Ryanair, British Airways and EasyJet having to ground a large percentage of their fleets in response. This comes as several nations have moved into the delay phase of the virus, leading to them closing their borders to outside travellers.

With this being the case investors who typically would have been shareholders of these companies would usually look elsewhere to hedge their long-term investments, many of them looking at Gold.

Gold Prices

In initially looking at Gold, prices of the metal rapidly rose from December to early March, where the panic really took flight. As seen in the below chart, prices reached as high as $1705, which created highs not seen since the Mortgage Crisis. As the tensions and uncertainty continued, many may have seen the potential to remain within this shelter, and only leave when the perceived panic started to show signs of disappearing.

chart

However during the last few days in the markets, including today, where Gold has already dropped by $40 in price, seems as though the investors have already started to flee safe havens. Could the panic be coming to an end? Or are investors looking for other opportunities?

The situation seems to be the latter. Investors have started to panic less and focus more on the opportunities created. A lot of these companies which have lost significant value, have only lost value because of the virus and the panic it has caused to the everyday consumer. So the logic here for those looking at this from a longer term perspective is simple. This is the notion of buy low and wait for the dust to clear. If this notion is correct, what we may see happen is that once normality resumes, or a new reality is created, these companies which have been keys to everyday life will return to that status. If they do, you will see the current lows, as a bargain investment as the price may eventually rally and all current and short term losses will mature and turn into longer term gains.

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