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50% Equity Market Drop Won't Drive Gold Prices Higher - CrossBorder Capital

Kitco News

(Kitco News) - Although the gold market has benefited from rising risk-off sentiment in the marketplace, one research firm does not expect a further correction in equity markets to have much impact on the yellow metal.

Analysts at CrossBorder Capital said, in a report Monday, that they expect the nearly two-month selloff in equity markets is just the beginning. Since early October, the S&P 500 has fallen 8.5%. The U.K.-based research firm warned that equities could fall 30% to 50% before the dust settles.

“Skidding levels of Global Liquidity, sky-high investors’ risk appetite readings and flattening yield curves warned us a year ago that World markets would suffer badly as 2018 unfolded,” the analysts wrote said. “Looking into 2019, and try as we might, there is not much positive change that makes us any more optimistic. The bear’s grip will continue!”

The analysts said that a flattening yield curve and tightening credit markets, as global central banks tighten monetary policy, will continue to weigh on equity markets.

“Today, the profit model concludes that there needs to be more ‘blood on the streets’ before we can begin to look forward to better market prospects. The economic news has yet to darken meaningfully and, if history is any guide, we may still only be half-way through this correction,” the analysts said.

Looking to 2019, the firm recommended that investors look at short-to-mid-term government bonds as a safe-haven in the current market environment.

Looking at gold, in an emailed comment to Kitco News, Michael Howell, managing director at Crossborder Capital, said that they don’t see gold as a safe-have asset in the current conditions. He added that the yellow metal performs well when central banks loosen monetary policy, not tighten.

“Bonds perform best as a safe haven asset when liquidity is generally tight. Gold responds to the quality and the quantity of liquidity. It does best when the quality of liquidity deteriorated sharply when Central Banks print money,” he said. “Global Liquidity, led by Central Banks, is currently skidding at its fastest rate since the 2008 Crisis.  Hence, gold is weak and bonds potentially strong.”

However, Howell said that while current conditions don’t favor gold, it doesn’t mean that the yellow metal doesn’t have a role to play in a diversified portfolio.

He added that it is difficult to time when central banks will reverse course and start loosening monetary conditions again so investors should always have an allocation in gold.

“Central Banks always resort to money printing at some stage,” he said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.