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Gold shines?

Written by Ole Hansen | 3 minutes
THU 02-04-2020

Gold’s failure to rally over the past few weeks, as the Covid-19 spread and economic uncertainty rose, has brought back memories of the 2008 Great Financial Crisis. During the early part of the 2008-09 crisis all assets were sold as a result of the need to deleverage in order to realise cash or pay for losses elsewhere. In the early weeks of the crisis gold suffered a 27% sell-off to $725/oz before beginning the ascent which eventually took it to $1920/oz.

The rally started in gold mining stocks before moving to gold and it took another few months before the stock market finally bottomed out. With this in mind we are keeping a close eye on gold mining stocks, through the Vaneck Major Gold Miners  ETF (Ticker: GDX:arcx).

What happens next remains to be seen but the sharp recovery indicated that buyers had been waiting for the opportunity. While gold has fallen we also have to keep in the mind that the cost of fuel, which accounts for 20% of the mining cost, has collapsed. Gold miners have therefore, at least for now, not suffered the hit that the drop in gold would otherwise imply.

However, as mentioned, the main driver behind gold’s recent weakness has been the “dash for cash”. A move that was strengthened by the elevated leveraged positions that had been built up in gold during the past few months. I recently highlighted how deleveraging had become the overriding theme with both long and short positions being reduced. The biggest long reductions were seen in crude oil, gold, sugar, cocoa and cotton while short-covering was seen in natural gas, soybeans and corn.

Author

Ole Hansen

Ole Hansen joined Saxo Bank in 2008 and has been Head of Commodity Strategy since 2010. He focuses on delivering strategies and analyses of the global commodity markets defined by fundamentals, market sentiment and technical developments.


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