Why Gold Market Will Act Differently During Next Financial Crisis

Some analysts think the next crisis will be the same as 2008, but others disagree, specifically when it comes to gold.

market crash won't take down gold

Despite the perceived strength of the U.S. economy and votes of confidence from global central bankers, one doesn’t need to look far to find warnings that another financial crisis is approaching. These doomsday scenarios usually involve the U.S. slipping into a recession, with the accompanying erosion of the dollar and soaring inflation. A recent article on Streetwise Reports focused on the current economic landscape to see how a new financial crisis would differ from that of 2008, and what it would mean for gold prices.

According to the article, a loss of liquidity was the hallmark of the 2008 crisis, brought on by overwhelming leverage and a sudden lack of confidence in real estate credit. Eventually, central banks decided to deal with the issue by lowering interest rates and artificially increasing liquidity, paving the way for what could be the next crisis.

Analysts who warn about another global economic slip generally agree that the setup will be the same: a broad fall in asset prices brought on by sky-high debt loads and high-risk credit. Yet, according to the article, some gold specialists disagree with the consensus forecast when it comes to the gold market, as they expect the metal to act markedly different than it did in 2008.

While other analysts concur that gold will ultimately skyrocket in response to central banks’ actions, the previously stated gold specialists expect the yellow metal to initially suffer the same fate as all other assets. This was the case in 2008, when gold went from an all-time high of $1,030 in March to below $700 by November. The article points out that the paper gold market of March 2018 was over-owned and highly leveraged, riding on the confidence of a seven-year bull market.

The second half of 2008 saw an abundance of margin calls and widespread liquidation in the futures market which brought the gold price down. Gold then moved towards backwardation for the second time in modern history as 2009 approached, with physical demand soaring as wary traders and investors sought to get their hands on the real thing.

In contrast, the current gold market is under-owned and minimally speculated reports the article. The seven-year bear market since the peak of $1,921 an ounce in September 2011 has all but driven out leveraged long positions, as seen by the prevailing number of short positions by speculators.

The article reports that readiness is another major factor that could set the new crisis apart from the previous one. Whereas central bankers and investors alike took months to figure out what to do, each group is expected to be well-prepared to deal with the fallout the second time around. According to the article, central banks may waste no time before dropping interest rates and possibly stopping cash withdrawals. Investors, on the other hand, may turn to the physical gold market to shield themselves from defaults and assure enough liquidity for other markets. This will allow the gold market to separate itself from the fold and soar even as all other asset classes plummet.