Two "Black Swans" hit the market, but why didn't gold soar to 1900?

This week is destined to be a week in history. On Monday, the global market suffered a "Black Monday": oil prices fell by 30%, the second time in the history of U.S. stocks triggered the circuit breaker, the coronavirus outbreak and oil prices - two "black swans" have caused the sharp rise of risk aversion, but the performance of gold, previously known as a safe haven, has shown no momentum.

When the benchmark 10-year U.S. Treasury yield fell to an all-time low of 0.318% on Monday, why didn't gold price hit an all-time high of $ 1,900?

Gold's upside potential was limited on Monday, when it once broke through $ 1,700 and then fell back to around $ 1,680. 

Many people wonder why the price of gold did not rise further when the stock market experienced its worst day since the 2008 financial crisis on Monday. Many have pointed out that investors need to sell gold to raise cash to offset losses elsewhere.

Scotiabank also mentioned the issue in its latest commodities report.

Nicky Shiels, a commodities strategist at the bank, asked, "Given the massive repricing of US nominal and real yields, why hasn't the price of gold hit $ 1,900?"

She pointed out that, the "core" of gold is a commodity in nature, although it is also a safe-haven asset, which will respond to macroeconomic factors such as interest rate fluctuations, exchange rate fluctuations and risk appetite.

The strategist added in the report that due to the lowered global economic growth prospects and increased global stimulus, gold has performed better than other commodities.

However, the recent plunge in oil prices has hit on gold prices and seems to have suppressed the rise in gold prices.

She pointed out: "Figure 2 shows the reaction of gold in the early period and after 9 events in which oil prices plummeted by more than 10% in one day. On average, the price of gold was -0.80% (in 7 days) and -1.5% (in 50 days) This shows that as the price of oil falls, this ordinary "commodity" loses its luster, and it is difficult for gold prices to really break through. "

Source: Scotiabank Canada Source: Scotiabank Canada

Shiels added that another reason for the stagnation of gold prices was the de-risking of margin-related gold.

 "In essence, we recorded this as a margin-related sell-off, and there was very little physical support when such a sell-off occurred," she wrote in another report last week. 

Shiels explained that "gold is a tool for hedging stock market rises, so as the situation changes, the risk of ETFs or passive liquidation increases. In times of turmoil, cash is usually the most valuable, rather than gold."

Shiels pointed out that, most importantly, in the fear of coronaviruses, safe-haven buying is looking for other investable assets, such as stocks such as bonds, utilities and essentials.

Looking ahead, market uncertainty may continue until central banks around the world take a "coordinated" response or the number of patients with coronavirus decreases worldwide.

Shiels wrote: "The market is still extremely tight and eagerly awaiting unexpected policy decisions (beyond scheduled policy meetings and data releases). For more than a decade, the practice of pricing" bad news is good "at risk assets is now finally getting useless. That’s because the rate of return is diminishing, and to a certain extent, the stimulus is not enough; the last few bullets used by the Federal Reserve to deal with an event are triggered-at the risk of not being suitable for this event. "

Scotiabank remains bullish on gold, noting that the market needs to move from "chasing up" to "buying on dips".

The bank's forecast for gold prices this year has been raised to $ 1,750, with an annual average of $ 1,650.

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