Some investors have been pondering why gold has not confirmed its traditional status as a safe haven as the coronavirus sends equities globally into freefall, but AJ Bell points out that the yellow metal behaved like this in the financial crisis. 
The precious metal did rally above $1,600 on 24 February when investors first started to realise that the novel coronavirus, or Covid-19, was much more serious than initially thought.
But since then, gold is down over 11 per cent and is below the $1,519.50 that it started the year on.
Russ Mould, investment director at AJ Bell, said a common theory to explain gold’s tendency to fall during market stress in 2020 has been that “investors are looking to meet redemptions or margin calls and the precious metal is a logical port of call, especially as many investors will have a profit to take and the gold market is relatively liquid”.
He alluded to the fact that the same thing happened to gold at the peak of the global financial crisis in 2008.
Gold price between 2007 and 2010
Source: Refinitiv data
“As the recession deepened and stock markets tumbled, gold was dragged down as professional and private investors alike had to meet margin calls, settle fund redemptions or simply rustle up ready cash,” Mould explained.
Gold had climbed from its 2001 lows in the $250-to-$260-an-ounce range to $1,012 by March 2008 when the global financial crisis started to take hold.
However, much like today, the Federal Reserve slashed interest rates from 5.25 per cent in August 2007 to 2.25 per cent by March 2008, and the US launched a $152bn Economic Stimulus Act in February 2008, but share prices kept falling. The S&P 500 hitting 1,273 on 10 March 2008, down 19 per cent from its October 2007 high.
“As US equities flirted with a bear market, gold looked like a rich source of cash, especially as there were still profits to be taken,” the AJ Bell investment director said.
Gold fell 15 per cent to $856 by mid-May 2008 then rallied a bit before slumping to $777 on the day the Lehman Brothers declared bankruptcy in September 2008. The yellow metal bottomed out at $718 in November 2008.
Mould pointed out that by this time then-Treasury secretary Hank Paulson had launched the $700bn Troubled Asset Relief Program (TARP), the Fed had launched its first round of Quantitative Easing in November 2008 and US interest rates were heading to 0.25 per cent.
The newly established Obama administration then went on to sign the $787bn American Recovery and Reinvestment Act in February 2009. Mould said this “combination of huge monetary stimulus and huge fiscal stimulus gave gold an equally huge boost”.
“Investors sought a haven as the authorities fought to take control of events, whatever the cost,” he added.
The Fed ultimately held interest rates at 0.25 per cent for seven years and followed up with two more rounds of quantitative easing, in November 2010 and November 2012.
Fed balance sheet vs gold price
Source: Refinitiv data, FRED – St. Louis Federal Reserve database
Gold finally lost its appeal when investors took fresh confidence in policy in 2011-12 and believed that the European Central Bank had the eurozone debt crisis in hand thanks to its rate cuts, QE schemes and Mario Draghi’s promise to ‘do whatever it takes’.
“There are therefore quite a few parallels between 2008 and now – even if the cause of the upset this time is very different,” Mould said.
He pointed out that the Fed “has already worked its way through a long list of policy measures” to tackle the ongoing coronavirus crisis, which has included interest rate cuts, more QE, the provision of liquidity to interbank lending markets and the exchange of collateral from brokers for cash.
In 2020, central banks have already cut interest rates 58 times between them worldwide in 2020, while the UK, France, Italy, Hong Kong and others have launched fiscal stimulus packages. The US is not expected to be far behind.
“If these prove to be enough to support the global economy, gold may stay out of favour and, ironically, remain a source of ready cash as financial markets stay unsettled,” the investment director continued.
“But if more unorthodox policy is needed, and more ‘money’ is conjured out of thin air via negative interest rates, QE, helicopter money or increased government deficits, investors could yet return to the precious metal, just as they did from late 2008 to summer 2011, when gold peaked at almost $1,900 an ounce.”
Gold price vs Treasury yields
Source: Refinitiv data
Mould noted that in the past, the flatter the US yield curve has become, the better gold has done.
A flatter yield curve, ie, the gap between the interest rate on the two-year and ten-year US Treasury bonds, generally indicates a downturn is ahead.
“If markets fear the authorities are still behind the curve, literally and figuratively, then gold yet rally to please its fans and confound those who still dismiss it as a relic of a bygone age,” he finished.