Why Gold Didn't Rally During the Recent Sell-Off

Toward the end of 2017, we saw Bitcoin rise against both a stock market correction and a sideways gold market, giving analysts the impression that perhaps Bitcoin was a new “safe haven” asset; a contender to gold.

On February 2, as the Dow began its massive plunge, Bitcoin and other cryptocurrencies followed, dispelling the popular notion that the latter would surge as stock markets tumbled.

But gold, a time-tested safe haven asset, didn’t perform any better. It held its levels, more or less, but it too experienced a decline. What happened?

(Hourly chart of the Dow Jones from Feb 2 - 13; gold is represented by the red line)

Hourly chart of the Dow Jones from Feb 2 - 13; gold is represented by the red line

There’s a difference between running toward safety and running away from losses.

This might not make much sense at first, but that’s probably what happened. According to Commerzbank AG analyst, Eugen Weinberg, ETF investors may have been selling gold to offset their stock-market losses. In other words, many investors ran to cash.

A similar thing happened during the 2008 crash.

Why run to cash? Two reasons, one functional, the other emotional:

1. To cover margin calls (the functional reason);
2. To stem your “losses” (the emotional reason).

Unless you need cash right away, running to it for safety betrays the assumption that cash constitutes the bedrock of wealth.

But as we know, most gold investors run to gold for of its fundamental value as sound money, a value that fiat currency lacks, and certainly not because gold reacts immediately and positively to stock market crashes.

But if gold didn’t significantly “outperform” the stock market or cash in this most recent decline, then can we still call it a safe haven?

It’s a matter of scale. Let’s zoom out and compare the markets from December of last year. Below, is a chart of the Dollar Index, with the Dow Jones in green, and Gold in “gold.”

Gold may not have rallied during the most recent stock decline. But it’s still ahead of everything else, comparatively speaking.