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Gold, Silver, and the Run to Safety

August 7, 2020 By Mircea Vasiu

Every crisis follows more or less the same path. Investors’ panic, central banks intervene by providing liquidity, commodity prices begin to rise. 

Depending on the type of crisis and how deep the repercussions are, the effects extend more or less in time. For example, the Great Financial Crisis during 2008-2009 was short-lived, if we compare it with the current coronavirus crisis. It did not have the same global impact as the current crisis does, and financial markets did not respond in a similar manner.

The commodities markets offer the best example.

Who Drives the Run to Safety?

The price of gold hit a new all-time high as it broke above the $2,000 mark this month. Gold enthusiasts could not be more excited as they feel vindicated for years and years when gold underperformed traditional benchmarks like the S&P500 index.

Silver has an even more impressive run. A quick look at the gold/silver ratio tells us that silver recovered in a few weeks, the gap against gold built in the last several years.

As such, the run to safety, as suggested by the two most important precious metals (i.e., commodities), differs from everything we know so far in modern economics. ETFs or Exchange Trading Funds dominate in terms of gold ownership.

Because it represents a cheaper way to gain exposure to gold market moves, without actually owning gold, ETFs are valued by the investing community. That is particularly true in the case of retail investors.

As it turns out, funds hold more gold than some central banks do – telling us much about the fears generated by the coronavirus crisis. But it is not only about gold – silver prices have doubled since March!

Such returns are abnormal even in times of economic crises as the ones we have seen up to the current pandemic. But because there are so many unknown variables about the pandemic and its global impact, investors take no chance. Hence, the flight to safety or the flight to commodities continues.

Silver is the new FANG (i.e., Facebook, Apple, Netflix, Google) – it outperformed every major global financial asset in July. More precisely, it delivered more than twice the performance of the next best asset’s performance – the Shanghai Composite.

Long story short, investors watched how the crisis unfolded. Next, they looked at the time that passed and the pandemic’s evolution.

With economic growth far from the V-shape reaction many hoped for, the flight to safety seems normal. Moreover, it will likely continue until the underlying conditions change.