The Gold and Silver Selloff

Gold and silver have always been considered great “flight to safety” instruments.

Gold 2

The way stocks have been selling off lately, one may have thought that a safe place to park your cash was in precious metals, such as gold and silver.   These have always been considered great “flight to safety” instruments, as they are viewed as a store of value.  When there is a financial crisis, there is always the possibility that some assets “may not be around” when its all said and done.  However, throughout history, precious metals have always provided a home for cash when other assets were failing. 

However, during the current sell off in risk assets, cash has not necessarily rotated out of stocks and into precious metals.  Just one week ago, gold put in a near term high at 1703.60.  Over the course of the next 5 trading days, including today, the price of gold from high to low has sold off 14.8%, but held just above prior support near 1445.8.That level also coincides with the 161.8% retracement level from the lows on February 5th to the highs on March 9th

Source: Tradingview, FOREX.com

Silver put in a high of 18.929 on February 24th,  pulled back and bounced to 17.58 on the same day that gold put in its high. Over the next 5 trading days, including today, the price of silver sold off 36% (Yikes!) to today’s lows of 11.22 before bouncing to 12.85 today.  Today’s price action broke through the lows from May 22nd at 14.34 and fell to near the 161.8% Fibonacci retracement from the May 22nd lows to the September 4th highs near 11.08.  The RSI in silver is also in extreme oversold conditions.

Source: Tradingview, FOREX.com

On the other hand, the S&P 500 put in its highs on February 20th at 3397 and has been pulling back since. Since the highs on February 24th, price has pulled back 29.4%.  However, since March 9th (when gold and silver had peaks), price is only down 19%.  Previous lows from December 2018 held so far.

Source: Tradingview, FOREX.com

What does this mean?  It means that when the crisis started  (before we know it was a crisis), money was flowing the usual flight to safety pattern out of stocks and into gold.  However, as the coronavirus spread throughout the world and stocks continued to move lower, precious metals had to be sold so that cash could be raised.  The cash was needed for 2 reasons

1) to meet margin requirements

2) to build a cash reserve in case of “worst case scenario” (which is also one of the reasons stocks continued to sell off).

Its important to be aware that just because stock markets around the world are being sold off, that doesn’t always mean there will be a rotation into precious metals.  Sometimes, cash is the best position to be in!


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