Gold Rush: Stock Selloff Pushes Bullion to Three-Month High
Demand for gold and other haven plays surged on Tuesday following a politically-charged selloff in global equity markets, as investors reacted to new evidence from Turkey implicating Saudi authorities in the killing of journalist Jamal Khashoggi. The switch to risk-off mode presents the possibility of a new paradigm shift in the market – one that could set bullion on a path higher in the medium term.
Precious Metals Surge
Gold for December settlement, the most actively traded futures contract, reached a high of $1,243.00 a troy ounce on Tuesday, the highest in over three months. The Comex futures contract was last seen trading at $1,236.50 a troy ounce, up $11.60, or 1% on the day.
Silver futures settled in the same month clocked highs of $14.84 a troy ounce, the best levels since late August. The contract is currently trading at $14.76 a troy ounce for a gain of 17 cents, or 1.2%.
The U.S. dollar on Tuesday didn’t provide any downward pressure on precious metals. The dollar index (DXY), which tracks the greenback’s performance against a basket of six currencies, was virtually unchanged at 95.97.
Demand for Risk and the Bitcoin Alternative
The decline in global equity prices on Tuesday was accompanied by a sharp acceleration in implied volatility, as measured by the CBOE VIX. Wall Street’s preferred measure of investor anxiety jumped more than 20% after the open, reaching a high of 24.66. VIX moves in the opposite direction of S&P 500 index futures roughly 75% of the time.
Chinese markets returned to sell mode on Tuesday, just one day after posting their biggest advance in nearly three years. The world’s second-largest economy is reeling from a protracted slowdown in domestic growth, an escalating trade war with the United States and skepticism over government’s response to declining investor sentiment. The mainland’s benchmark Shanghai Composite Index is down more than 20% this year.
The hypothesis that stock-market volatility will lead to higher demand for bitcoin has not come to fruition this year, though the latter’s decoupling from the broader market offers investors a stable alternative to plunging share prices. Bitcoin does not trade inversely with stocks, but independently of the broader financial markets. The bitcoin price is largely immune to geopolitics, economic data, monetary policy and bond yields, which makes it a viable asset class for investors not satisfied with the returns offered by traditional safe havens.
That said, it’s a mistake to believe that bitcoin and gold are an either/or proposition. Both are considered stores of values and both have the opportunity to outperform a volatile stock market. Gold offers traditional haven demand whereas bitcoin has the ability to generate above-market returns regardless of the economic cycle. This is an attractive value proposition given bitcoin’s recent performance relative to its all-time high.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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