Gold up 3%, stocks down 10% in May on safe haven shift from bonds
Posted on 29 May 2010 with no comments from readers
Investors who chose gold over stocks in May have been rewarded with a postive gain on the month, while US stock market investors had their worst May in decades.
This is not the pattern seen in the autumn 2008 stock market correction. Then gold and silver prices took a big hit. It does appear to be different this time, although the rally in the US dollar and treasuries is exactly the same.
Silver resilient
Silver has also been resilient, losing one per cent of its value in May by comparison to a 50 per cent price plunge 18 months ago. Precious metals as an asset class seem to have regained their role as a store of value, and this time investors selling stocks are buying precious metals instead.
The main reason for this has to be extreme nervousness about buying government bonds, especially from certain European countries. The plunge in commercial bond prices recently also does nothing to ease investors’ fears. Best then to hedge with precious metals.
Of course, this is just a transitional phase. Once interest rates start to go up on government bonds then prices will go down. That is why the down-rating of Spanish debt yesterday caused such alarm.
Then the shift from bonds into precious metals will become a flood of money. This looks to be an inevitable cycle but we cannot be sure on the timing of it.
The next crash
A stock market crash in June might destabilize the global bond market or support it for a while. Gold and silver would be sold off by hedge funds to meet margin calls, although hedge funds are far less geared than in 2008 so this selling impact ought to be proportionately lower, and indeed might be more than offset from buying pressure from those seeking an alternative safe haven to bonds.
But those who held on to their precious metals as equity markets shifted lower have been rewarded in May and this is perhaps a lesson going forward for those who think the 2008 precious metals’ sell down will be repeated.
For those with longer memories the 2008 gold price correction increasingly resembles the 50 per cent haircut of 1976. Then some investors panicked and stayed out of a market that soared eightfold to peak in 1980. Is history repeating itself again?
