As the gold price struggled to stay in the green for the day due to coronavirus concerns, so gold stocks have plunged along with the rest of the equity market. Some investors might think gold stocks offer a safe place to park their capital as the concerns about the coronavirus continue. However, history shows us that it won’t be smooth sailing, even if the gold price continues to soar.
Investor’s Business Daily looked at what happened to gold stocks and the gold price around the 2008 financial crisis, which was the last time gold’s status as a safe-haven asset was called into question.
The VanEck Vectors Gold Miners ETF tumbled 14.5% in the last week of February, which was even more than the 11.5% decline seen in the S&P 500. Last week was a little better because the Federal Reserve revealed an emergency interest rate cut. The S&P was up 0.6% for the week, while the SPDR Gold Trust climbed 6.2%, climbing to the highest level in seven years. The VanEck ETF was up 12.2%.
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Today the VanEck Vectors Gold Miners ETF plunged more than 3%, although that was much better than the more than 6% decline in the S&P. Meanwhile, the SPDR Gold Trust fared better, falling less than 1% as it struggled to get back to the opening price this morning.
Gold price and gold stocks around the 2008 crisis
Comparing the performances of the SPDR Gold Trust and the VanEck ETF around the 2008 financial crisis and during the current time may offer some insight into what expect from gold stocks during the coronavirus outbreak.
According to Investor’s Business Daily, the SPDR Gold Trust plunged almost 30% between mid-July 2008 and Oct. 24 of that year. Gold did only a little better than the S&P, which lost one-third of its value during those same months. The VanEck ETF plummeted 70% during the same timeframe, indicating that gold stocks actually did much worse than the overall stock market.
Although gold stocks plunged along with the rest of the stock market leading up to the Lehman Bros. crash, the SPDR Gold Trust had mostly finished its decent by Sept. 11, 2008. The S&P was right on the edge of a bear market with a 20% decline from its record high. However, the index plunged another 40% in the next six weeks through Oct. 24, while the SPDR Gold Trust fell less than 5%.
At that point, the SPDR Gold Trust and VanEck ETF finally showed their strength as safe-haven assets. While the S&P plunged another 21% between Oct. 24, 2008 and March 6, 2009, the SPDR Gold Trust jumped 34%, while the VanEck ETF more than doubled in value.
Investor’s Business Daily notes that most of the decline in the gold price and the SPDR Gold Trust came as the Fed fell further and further behind the curve. The central bank slashed its interest rate target by 25 basis points to 2% on Apr. 30, 2008, although the financial market and economy became increasingly frail.
Then the Fed enacted an emergency rate cut of 50 basis points on Oct. 9. Another cut of 50 basis points followed on Oct. 29. These interest rate cuts marked the time when things started to change for the gold price and SPDR Gold Trust.
The gold price remained volatile in fall 2008, and the same should be expected now in the gold price and gold stocks amid the coronavirus outbreak. Interest rates remain a major driver of gold and gold stocks. If the economy and financial conditions are weakening faster than interest rates are falling, gold doesn’t exactly fulfill its safe-haven status.
Investor’s Business Daily notes that before the coronavirus outbreak hit, Fed policy already had weak inflation in focus. In 2008, the gold price started to recover after the Fed slashed its target rate to 1%. This time around, the central bank cut the federal funds rate half a percent on March 3 to between 1% and 1.25%. Markets are already pricing in another rate cut when the Fed meets later this month.
Like in 2008, gold stocks will be more volatile than the gold price during the coronavirus outbreak. The VanEck ETF still fell 15% on Dec. 1, 2008 when the S&P recorded one of its biggest percentage declines ever. However, with interest rates remaining low, the VanEck Gold Miners ETF and individual gold stocks should hold up better than other stocks.
Investors should also remember that deflation could be a major concern for gold and gold stocks. Inflation was already weak before the coronavirus outbreak, which means there is a risk of deflation when factoring in the macro risk from the virus.
If the economic impacts from the coronavirus end up being much worse than expected and deflation begins, even 0% interest rates would be a problem for the gold price. However, any deflation that might occur would be temporary, and the macro environment after the crisis could be good for gold prices, similar to the recovery from the financial crisis.