I Thought Gold Was a Safe Haven! Why Did It Tank With Stocks?
Mike Maharrey

It was a bloody Monday in the stock market as analysts digested the dreary jobs report released Friday and suddenly discovered the rot in the economy’s foundation.

• Dow Jones: -1033.99/ -2.6 percent
• NASDAQ: -576.08/ -3.43 percent
• S&P 500: -160.23/ -3 percent
• Russell 2000: -70.15/ -3.33 percent

The selloff wasn’t limited to the U.S. Markets around the globe bled red ink. Some $6.4 trillion was wiped off global stock markets. For instance, Japan’s Nikkei 225 Index plunged 13.2 percent as investors absorbed the recent interest rate hike.

It just goes to show how quickly market sentiment can shift.

The reasons for the global selloff went beyond worries about the U.S. economy. As a Bloomberg article put it, investors are coming to terms with the fact that they were operating under a lot of erroneous assumptions.

In fact, the plunge in the price of gold was perfectly normal given the market conditions. Gold often sells off early in a bear market for stocks.

In 2020, gold had a 3 percent decline multiple times in the early days of the pandemic selloff. In October 2008, gold plunged by more than 7 percent in the early days of the financial crisis.

But why?

Precisely because gold serves as a hedge.

Investors often liquidate winning gold positions during a sharp downturn to cover stock losses. But gold generally falls less sharply and recovers more quickly – exactly the scenario that played out on Monday.

Here’s how an analyst explained it to Bloomberg:

Margin calls are a big problem for investors during a sharp stock market downturn.

A recession would likely mean deeper and quicker interest rate cuts. As a non-yielding asset, the mainstream tends to view lower interest rates as positive for gold.

And of course, a return to easy money is a surrender to inflation. In other words, the inflation dragon will likely be resurrected (if you actually believe he is dead).

As far as silver, an economic downturn would temper industrial demand, and the white metal is much more volatile than gold.

But silver is fundamentally a monetary metal, and it tends to track with gold over time. In fact, silver has historically outperformed gold in a gold bull market. For example, during the pandemic, gold increased by about 40 percent, while silver increased by 141 percent.

Whether Monday’s selloff was just a tremor before the earthquake, or the beginning of the great unwind, there are plenty of reasons to be bullish on both gold and silver.

These price dips could be viewed as a buying opportunity.