April 09, 2020

A reputation intact or tarnished?

Performance of gold might have been expected to be very strong during this COVID-19 crisis, yet there have been a few twists and turns that have surprised investors.  In this article we set out what’s been happening, and whether gold’s reputation as a safe haven asset is intact or is in fact tarnished.

How has gold been doing since the start of the year?

So far this year, gold has held up well, with physical gold returning 6.0% over the quarter to March 31, 2020[1]. But it’s been far from plain sailing. Gold volatility has increased enormously in 2020 (shown by the blue line in figure 1 below), starting from mid-February when markets started to take the COVID-19 crisis very seriously. Gold, as a safe haven asset, performed well initially, but stumbled in the last few days of February and then experienced a massive correction mid-March. Gold is a reliable minute-taker of Federal Reserve meetings, and when the Fed announced what has been referred to as “QE Infinity,”[2] gold did what it has done regularly after monetary easing announcements, and shot back up.


The same bifurcation of gold bullion and gold equities that occurred in the global financial crisis of 2008 (GFC) has reoccurred in the current crisis — that is, gold equities sold off (with the rest of the market) while gold bullion performed well (see figure 1). We do note, however, that on a relative basis gold equities are 4.8% ahead of the broad equity market over the quarter.[3]

Figure 1 — Gold markets, quarter to March 31, 2020

Source: Thomson Reuters Datastream

What’s been causing these hiccups?

We noted in our recent white paper, Gold — You’re Indestructible, that gold tends to do well in low interest rate environments when equity market crashes are highly significant. Thus far, this thesis has held true; however, there were some points in recent weeks where doubt crept in. The mid-March stumble in the gold price has, we believe, a two-part rationale: First, there were many leveraged investors in equity and other markets who, when capital calls arrived,[4] sold the asset that was most liquid and that had gained in price — that is to say, gold. Second, gold has a well-documented inverse relationship to US real yields, and as the Treasury Inflation-Protected Securities (TIPS) market became illiquid, yields spiked temporarily. The “stumble” can therefore be seen as a technical event.


Gold markets have been creaking to say the least, as high demand for gold saw the futures curve moving into “backwardation” (people were paying more for gold contracts with delivery in April than in December[5]). In addition, the spread between futures and physical gold widened significantly as liquidity in the physical gold market dried up, due to both demand and logistical difficulties in delivering gold because of COVID-19 restrictions.


Gold volatility during a crisis is not unusual. The CBOE gold volatility index (VIX) had a median level of 16 over the 10 years to March 31, 2020; it spiked to a level of 49 recently (March 18, 2020), and during the GFC it peaked at 65 (October 10, 2008).[6] We note that after the GFC spike in the gold VIX, the performance of gold rose steadily toward its peak in 2011, by which time asset markets in general had “normalized.”


Additional perspective

Gold is in many ways an alternative currency, one that tends to benefit when other major competitors (i.e., fiat currencies) are debased when the money supply is being inflated by central banks such as the European Central Bank, Bank of England, Bank of Canada and the US Federal Reserve. It’s important to consider the returns not just against the US dollar, but against other major currencies (see figure 2). Gold outperformed major currencies, but performed the most strongly against those currencies viewed as “risk on” currencies (the Australian dollar and, in recent times, pound sterling, are good examples), and less so against those currencies viewed as “risk off” or safe haven currencies (the US dollar has performed very strongly).

Figure 2 — Gold returns by currency during the crisis so far (Q1  2020)

Source: Thomson Reuters Datastream

Bitcoin (see figure 3), which has been touted by many commentators as an electronic store of value or an alternative to gold, has so far failed to protect dollar capital during the crisis. 

Figure 3 — Cryptocurrency as a store of value

Source: Coindesk

Our view is that gold is behaving as expected, and its reputation therefore remains untarnished. Some investors may prefer to use gold’s optionality, and use a gold sale to purchase attractively discounted assets. However, there is ample possibility for the price to rise higher if easing programs accelerate and stiff demand continues. In either case, the hedging reputation of gold is intact — please read our recent white paper, Gold — You’re Indestructible, for more details.

[1] Thomson Reuters Datastream. Using Gold bullion: LBM, December 31, 2019 to March 31, 2020.

[2] The Federal Reserve announced on March 23, 2020 that it would buy potentially unlimited amounts of US government bonds and, for the first time, corporate exchange-traded funds.

[3] Thomson Reuters Datastream. Using FTSE Gold Mines Index and MSCI ACWI Index on a USD basis, December 31, 2019 to March 31, 2020. The FTSE Gold Mines Index encompasses all gold mining companies that have a sustainable, attributable gold production of at least 300,000 ounces a year and that derive 51% or more of their revenue from mined gold (source FTSE). The MSCI ACWI Index captures large and small-cap representation across developed markets and emerging market countries.  The index covers approximately 85% for the global investable equity opportunity set (source MSCI ACWI Factsheet, MSCI Inc).

[4] We note that investors hedging various risks with derivatives were subject to capital calls too, as interest rate and inflation volatility spiked, and currency hedging programs for non-US dollar investors devoured capital.

[5] The gold futures market is almost always in contango due to the costs involved in storing gold.

[6] Thomson Reuters Datastream.


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Matt Scott
Matt Scott

Strategic Research Specialist

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