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The Price of Gold Is Acting Strangely Normal

Written by Luke Burgess
Posted October 15, 2018 at 3:45PM

The price of gold is acting... normal.

And that's actually surprising to see.

For the gold market, “normal” hasn't been... well, normal. Gold is traditionally a safe haven asset used to hedge economic and market risk. Demand and prices traditionally increase in times of fiscal turmoil. But this has not largely been the case for the past decade.

Since the turn of the century, the gold market has dynamically changed, particularly in terms of what moves prices. Twenty years ago, the price of gold was very reactive to economic destabilizing events like terrorist attacks. This is not so much the case today.

Immediately following 9/11, gold prices spiked. Robin Bhar, metals analyst at Standard Bank London, said in a CNNMoney interview at the time, “There is panic buying of metals, gold and oil — it is complete pandemonium.”

There has not been a terrorist attack as economically devastating since 9/11. But subsequent smaller-scale attacks around the world also lifted gold prices following the attack. And for a safe haven asset, this can be expected.

Terrorist attacks can have both direct and indirect global economic effects. And gold is traditionally the ultimate go-to asset in the face of economic uncertainty.

Today, however, terrorist attacks, even those that make international headlines, are very unlikely to move gold prices. Following the Las Vegas shooting last year, gold didn't budge.

Again, there has not been a terrorist attack as economically devastating since 9/11. But no longer do smaller-scale attacks move gold prices.

Perhaps the market got burnt out on reacting to terrorist attacks? Perhaps attacks have become so common that the market doesn't expect significant effects? Either way, most terrorist attacks won't move gold prices today. 

The price of gold was also very reactive to market downturns and corrections. The financial crisis of 2008 kicked off one the biggest rallies for gold in decades. And again, this can be expected from a safe haven asset.

But since then, gold has become less and less reactive to market corrections. When the Dow Jones fell 1,000 points in February, gold didn't move at all.

So I was surprised to see gold prices spike after last week's correction. The price of gold jumped nearly $35 on Thursday as a sell-off pulled equity prices down around the world.

5 Day Gold 1 Month Gold

What changed? Why did the market all of a sudden decide to run to gold as a hedge?

Well, that's the big question.

And I'm not sure it will ever really be answered. But what's really important is that the market is treating gold as a safe haven asset again.

This could mark the beginning of another dynamic change in the gold market: the return of normal trading behavior, where gold is actually used as a safe haven asset to hedge economic and market risk.

I think it's quite proper that with all the strange things going on in the world, gold is going to act normally. It's as if gold is the ultimate contrarian. If the world acts strange, gold will do the opposite and act normally.

Gold's reaction to the market's latest downturn is significant. Investors should keep an eye on the gold market.

Until next time,

Luke Burgess Signature

Luke Burgess

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As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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