The Last Safe Haven? Crude Oil Crashes Overnight While Gold on the Rise

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Last Updated on: 10th March 2020, 01:04 am

On Monday, market watchers woke up to find that, while the sky hadn’t fallen, virtually every asset in their portfolio had plunged into the red. Or, perhaps, maybe the sky had.

The Dow fell 2,000 points and the S&P 500 sank 7%, causing the New York Stock Exchange to briefly grind to a halt after triggering a Level 1 circuit breaker stoppage. Silver bullion fell 1.4%, Dow futures pointed to a 1,300-point cliff dive. 10-year Treasury yields fell to an all-time low of 0.318% on Monday morning. However, crude oil saw the worst overall losses by dropping 30% overnight before recovering some of the sell-off and stabilizing around the -20% mark on Monday.

For the most part, only gold and precious metals-related stocks came out of Monday’s sell-off relatively unscathed. Overnight, gold hit a 7-year high after breaking through a critical resistance point at $1,700 an ounce—a price point the asset hasn’t reached since late 2012.

The economic outlook isn’t pretty. Today, the questions in many investors’ minds are why and what now. In this brief market recap, we’ll answer both.

What Caused Monday’s Oil Sell-off?

For the first time in weeks, a market sell-off likely has nothing to do with the spread of the Covid-19 coronavirus. Rather, the sharp drop in the price of crude oil is due to geopolitical conflict between Russia and Saudi Arabia. Both states are global oil suppliers and, as Monday proved, economic spats between them can cause crude prices to fall by a whopping 34% overnight.

The root of the conflict stems from Russia’s refusal to follow in the footsteps of OPEC (a cartel of oil-producing states) by cutting crude oil production. In response, Saudi Arabia, a leading OPEC member, also signaled that they would increase their production and slash prices. Combined with a dramatic reduction in demand due to decreased industrial output in China and decreased flights and international travel due to coronavirus fears and you have a perfect storm for an oil market crash.

It remains to be seen whether both states will agree to follow OPEC’s directives to ramp up oil production. As it stands, Russia can get by with oil prices at $42 a barrel (Brent crude currently sits at $34.24) whereas the less-diversified Saudis require oil prices to stay above $80 to break even. Therefore, it’s unlikely that either state will be able to weather the storm brought by artificially restricting their country’s oil output.

The Fed Scrambles to Catch the Fall

The New York Federal Reserve announced on Monday that it will be boosting their overnight funding (“repo”) from $100 billion to $150 billion through until at least Thursday, March 12. The move comes as a response from the central bank to prevent liquidity shortages among commercial banks and lenders.

In other words, the Fed has increased its short-term funding available to banks and money markets to the tune of 150%. Amid uncertainty market conditions and the potential for a full-scale panic, the Fed now deems it necessary to ensure that banks have access to the liquidity they need to meet market demands.

Ultimately, it’s never a good sign when the Fed expands its repo operations. It implies that the US central bank doubts whether banks will be able to access the cash reserves they need and, more broadly, it serves as a signal for a looming bear market.

A Beacon of Stability: Precious Metals

Amid Monday’s chaos, gold opened at +6.53 (+0.39%). Safe-haven demand from investors fleeing oil and US equity markets on Monday pumped the price of gold briefly above $1,700 per ounce before going horizontal around $1,675 at mid-day.

Compared to crude oil’s largest one-day loss since the 1991 Gulf War, it’s evident that gold is the sole blue-chip store of value for investors hedging against stock and commodity market volatility.

In both the short and long-terms, the price of gold has seen continual growth. By contrast, US bond yields, stock indexes, and the US dollar indexes have consistently traded lower and lower over the past few weeks. In fact, even the silver market saw a dip on Monday alongside other raw commodities when silver futures contracts fell 3% to $17.46 per kilogram. The price of silver, unlike gold, saw a drop due to slumping industrial demand for the alloy.

Contrast the 5-year gold price, pictured above, with the performance of the major stock market indexes at the same time and one thing is abundantly clear: taking a position in gold is the better investment for risk-averse investors looking to minimize losses during times of uncertainty. In a market experiencing unprecedented levels of volatility and overnight losses, gold bullion remains the only bull market.

Gold: The Only Safe Haven Investment

This week’s market is in uncharted waters. There’s no telling how the stock or bond market is going to react in the days ahead, and there remains great uncertainty over the future price of oil amid geopolitical tension between Russia and Saudi Arabia.

With silver bullion sliding -1.45% overnight and over 3% over the last 30 days, investors looking to reduce their exposure to US equities and bonds should instead look to gold which has performed comparatively well.

As the novel coronavirus tightens its grip on international markets and the price of oil remains ensnared by Russian-Saudi petro-politics, savvy investors should minimize their exposure to risk by investing in physical gold. All signs point to an imminent recession, and investors should prepare themselves for the worst by taking a position in the market’s only safe-haven asset: gold.