The Dow loses over 11% in trading this week officially confirming a correction

The facts are clear. Even with one day still remaining in this trading week so far, the U.S. equities are on track for their worst week since the financial crisis of 2008. Today alone the Dow lost another 1,190 points, a drawdown of 4.42%. The total decline for the Dow is in excess of 3,200 points, resulting in a drop of just about 11% in this major U.S. equity index. The major averages have fallen by about 4%, and the Standard & Poor’s 500 is currently experiencing its largest drop since 2011.

So, the question remains. With so much selling pressure currently at play in the global equities markets, why has the safe haven allure, and financial safety net provided by gold been so weak? Yesterday we cited two distinct possibilities that have contributed to this unusual tandem selloff in both risk on assets and gold. First is that in times of major selloffs in equities markets, traders and investors can scramble to liquidate assets needed to gain capital for margin calls. A second possibility is that many traders and investors are working under the assumption that the current coronavirus epidemic will not morph into a pandemic thereby making this crisis shorter lived than originally perceived.

Yesterday we also pointed out the discrepancy between the spot and futures markets in gold, with gold futures trading under considerable pressure while for the majority of the trading day spot gold moved higher.

Recently many analysts are now anticipating that and additional rate cut from the Federal Reserve will be announced immediately following the next FOMC meeting to be held in March.

Today we received data that suggests another primary reason we have seen gold futures perform so poorly this week.

MarketWatch today published a note written by Warren Patterson, head of commodity strategy at ING, in which he said, “Uncertainty over the virus continues to see investors flocking towards the yellow metal, with gold ETF holdings increasing for 26 consecutive days, with inflows over that time growing by 2.72 million ounces to total 84.43 million ounces currently. Given this uncertainty is likely to linger, along with the prospect for lower rates, it suggests that gold prices are the to remain well supported.”

Although the data is clear and straightforward why the U.S. equities markets have declined and can be officially defined as a correction, the rationale behind gold’s lackluster performance this week are not clear. One partial and possible explanation is that although in this instance market participants believe in the safety and longevity of gold holdings. Investors have been choosing to accumulate either physical gold or the

electronically traded fund GLD as an alternative to trading gold futures for long-term protection.

Wishing you as always, good trading,