In mid-March, gold appeared to have lost its safe-haven status as the gold price tumbled due to the combined effects of a number of factors, including the global stock market rout, the highly synchronised price movement between gold and commodities, the magnified role of a strong dollar and the oil price crash. However, in the long run, gold is still a sought-after safe-haven asset and will continue to shine as a portfolio diversifier given the massive and unprecedented monetary and fiscal stimulus measures launched by central banks and governments worldwide to combat the economic damage generated by the virus.

The onset of 2020 saw significant financial market turmoil and heightened asset price volatility as the COVID-19 pandemic raged globally. The same rings true for gold. The spot gold price in one week alone plunged over 15% in mid-March. As a result, it was questioned whether gold’s role as a diversifier still held as gold’s safe-haven status was seemingly lost.

So, Is Gold Still A Safe-Haven Asset?

On the face of it, the drastic volatility in the gold price at the beginning of the pandemic looked quite similar to what we saw in the 2008 global financial crisis. However, the root causes of the two are different. Theoretically speaking, there are a host of factors that affect the gold price and the role each plays differs. The significant gold price volatility this year was not as a result of traditional fundamental or geopolitical factors, but mainly driven by the sudden disruption of economic activities together with the macroeconomic policies launched against the gloomy growth outlook in times of market distress.

In mid-March, gold appeared to have lost its safe-haven status as the gold price tumbled due to the combined effects of a number of factors, including the global stock market rout, the highly synchronised price movement between gold and commodities, the magnified role of a strong dollar and the oil price crash. However, in the long run, gold is still a sought-after safe-haven asset and will continue to shine as a portfolio diversifier given the massive and unprecedented monetary and fiscal stimulus measures were launched by central banks and governments worldwide to combat the economic damage generated by the virus.

Drivers Behind The Heightened Gold Price Volatility

At the end of March, the gold price nosedived to $1,450.98/oz from its Q1 peak of $1,702.56/oz, a steep drop of 14.78%, which was followed by a rapid rally. As illustrated in Chart 1, gold continued to push higher, hitting $1,689/ oz on 10 April and then $1,786.02/oz at the end of June, before reaching an eight-year peak, up 17.36% YOY in the first half of 2020.

So what led to the huge price volatility in gold this time round?

1. The plunge in financial assets across the board in the US and Europe due to COVID-19 Since the COVID-19

outbreak, the total number of confirmed cases worldwide reported to WHO has exceeded 12.76 million (as of 30 June). Most of the countries responded to the health crisis by introducing lockdown measures, which pushed the world economy into a temporary lockdown and the medium to long-term global growth outlook into negative territory.

As we all know, human capital is the most dynamic factor in driving productivity. Once the health or life of humanity is under threat, the demand for work and wealth suddenly becomes awfully subdued. So, it is inevitable that once COVID-19 put human capital in jeopardy, it wreaked havoc on the real economy, which manifested in business shutdowns, market shrinkage and a free-fall in trade activities from the transportation, hotel, catering, wholesale, culture, sports and entertainment sectors.

The crisis in the real economy, with its knock-on effect on the whole financial market, got amplified and, in turn, commodity, bond, equity and gold markets became highly volatile. It then moved rapidly onto financial institutions such as asset management companies, insurance companies and banks, snowballing into larger crises. In other words, the colossal ‘top-down’ damage from COVID-19 to the real economy set major systemic risks off in the global financial markets, which in turn imposed more acute and sweeping repercussions than the ‘bubbles’ in previous financial crises. Chart 2 below illustrates this point. Since COVID-19 hit advanced economies in March and began spreading rapidly, there have been growing concerns about an economic downturn and a liquidity squeeze. Consequently, the VIX Index saw a surge to an all-time high of 82.69 on 16 March.

During the same period, the US equity market saw four circuit breakers triggered on 9, 12, 16 and 18 March. The Fed responded by aggressively cutting rates to near zero, and introducing a new $700 billion QE programme and a combination of policy toolkits to inject liquidity directly to consumers, businesses, funds and banks. This was achieved through expanding the Consumer Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), the Money Market Mutual Fund Liquidity Facility (MMLF) and ‘unlimited’ QE bond buying, establishing the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), etc. Despite all these initiatives, the US equity market was still subject to heightened swings, further proof of market-wide panic and liquidity constraints. Faced with this decline and significant volatility across global equity markets, some investors had to sell liquid assets such as gold to cover their losses and margin calls. And in so doing, money flowed out from gold market.

Worse still, the virus-induced ‘all-out crisis’ plunged the world economy into a downward spiral, depleting liquidity in the financial markets and bringing a precipitous drop across the asset classes, including equity, crude oil, gold and bonds. Rising uncertainty and risks, together with deleveraging, led to the trampling effect and the plummeting of financial assets. Even gold was not immune to this sell-off across the board and its safehaven status remained dormant amid the early financial turbulence.

2. Price actions for gold and commodities moved in lockstep as gold is widely included in financial asset indices

Financial products such as the Commodity Research Bureau (CRB) Index futures, one of the most widely traded contracts worldwide, covers 19 commodities, including crude oil and gold (in this case, gold’s role as monetary value becomes vague). So, if commodity prices tank, especially when risk-off tone returns, investors tend to sell off CRB Index contracts. Therefore, gold was indiscriminately liquidated along with other assets as all commodities were included and bonded in the index in equal proportion.

Likewise, gold has also been widely added to investment portfolios, meaning that when the financial markets see a rise in volatility, gold tends to move in lockstep with it. This might well explain why gold lost its safe-haven status when risks started to surge in the international financial markets. However, the correlation between gold and other commodities is not organic in that it is designed and made by humans to optimise asset allocation. After all, gold, unlike other commodities and common financial assets, will usually recover its safe-haven status when the shock of a liquidity crisis gradually eases.

3. The magnified role of the US dollar in the gold price

The US Dollar Index is a major factor affecting the gold price. Despite the inverse correlation that the index has with the gold price in the long run, the effect of such a correlation gets greatly magnified when financial liquidity is in extremely short supply. A case in point is when the US Dollar Index experienced a temporary drop in late February as a result of the COVID-19 contagion and the US stock market rout. On 9 March, the US equity market hit its two-year low, triggering the first circuit breaker this year. As market liquidity started to squeeze, the US Dollar Index soared to 103.01 on 20 March, a new three-year high. Contrary to the US dollar, the gold price lost its upward momentum on 9 March and started to dive down. With this in mind, we can see that the inverse correlation between gold and the dollar index got greatly magnified.

With looming risks, market panic crept in as investors were faced with significant uncertainties and extreme fluctuations. At this point, the US dollar, a benchmark for global wealth, was undoubtedly the hedge of choice against market risks, and that was the rationale behind the sell-everything-for-the-greenback response, even though the Fed unleashed two rounds of unconventional rate cuts in March.

The highly leveraged US equity market faced a situation of forced liquidation risks and liquidity crisis when the dollar plunged. Though the Fed injected more cash into the market via banks, the liquidity found it hard to make its way into the equity market as US banks are subject to the Volker Rules, which generally prohibit banking entities from engaging in proprietary trading or owning, investing in or sponsoring hedge funds or private equity funds. On top of that, highfrequency trading and financial derivatives exacerbated the liquidity crunch because of the liquidation of assets in dollar terms in extreme market conditions. Then, cash became king again across the financial markets. Even though the Fed cut interest rates to near zero and launched QE bond buying, the liquidity crunch did not ease. Normally, the US Dollar Index dips following rate cuts, but it surged surprisingly this time, which indicates the magnified role of the greenback in financial markets.

4. Oil price crash weighed on gold

Amid the initial phase of the COVID-19 outbreak in China, there were concerns over China’s economic fallouts from the virus, which aggravated the imbalance between supply and demand in the global oil market and sent the oil price in a downward spiral.

On 22 February, the virus started to hit other countries and worries about the epidemic intensified as the oil price dipped at a faster pace. On 4 March, Russia rejected the OPEC+ backed additional oil cuts. On 7 March, Saudi Arabia announced its decision to sell oil at a sharply discounted price and increase its production to well above 10 million barrels a day, which it then increased to 11 million barrels a day in April. Subsequently, other OPEC members followed suit and joined the oil price war. On 9 March, the oil price took another dive, with the WTI crude oil price nearly back below $20 mark at $20.06 per barrel from its peak $65.65 per barrel, down approximately 70%. In this sense, the oil price crash weakened further the already fragile financial markets.

Low oil prices also pounded the US shale oil sector, with the majority of US shale drillers and producers bearing the brunt and being forced into debt crisis, given that the break-even cost on average is above $45 dollars a barrel. In the meantime, the shares across the sector started to collapse, with the industry tycoon Chesapeake Energy down by 75% in less than a year. In this sense, panic in the equity market and the liquidity crunch were clearly intensified.

Gold Is Still A Sought-After Safe-Haven Asset

Though gold was not immune to the across-the-board price drop in the early stage of this year’s financial turmoil, from the point of view of its previous data, gold is still a sought-after safe-haven in the long haul.

1. As one of the best-performing financial assets with the highest yield this year, gold continues to see sizeable growth in trading

Despite the fact that the gold price posted its biggest fall of 15% in March, gold still managed to be top of the list of this year’s bestperforming assets, with handsome returns as of the end of June. Gold-backed exchange-traded funds (ETFs) increased their holdings of gold by 154 metric tons in May, taking holdings to 3621 tons at the end of June. The global gold ETF inflows outpaced records for any calendar year in only five months. As SPDR, the world’s largest gold ETF, increased its gold holdings to 3.8 million ounces (about 1,178.91 tons), the record net inflows revealed investors’ enthusiasm for gold’s safehaven status.

In addition, driven by the surges in the gold price in 1H 2020, gold exchanges across the globe witnessed remarkable growth in trading volumes. While major international exchanges for precious metals, such as the CME and TOCOM, saw a substantial increase in trading volume, the SGE also hit record highs on many fronts. In the first six months, trading turnover on the SGE registered 18.7 trillion RMB, up by 84.19%, among which gold trading volume climbed 13.28% to 33,800 tons and silver a staggering 272.06% to 1,561,400 tons.

2. Historical data shows gold expects a faster rally than other commodities

When SARS broke out in 2003, the CRB Index fell 11% from its peak of 221.38 to its lowest point of 197.79. In contrast, gold reversed its downward trend on 7 April on the back of a two-month drop and reached $415 per ounce at year end, while the CRB Index did not rally until three weeks later on 29 April.

During the 2008 financial crisis, the CRB Index hit its year low of 208.6 on 5 December, a 66% plunge from its high of 473.52 on 2 July. As the financial meltdown ran its course, and the market was flooded with liquidity from the Fed, the gold price started to rebound and has gained momentum ever since to reach $1,964 per ounce at the end of July, 2020. In contrast, the commodities included in the CRB Index (see chart 4) were yet to recover at the end of 2008.

Given that the end of the coronavirus pandemic is not within sight, gold is poised for tremendous volatility further down the line. But it is more likely that the gold price will rally at a faster pace than other commodities once the financial markets return to normal after COVID-19 has ended.

3. Gold helps navigate risks arising out of the global macroeconomic policy stimulus

According to the IMF’s April World Economic Outlook forecast, more than 170 countries were projected to have experienced negative per capital income growth, a far cry from the previous prediction that more than 160 countries would achieve positive growth in 2020.

And yet, its latest forecast shows that the world could face a deeper recession in 2020, with global output projected to decline by 4.9 percent. What’s worse, the cumulative loss of output to the global economy across 2020 and 2021 from the pandemic crisis will be over $12 trillion.

What may be certain within the great uncertainty regarding the length and depth of COVID-19 is that global economic growth in 2020 will take a sharp turn for the worse, possibly triggering the worst recession since the Great Depression.

In early April, governments all over the world took corresponding action and set in motion a major policy co-ordination to respond to the pandemic by announcing fiscal measures amounting to $8 trillion, as estimated by the IMF. In addition to the massive monetary stimulus adopted by the G-20 and other countries, the global market now features broad counter-cyclical economic policies previously unseen.

The key point, however, is that the main role of monetary and fiscal stimulus policies is to alleviate the significant economic volatility. Therefore, it would take time for future economic growth to cushion the perspective economic fallout from the macroeconomic policy stimulus.

Since mid-February, the return of the US high-yield bond has increased to 16.65% from 11.25 %, while the OAS of corporate bonds with a BBB rating has jumped from 135bps to 290bps. Plus, the findings from transmission patterns of crises such as the Great Depression in 1929 indicate that widened credit spreads will lead to inaccessibility to finance for corporates, which spells crises that spread in a bottom-up fashion. That is to say, the Fed’s unlimited bond buying and aggressive rate cuts won’t be able to turn the tide.

If the COVID-19 virus continues to rage or even mutates, the macroeconomic policy stimulus could turn into a novel crisis once the global economy becomes stuck in a downward trend.

For that reason, gold, with its intrinsic credit and monetary value, is undoubtedly a surefire investment to hedge against risks from policy stimulus.


Since this article was written, the yellow metal has climbed above its 2011 peak to a new all-time record of $2,068/oz in early August. That speaks well for gold’s status as an outstanding safe-haven asset.

Mr Jiao Jinpu, is Chairman of the Shanghai Gold Exchange, as well as a Research Fellow, a Member of CPPCC Shanghai Committee and Vice Chairman of Economic Committee in Shanghai Municipality. Mr Jiao has been Chairman of the Shanghai Gold Exchange since October 2015. Prior to this Mr. Jiao Jinpu worked in China’s central bank, the People’s Bank of China (“PBC”) for nearly 30 years. His main responsibilities covered the research and policy formulation ranging from financial reform, monetary policies, financial regulation, to inclusive finance.

In his days with PBC, he held various senior positions, including Deputy General Director and General Director of the PBC Research Institute, Secretary of the CPC PBC School of Graduate Students Committee, General Director of the Financial Consumer Protection Bureau, and Party Member of the CPC PBC Shanghai Headquarter Committee.

Mr. Jiao is a trailblazer in China’s inclusive finance and financial consumer protection with in-depth knowledge in financial market trading, wealth management and commodities pricing. He is also a prolific author of more than 10 books, and over 200 academic papers. Governments all over the world took corresponding action by announcing fiscal measures amounting to $8 trillion