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By James Blacker, Benzinga
Early August saw a global market sell-off with significant declines in major indices and asset classes. In the first five days of the month, the QQQs, which tracks the tech-heavy Nasdaq-100, fell nearly 15% from $27.96 to a low of $23.90 on August 5. During the same period, Japan’s Nikkei index was down around 20%, including its largest one-day drop since 1987. Cryptocurrencies were also not spared, with Bitcoin dropping below $50,000 to its lowest level in six months and down over 24% since the start of August. Amid the widespread market turmoil, gold has proven to be relatively stable, living up to its reputation of resilience in economic downturns and as a hedge against market volatility.
Factors Driving The Market Downturn
The market turmoil can be attributed to several key events. In a July 31 meeting, the Fed decided to maintain its benchmark interest rate within the 5.25%-5.50% range. While this move was anticipated by the market, it has added pressure on companies already grappling with economic uncertainties. Many analysts now expect a 50 basis point cut to come in the Fed’s September meeting, but not before. Market sentiment was further upended by the July jobs report, which showed that just 114,000 jobs were added in July, far fewer than the expected 179,000. Unemployment is also at 4.3%, its highest since October 2021.
Furthermore, the July earnings season has been a tough one for some of the biggest names in tech. The latest round of earnings reports, which has been seen as a test of the bullish AI narrative, saw disappointing second-quarter results for giants such as Amazon (NASDAQ: AMZN), Intel (NASDAQ: INTC), Alphabet (NASDAQ: GOOG), and Microsoft (NASDAQ: MSFT). Nvidia (NASDAQ: NVDA), which has seen its shares rise more than eightfold between the start of 2023 and mid-June, is scheduled to report its results at the end of August.
The Yen Carry Trade
The Bank of Japan's (BOJ) decision on 31 July to raise interest rates by 25 basis points is another factor contributing to the market sell-off, as this rate hike has caused the widespread unwinding of the yen “carry trade.”
A carry trade is essentially when investors borrow money in low-interest-rate currencies, like the yen, to invest in higher-yielding assets. Interest rates in Japan have been held at or near zero in recent years, making the yen carry trade extremely popular. The BOJ’s rate hike in July pushed up the value of the yen, eating into any potential profit from the carry trade and forcing investors to unwind these positions.
Gold’s Immunity To Market Contagion
The recent market disruptions and fears of a recession have rippled through multiple asset classes. U.S. and global stocks, Bitcoin and cryptocurrencies in general have been deeply affected by the contagion of market fear. This chain reaction across different markets highlights the interconnected nature of the global economy, where a crisis in one region can quickly lead to a broader downturn.
Gold prices, however, have been largely immune to the financial contagion, having remained relatively stable throughout this period of volatility. The precious metal saw a slight dip in the first few days of August but remains around the $2,400 mark and close to its all-time highs. As such, gold’s unflinching stability continues to underscore its status as a wealth-haven asset and a store of value.
Gold has historically performed well during a recession. As an example, even as the stock market collapsed in 2008, gold demand spiked, with the price of gold more than doubling over 2007-2011. Similarly, the price of gold reached all-time highs during the Covid-19 pandemic. As a wealth-haven investment, gold prices also hit new highs in December 2023 and in 2024, driven by geopolitical turmoil, among other factors.
As the global economy continues to face uncertainty, geopolitical conflict and market turbulence, gold’s resilience makes it an increasingly attractive option for investors seeking stability. Unlike stocks, cryptocurrencies or other volatile assets, gold has been proven to maintain its value over long periods of time – even in periods of economic uncertainty – and provides a layer of security that is hard to find in other assets.
Buying gold requires a trusted precious metals dealer with a proven track record, such as Priority Gold, which can help novice and experienced buyers in gold through its expertise, resources and guidance.
Featured photo by Zlaťáky.cz on Pexels
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