In the week of March 9-16, 2020, the gold price fell 10 percent. In the same week, however, the S&P 500 also fell by 13 percent, the DAX by 18 percent and the IBEX 35 by 20 percent. When you look at these headlines, gold hardly looks like the defensive asset as it is widely recognized. However, if we look over the facade, we can see that gold did play its traditional role.
In times of extreme market volatility, where there are many margin requirements for risky assets, investors often seek liquid assets to meet these demands. Gold and government bonds are two important assets in this category. They were sold to provide liquidity for other purposes, and prices fell accordingly (see figure). Treasury yields, which tend to rise as prices fall, moved in line with the price of gold.
The fact that gold fell in parallel with stock prices, although its long-term correlation with stocks is negative (-0.15 between 1980 and 2020) is not unusual. During the Great Financial Crisis, the gold price fell almost 20 percent between September and November 2008, before rising by 170 percent to a peak in 2011. In times of liquidity shortages, gold initially coincided with the stock market. When central banks injected liquidity into the financial system, gold began to behave with its usual characteristics.