The Corona crash and the safe haven fairy tale
It is probably no exaggeration to claim that a large part of the Foolish investors hardly want to look into their portfolio at the moment. On the one hand, the corona virus has caused a global crash on the financial markets, which brings back memories of the financial crisis of 2008/09. On the other hand, even formerly "safe havens" were not spared from the effects in further consequence. For precious metals such as silver and gold, and especially cryptocurrencies, which should shine in uncertain times, have been brutally sold off by investors in recent days.
But what is the reason for this sell-off? The actions of many central banks, such as a reduction in interest rates and purchases of government and corporate bonds, should basically boost silver, gold and cryptocurrencies. This even leads to the question of whether there are actually safe havens in crash times or whether cash is king here.
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Reasons for the sell-off
In order to understand the reasons for the massive sell-off of precious metals and cryptocurrencies, one must bear in mind that a large number of investors speculate on the stock market by means of Lombard loans. These investors put their portfolio up as collateral with their custodian bank to get a loan, which they in turn use to speculate on price gains.
In bull market times, this is a profitable strategy for investors, because it allows them to massively increase the return on their invested capital and, provided that stock market prices rise, to repay their borrowings in part from the price gains.
However, when a crash scenario occurs and stock prices fall, in some cases by 10% or even 20% per day, the deposit balance and the underlying collateral security, which is the basis for the bank loan, is also reduced accordingly. This can subsequently lead to the ever-familiar and dreaded margin calls from banks, urging investors to either reduce their exposure (to equities, for example) or to inject capital so that collateral is once again adequate.
Thus, the investor has two options, both of which would put pressure on the financial markets. If many investors sell their custody account positions as a result of these margin calls, this subsequently triggers increased pressure on the markets, so that this could trigger a domino effect and more and more investors are forced to liquidate their custody accounts.
Since a majority of the investors do not want to sell however their positions with a large loss, shoot these capital after. However, these investors are usually so deeply invested that they do not have these amounts on the high side (no Lombard loan is taken out for nothing). Therefore, the silverware is sold, so to speak, which has given good returns in recent weeks and months. And this is especially true for precious metals and cryptocurrencies.
Conclusion
At this point, I would like to refrain from my personal assessment of this dilemma. The system is currently the way it is. However, it can be said that many investors have learned nothing from the mistakes of the financial crisis of 2008/09 and also the policy has failed to put a stop to speculation with the help of loans.
In my opinion, the sell-off of precious metals and cryptocurrencies is in any case fundamentally incomprehensible, as these tangible assets should benefit massively from the measures taken by central banks, after which I assume that these assets could rise disproportionately as soon as the downward pressure on the financial markets will weaken.
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Michael owns physical gold and the cryptocurrencies Bitcoin, Bitcoin Cash, Ethereum, Dash, IOTA and Lisk. The Motley Fool does not own any of the securities mentioned.