gold investment, silver investment

Precious metals investment terms A to Z

Circuit Breaker

We love AC/DC and High Voltage is a great song. But high voltage can be also fatal. This is why we use circuit breakers – to protect an electrical circuit from damage caused by excess current.

However, circuit breakers, or trading curbs, are not only used to halt excess overload, but also to curb panic selling in the stock exchange. These are temporary measures that halt trading. They were implemented in the US after the Black Monday (October 19, 1987) when the Dow Jones plunged 22.6 percent in a single day. They apply to both individual securities and market indices – in case of the latter, they are triggered only based on downward price movements. There are three levels of circuit breaker on NYSE, which kick in when, for example, the S&P 500 declines 7 percent, 13 percent, and 20 percent from its closing price the day before. In the two first cases, trading is halted for 15 minutes, unless it’s after 3:25 p.m. Eastern time. Level 3 circuit breakers halt trading for the remainder of the trading day.

Although seen as useful measures to curb panic selling, the circuit breakers can actually make trading more volatile and speed up the panic, because traders try to exit the market before the circuit breakers officially kick in. And the mere fact that some breakers were triggered, can exacerbate panic later. This should increase demand for gold as a safe haven. Moreover, the flow of information is reduced during trading halts, which hampers the price discovery process.

Circuit Breaker and Gold

What is the link between the circuit breaker and gold? First, there are also circuit breakers on the gold market. On NYMEX, the trigger is set currently at 10 percent (raised from 5 percent during the coronavirus crisis). Second, when the circuit breakers in the stock market kick in, it means that something really big is happening! You see, most of the time, the circuit breakers are not used. The last time the trading curbs were applied, was October 27, 1997. Until, of course, the coronavirus crisis. So, after more than 20 years without a market-wide trading halt, we experienced four circuit breakers in just two weeks of March 2020! The trading curbs were triggered on March 9, again on March 12, again on March 16, and again on March 18, as the markets fell more than 7 percent at the open due to the COVID-19 pandemic concerns. It means that since four out of five cases when the circuit breakers were triggered since their origination in 1988, happened in March 2020! It shows that the scale of the coronavirus crisis is really huge.

Let’s face it: the COVID-19 shock did not come in the context of an otherwise healthy economy. Actually, the trading curbs from March 2020 show that the US stock market bubble has burst. The stock market crash is presented in the chart below.

Chart 1: S&P 500 Index (green line, left axis) and Dow Jones Index (red line, right axis) in 2020.

Circuit Breaker and Gold Chart

Given that gold rallied in the aftermath of the economic crisis of 2008, we could expect a replay of this rally, especially if the current health crisis transforms more decisively into a full-blown financial crisis

We encourage you to learn more about the precious metals market – not only what is the link between circuit breaker and gold, but also how to successfully use gold as an investment and how to profitably trade it. Great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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