LAWRIE WILLIAMS: Equities recovery too far, too fast. Gold could surge
One hates to put a dampener on the hopes of our American readers, but we think the huge recovery in U.S. Equities indexes this week has been massively overdone, perhaps buoyed by the stimulus measures taken by the Administration and the Fed, and the President’s assertion that he hopes to get America back to work again by Easter - in only around 2 weeks time. Once the true realisation of the magnitude of the coronavirus spread kicks in then we suspect the markets may crash again – and this time will only start to resurrect once the virus peak is seen to have been reached, which could be at least another month away yet.
President Trump has a point in that the U.S. economy will continue to crash unless people get back to work quickly and revive the key manufacturing sector, but Easter is almost certainly far too soon to target as the date by which this should happen. U.S. coronavirus cases have more than doubled since the weekend and, as we noted in my last article, will probably rise so as to make the country that with perhaps the largest number of confirmed coronavirus cases in the world by the end of this week. (See: Physical Gold And Silver Making Their Move?). The country has already reported around 70,000 cases and could even overtake Italy and claim the No.2 confirmed virus incidence spot today or tomorrow and No1. By Saturday.
With many of the big manufacturer hosting states in partial lockdown, which the state governors may be loath to reverse until things are seen to be improving, then the President’s hopes for a speedy return to work will likely be thwarted in any case. The WHO has already described the U.S. as likely to be at the virus epicentre and at the rate the Covid-19 virus is spreading at the moment and the U.S. could be recording another 150,000 confirmed virus cases by the Easter weekend and deaths in the thousands. Coronavirus confirmed cases in New York State alone seem to be rising by around 5,000 a day at present and are showing little sign of the rises slowing down. Indeed New York State alone would rank in 6th place globally – ahead of Iran – in the listing of infections for individual countries. U.S. virus-related fatalities have already exceeded the 1,000 mark.
These figures may bring the equities markets (and the industrial elements of the precious metals markets – palladium in particular) down to earth, but leave gold, the ultimate safe haven, relatively unscathed despite efforts to keep it subdued in the futures markets. Physical gold (and silver) seem to be pretty well unobtainable at the moment without the payment of exorbitant premiums. Indeed the physical price of gold bullion, if one adds in the premium, seems to be thus distancing itself from the spot price as set in the futures markets. If gold gets into a really short squeeze position given the high level of shorts in the futures market, the price could really take off. And silver could do likewise, although it has been hugely out of favour as an investment, as witness the high level of the gold:silver ratio. This would have to come down substantially if silver is to achieve the investment status its true believers would have us consider. For the moment pgms may be buoyed by South Africa ordering a shutdown of mining operations as the world's largest producer of platinum and second largest of palladium.
As we have seen overnight, gold and silver are far from immune to further falls in line with equity margin calls as those markets crash again today. Stocks have already fallen sharply in Asia and opened substantially down in Europe and we anticipate the U.S. equity indexes will give up most of their last two days of gains by the weekend. The Gold:Silver ratio remains at a high 111 as I write, and pgm prices are also down. Precious metals could still surge but the timing remains uncertain.
Singapore, which has controlled the virus incidence pretty well considering it was one of the first nations to report cases, has already just announced a contraction in GDP and its in a far better financial state than most European nations and the U.S. Prepare for more volatility and an exceedingly bumpy ride in a continuing downwards direction for equities, while gold and silver may just about stem the tide – but don’t bank on it. As we have warned before things will likely get worse before they start to get better and we can all start returning to a more normal existence.