LAWRIE WILLIAMS: Gold drops, Equities freefall, Recession looms

The U.S. Dow Jones Industrial Index moved officially into bear territory yesterday having dropped 20% from its high point achieved only around 3 weeks ago, while the other major U.S. Indexes were 19% down so not technically yet in bear markets.  Yet today initial indications are that all the U.S. indexes will be substantially down further following President Trump’s announcement of new measures to try and control the virus spread.  The fact that the President and his Administration may be at last beginning to take the virus threat seriously is perhaps belatedly coming home.  Meanwhile the news of Hollywood royalty in the form of actors Tom Hanks and his wife testing positive for the virus in Australia, further brought the seriousness home to the American people and markets. 

Meanwhile Japan’s Nikkei Index has dropped around 22% and in Europe, at the time of writing, the German DAX index is down around 29% and the UK’s FTSE 100 down close to 27%.  In comparison, the gold price, although down also, has only fallen around 3.5% from its recent interim briefly-achieved peak of a few days ago.  As we had warned, precious metals prices also tend to suffer in a big equities market downturn as funds and individuals who may have bought on margin on the mistaken opinion that the only way for the Dow, Nikkei, DAX or FTSE etc, was up have needed to sell off good assets along with bad to maintain liquidity.  We have also seen the opinion expressed that some misguided investors have been selling off strong assets like gold to buy equities at what they assumed to be bargain prices convinced by advisers who have gone on record as saying the equities market crash has just been a temporary blip and it would rapidly recover.  They had also been convinced by occasional days of strong market resurgence amid the overall declines.  Dead cat bounces in our opinion.  (We warned about that in a previous article!

We had been predicting what has actually come to pass around six weeks ago before the Ncov-19 virus had a name and was still largely confined to the Chinese mainland (See: Prediction: Wuhan virus could boost gold and silver, trigger equities meltdown).  Well, maybe we were wrong about silver, but even the white metal’s lacklustre performance vis-a-vis gold has been way better than the subsequent falls in equities.  Gold has admittedly come back off its peak – we suggested that might happen also – but longer term the yellow metal should perform strongly as it did back in the last big equities meltdown in 2008/9 following a couple of months of weakness, after which it really took off.  As for equities, which had already been at price levels conservative analysts and economists had considered unsustainable,  they may yet have considerably further to fall as the virus effect on national economies becomes apparent and the whole world likely moves into recession.  Oil prices are moving back down again, while even bitcoin also seems to be in strong decline.

We had also been somewhat pessimistic about the likely price fate of the platinum group metals, particularly palladium.  These are more industrial metals nowadays and should be rated as such rather than as part of the precious metals complex.  Palladium is hugely dependent for its demand on the light vehicle internal combustion engine exhaust emissions control market and this has been turning down sharply all around the world – not least in China, currently the world’s largest market for automobile production and sales.  Palladium is also ever-increasingly vulnerable to the creeping replacement of internal combustion engine driven light vehicles by non-polluting electric cars (or hydrogen or fuel cell cars in the longer term.) Platinum, though, still has some jewellery usage and its place as a diesel engine exhaust control catalyst is perhaps not quite so much under threat as palladium in the petrol (gasoline) engine sector. 

Silver remains something of a disappointment.  Its close ties to gold have somewhat limited its percentage decline, but its status as a true precious metal seems to be slipping with around 60% of its demand coming from forms of industrial usage – not as much as the pgms but sufficient to keep it underperforming gold for the time being.

So where do we go from here?  At one time we opined that the downturn in the China-West supply chain would likely knock points off Chinese and Western GDP forecasts leading to a likely recession.  However increasingly draconian measures being taken by a number of Western democracies to slow the virus spread are further exacerbating this problem and will likely knock the whole world into serious recessionary territory.  Ironically this is happening as the latest figures out of China and South Korea suggest that the virus spread may be coming down in those countries, in part because of the stringent measures being taken, but perhaps also because the virus incidence is peaking on its own account.  This may offer a ray of hope to those countries which are currently seeing heavy virus case increases but the virus knock-on effects will likely continue for many months yet amidst huge declines in some sectors, which may even be terminal in some cases.

Gold tends to outperform equities at times of economic uncertainty and a move into a global recession, which is virtually inevitable now, will further enhance the yellow metal’s safe haven status.  But don’t necessarily expect it to skyrocket as some pundits are predicting.  The forces ranged against it may well be too strong for that as the gold price is seen very much as a government performance indicator, and thus the powers that be may do all they can to suppress any signs of vertical gold price growth.  They don’t like to be seen as incompetent economic managers! 

Next week’s U.S. Fed meeting, which will likely come up with another rate cut provided they discount the adverse effects on equities of its ‘emergency’ 50 basis point cut of last week, may boost the gold price a little and delay the fall in equities for a day or two, but like the U.S. Administration’s belated response and blame-shifting, it may all be too little too late.  The equities falls will likely go on and recession looks to this observer to be unavoidable.

UPDATE: This afternoon the gold price dived back to the $1,560s as panic selling hit the equities markets and some traders needed to sell gold to stay afloat,  But even so gold is nnly down 6-7% against the near 30% fall in equities,  The Dow fell a further 9% at one time in yet another meltdown and there could be more to come.  The Dow is now back to levels not seen since mid 2017.  Where will it end?  Some analysts predict the worst is yet to come.  We may well see something of a recovery as some economists and the Administration  try to talk the markets back up, but don't bank on them having any long term success!

12 Mar 2020

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

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