LAWRIE WILLIAMS: Gold, politics and the pandemic – dangerous times ahead

On Friday the U.S. recorded over 200,000 new people testing positive for coronavirus infection and close on 2,000 new deaths attributed to the virus according to worldometers.info, a website which publishes probably the most comprehensive tabulation of global virus infections.  Indeed two states – Texas, and California – have each recorded over 1 million cases each of positive COVID-19  infections and Florida is catching up fast with well over 930,000.  Yesterday the U.S. daily totals were 172,839 new cases and 1,460 attributable deaths.  Heaven knows how many excess non-COVID deaths are indirectly virus-related due to hospital capacity being overwhelmed by coronavirus cases.  

The U.S. totals now stand at around 12.5 million people having tested positive and over 260,000 recorded deaths and both figures are rising seemingly exponentially.  If Texas and California were countries they’d rank 12th and 13th in the world for confirmed virus infection cases (however one suspects real figures for many countries are probably far higher than the officially reported records show). 

President Trump does have a point with regard to the fact that the more tests that are carried out, the more infections will be found.  In terms of tests per million of population, the U.S. does indeed rank second among countries with populations of over 10 million people, only exceeded by the UK, but also does rank 8th in the world for deaths per million of population using the same total population parameters. Here its death rate falls behind Belgium, Peru, Spain, Italy, Argentina, the UK and Brazil but still is one of the world’s highest despite its much vaunted health system.  Maybe President Trump’s laissez faire attitude in perhaps rating the economy as being more important than human lives has a lot to answer for in terms of mortality rates, so possibly he will go down in history as the partial saviour of the U.S. economy – but at a very considerable cost in human lives.

From an outsider’s view he will fall somewhere between the two camps of preventing the economy free-falling due to perhaps over-strict virus controls measures which some suggest, but at the expense of an enormous death rate.  By effectively indirectly discouraging measures like mask wearing, shown to have a positive impact in many countries – particularly in Asia – he has probably ploughed a furrow that may well end up with him being blamed for the high number of virus-related deaths which is probably nowhere near its peak yet.  To some this may be acceptable given the fight against the virus pandemic may be seen as a war but, to put the figures in perspective,  the total coronavirus-related death toll is already higher than four times that of the number of Americans killed in the Vietnam war for example.  Deaths are also already over double those of the number of U.S. personnel killed in World War 1 and more than halfway towards the number killed in World War 2.  These are massive numbers – particularly since they have occurred in peace time!.

So what is the relevance of all the above to the precious metals markets?  With an assumed Biden Presidency ahead, despite Trump’s continuing efforts to delay what seems to be the inevitable transfer of power, stricter virus control measures are almost certainly in the offing.  Even with a prospective vaccine being rolled out the economic downturn will adversely affect the U.S. economy for many months yet.  Biden also appears to be in favour of a far larger economic stimulus package, assuming he can get that through the Senate.  We see the chances of that better than is generally reckoned if Biden does succeed to the Oval Office.  It would only need a couple of Republican senators to vote in favour, or abstain, for that to pass and with the economic health of the nation at stake we suspect a degree of horse trading in what will hopefully be a marginally less politically divisive upper house may see this through.

The likely effects on all this are two-fold, but both could be seen as gold positive. The continuing overall negative impact on the U.S. economy has to filter through to the equity markets, which so far seem to have ignored the fact that the U.S. economy has turned down hugely.  The realisation that there is, indeed, a severe economic downturn occurring should result in more investors turning to supposed safe havens like gold to insure against what many observers see as an inevitable equities market crash.  The higher stimulus initiative could see more money pumped into the system, which may mitigate the possible tendency for equities to dive, at least in the short term, but should benefit perceived safe havens like gold.

On the other hand continuing good news about the roll-out and efficacy of an effective vaccine, assumingly having the potential for bringing the virus impact on the economy to an end, could continue to have a positive influence on equities and be negative for gold.  Positive vaccine news may generate the kind of euphoric effect on markets – equities rising and safe havens having less relevance – which we saw on the Pfizer vaccine announcement last week.  However once the fact sinks in that even with an effective vaccine, economic recovery remains months, if not years, into the future, maybe the ‘vaccine availability effect’ may fall away.  Some of the structural impact of the virus on the U.S. economy – and that of other severely affected nations – is probably irreversible except, perhaps, in the ultra long term.

Nevertheless markets tend to be driven by sentiment, and with a generally optimistic outlook prevailing, it could need a sobering dose of reality to change the overall market reaction to current driving forces.  One doubts that even the incidence of a Biden Presidency, assuming he prevails in the current political contretemps, with a perhaps more vigorous approach to virus control will have this effect.  As a politician Biden will want to maintain an optimistic outlook for the U.S. economy, however misleading that may be in reality.

Of course the one thing that could derail any U.S. economic growth is the real threat of rioting, and even perhaps insurrection, once the direction of the Presidency has been decided one way or the other.  It currently looks like going Biden’s way, but Trump has been hugely successful in generating strong divisions, and a fanatical following, among nearly half the American people.  If Biden is confirmed as president will Trump’s army of supporters, which includes heavily armed right wing militias, accept the decision. On the other hand, in the unlikely event, as it seems from across the Atlantic, Trump prevails and retains the Presidency, will the Biden supporters accept this?  Given the huge prevalence of the American obsession with gun culture – it is estimated that nearly half of American households own one, or more, guns – the strengths of feeling could lead to some very nasty confrontations indeed.  If violence should flare up then gold could take off as safe haven investment really comes into play!

We have concentrated in this article on America as it tends to be the U.S. markets which are setting precious metals prices, and what happens in equities markets there also tends to impact those elsewhere in the world.  It’s not that other global events have no relevance – they do – and a worrying ‘black swan’ instance cropping up elsewhere in the world could quite easily have a further positive impact on the gold price.  It is certainly not beyond the bounds of possibiliy that one of the other superpowers may try to take advantage of what they may see as current American disarray.  The most likely looks to us like a possible naval confrontation in the South China Sea, or a renewed Middle Eastern flare-up pitting American interests against those of Russia.  Let’s hope neither of these happens, nor any other potential superpower confrontation.  We live in dangerous enough times, without these being complicated further by geopolitical breakdowns!

22 Nov 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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