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LAWRIE WILLIAMS: Gold sets base at $1,700 as virus effects sink in?

The confirmed number of global coronavirus cases passed 2 million today and confirmed deaths 131,000 and the whole world seems to be in the grip of the sometimes lethal Covid-19 coronavirus.  Indeed the above figures are almost certainly a huge under-estimate with testing numbers very limited in most countries and reported deaths primarily restricted to those that have occurred in hospitals, ignoring coronavirus deaths which have happened in the community and care homes.  There is also anecdotal evidence that some countries have seriously under-reported virus cases and deaths for political and logistical reasons.  China, in particular, has suffered from this accusation with eyewitness accounts suggesting that deaths in Wuhan in particular have been massively under-reported.

Furthermore the incidence and spread of the virus in less developed nations which neither have the hospital systems, nor good medical access to remote regions, will also have probably been completely unrecorded representing, perhaps, virus figures that only represent the tip of the proverbial iceberg.  Our conclusion is that virus incidences and deaths are a multiple (perhaps a large one) of the reported figures which appear daily on the Johns Hopkins University or Worldometers websites among others.

Many countries have resorted to quite severe lockdowns which have had an enormously adverse effect on their domestic economies leading to a decimation of many large and small businesses, some of which will go bust or take a huge amount of time to recover, and these are also having a dramatic effect on global growth figures.  Equities markets have been hugely volatile, buoyed up from time to time by government and central bank initiatives to mitigate national economic effects.  But overall global equities markets have fallen 30-40% so far and, we think, will likely still fall far further before the whole pandemic situation plays out.

According to the BBC website, the IMF has described the global decline as the worst since the Great Depression of the 1930s, and referred to the effects of the virus spread as having plunged the world into a "crisis like no other", which will test the ability of governments and central banks to control it.  The BBC also reported that Gita Gopinath, the IMF's chief economist, reckoned the crisis could knock $9 trillion off global GDP over the next two years.  This is perhaps even an understatement of the true position given that these figures are already being exceeded. 

The IMF also suggested an, in our view, hugely optimistic figure for global growth next year of around 5.8%, assuming the fading of the virus effects in the second half of the current year.  We put both aspects of this prediction down to wishful thinking.  We suspect the knock-on effects of the pandemic on the global economy could yet continue for several years – particularly given the huge debts run up by some countries to try and protect their economies from the virus-related downturn.

As always, there are some winners among companies benefiting from the lockdowns – notably those which conduct the majority of their business online, supermarkets and other food outlets, and those manufacturing surgical supplies and drugs etc. Meanwhile others like the auto industry, airlines, cruise lines and travel companies in general etc. have been well and truly decimated and could take months, if not years, to recover. 

Oil companies too have suffered hugely given the fall in the oil price due to an enormous drop in demand and a price war between the world’s two largest producers, Saudi Arabia and Russia.  Even an apparent accord between these two oil sector behemoths leading to a supposed big cut in global output seems to have done little to boost the price – but could lead to some big prospective equities gains ahead – but how far ahead?

Safe haven options – gold in particular – have seen some strong positive price movement.  Some analysts see price rises ahead in multiples of thousands of dollars.  We are not one of these but do see the prospect of good price growth ahead – perhaps to $1,800 by sometime in June/July, and a test of the all-time dollar high of over $1,900, ironically by Labor Day, in the U.S. in early September.  The northern hemisphere autumn (fall) can hold mixed fortunes for precious metals, but we wouldn’t be too surprised to see $2,000 gold before the year end. 

But never under-estimate the power of the big bullion banks, and their allies controlling the futures markets, in keeping precious metals prices well controlled to suit their own agendas.  In this context the reader might like to consider the following article aimed at precious metals dealers which sets out the mechanisms by which such activity is achieved: If the CME Artificially Creates Dips in Paper Gold and Silver Futures Prices by Raising Margins, Stand Your Ground.  While we might question some aspects of this article, it does set out a procedure, apparently already in place, which could be construed as helping control the movements in the precious metals markets.

The gold price currently seems to be firmly set in the low $1,700s, still a couple of hundred dollars below its all-time U.S. dollar high, but as we have pointed out before does remain at or around all-time highs in most other countries’ currencies – or at least in those which don’t have a direct link to the U.S. dollar.  This all-time high level is apparent in most of the world’s major gold producing nations, with the exception of China and the U.S. itself, and even in these latter two countries the current price is high enough to ward off some closures and keep interest and exploration for gold at decent levels.  How much more so in countries where the higher price is hugely supportive of the precious metals mining sector?

Now that parts of Canada, which had shut down gold mining operations in coronavirus related advice, are now classifying gold mining as an essential activity, then that could help open the floodgates for investment in the less risky gold miners, which tend to offer better returns than bullion investment itself.  However one needs to do one’s due diligence before investing in any mining stock.

15 Apr 2020 | Categories: Gold

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