LAWRIE WILLIAMS: Gold, silver and the Covid-19 impact in March
March 2020 has certainly been the standout month so far this year in terms of the impact of the Covid-19 novel coronavirus globally and the start of the global recession/depression with its initial impact on gold prices (and, to a lesser extent, silver). Pgm prices remain hugely volatile and seemingly undecided whether to take their cues from gold and silver, or to descend sharply along with the parlous state of the global economy.
March seems to have seen the previously most affected nations – China and South Korea – apparently bring the virus spread within their borders under control, while other Far Eastern countries like Japan, Taiwan, Singapore – and the Chinese semi-autonomous regions of Hong Kong and Macau – have seen their early actions vindicated by low virus transmission and death rates. The virus epicentres have moved to Europe and the U.S. with the USA, Italy and Spain already comfortably surpassing China in numbers of reported cases and reported deaths. We’re not sure how accurate the Chinese figures are as it is claimed that the country does not report asymptomatic cases and there is anecdotal evidence that the death rate is far higher than officially suggested. But be this as it may, it does seem that the draconian lockdown measures taken early on by the Middle Kingdom has certainly been instrumental in getting part of the country’s massive manufacturing sector back to work.
Initially we had thought that it would be the impact on the supply chain of the Chinese shutdowns which would perhaps drive Western economies into recession, but we had totally underestimated the speed and spread of virus infections, and deaths, in the developed world. Even though we warned back at the beginning of February (See: Prediction: Wuhan virus could boost gold and silver, trigger equities meltdown.) that the ‘Chinese virus’ as President Trump is so fond of calling it would have a really significantly adverse effect on equities and the U.S. economy and drive it into recession, we had thought the country’s much vaunted medical system would manage to control any virus spread. (It, in effect, has been found hugely lacking as the mostly private health care system is only really open to those with medical insurance or who are independently wealthy). Not that the European, mostly free, health systems have done much better!
Now perhaps the economic boot is on the other foot in that the resurgence of the Chinese manufacturing sector will find itself with a vastly diminishing export demand for its goods, except perhaps in the medical equipment and supplies sectors. Now the ‘American and European’ virus will have a hugely adverse impact on the Chinese and South Korean economies, among others, which are seeing enormous drops in demand for their exported products which are at the heart of their economies.
One has to have some sympathy for the USA’s President and his desire to get the country’s business sector back to work, but the nation is paying the price for the early-on seeming downplaying by the Administration of the likely virus effect on the economy. We doubt if the country can resume working in any significant manner for another couple of months yet, and even that may be being optimistic. The President may now say that he always knew this was a virus pandemic, but he certainly didn’t act that way until about mid-March, by which time his actions were definitely too little too late. At the time of writing we reckon that confirmed U.S. virus infections will probably pass the 200,000 mark today, rising at around 25,000 a day. Deaths in the U.S. are already above 4,000 today – and are also still rising fast. New York State alone would rank about No.4 in the world for virus cases. The USA now has nearly three times the number of virus cases reported by China and considerably more reported deaths too. However as far as reported deaths are concerned Italy and Spain lead the world, followed by Iran and France, with the USA coming up fast!
The gold price has been seemingly well controlled in the futures markets by those who have a strong interest in keeping price rises as low as possible, for both political and financial reasons, but we suspect these forces will be unable to keep a lid on the physical metal price which still looks poised to break out – perhaps much higher. Precious metals all fell yesterday – gold back below the $1,600 mark, while U.S. equities also resumed their downwards path despite a seemingly illogical move upwards on Monday .
The top 10 countries on the basis of reported virus cases are currently as follows:
Note that South Korea has now dropped out of the Top 10 to around 14th place - a quite remarkable turnaround. It will probably soon be surpassed in cases by Canada and Portugal, both of which are seeing big daily case increases, with Brazil coming up fast too. Far Eastern nations seem to have had much more success in controlling virus infection numbers than their European and Middle Eastern counterparts, perhaps due to the mostly compulsory wearing of face masks when venturing outside the home. Face masks so far seem to be shunned by Western populations.
As far as markets are concerned we would anticipate further falls in U.S. and European equities despite recent days of recovery. It should be remembered that in the 2007/9 Global Financial Crisis (GFC), U.S. equities in particular fell well over 40%, but the fall was interspersed with several ‘dead cat bounce’ recoveries, a couple of which were quite substantial. The difference this time around is that job losses are far, far, higher and Government and Fed stimuli were much lower. While the two may balance one another out to an extent, the fall in GDP this time around is going to be significantly greater, and probably more prolonged, with the whole world moving into first recession and then depression.
In the 2007/9 GFC gold fell along with equities, but not nearly to the same extent and it recovered all its lost ground very quickly, and them went on to new record price levels. This time around things may well be different in that physical gold is already apparently in short supply in the markets where it is in most demand as far as metal for investment is concerned. With mines and refineries being shut down because of the coronavirus, supplies will be squeezed further and prices as we noted above should break free of the straitjacket being imposed in the futures markets and could well take off. Whether the likely rise is sustainable once things start getting back to normal, as they will eventually, may be another matter though!
So what do we have to look forward to? Another several weeks at least of lockdowns in Europe and the Americas and an increasing spread in hitherto limited virus areas like Africa where health systems are unlikely to be able to cope. Some sectors of the Western economy may take years to recover fully – and some maybe not at all. Life will undoubtedly change as businesses realise that working from home for many employees can be an attractive option with the potential for cutting overhead costs – smaller offices for example, while individuals may find this prospect appealing and may even be prepared to take pay cuts to avoid lengthy and stressful commutes and thereby spend more time at home with families. Business meetings will increasingly be held by video link and maybe travel budgets will be cut drastically. We will probably all get used to washing our hands more thoroughly than in the past which may have the effect of limiting the transmission of other epidemics like seasonal ‘flu.
As for precious metals, gold – and maybe silver – will come into its own as more and more view the enormous debt being rung up by the biggest global economies to try and keep their countries afloat, and see these as unsustainable. Inflation will likely soar once the virus scare is over, if it ever is, Gold tends to do well in times of global uncertainty and the world has seldom seen anything like the effects of the Ncov-19 coronavirus, if ever. Equities markets were almost certainly riding too high pre-virus and we think they have plenty of room to fall further – although certainly not in a straight line. And this will undoubtedly give rise to a move into gold as the ultimate safe haven. That may drag silver up with it despite the latter having very much fallen out of favour – the market is small in comparison with gold and far too easy to influence adversely by those big money players for whose interests keeping prices low may be beneficial. But if gold takes off they may no longer be able to control its perceived sibling metal.
As for pgms we had expressed doubts about the pricing of these in an industrial recession/depression. But virus-related mine closures – in South Africa in particular - may affect the supply/demand fundamentals and be a price saviour for the moment. But we may also get used to the fall in atmospheric pollution levels due to less traffic on the roads and manufacturing shutdowns. This could give a boost to non-polluting motor vehicle sales which would be bad longer term for palladium in particular.
Everything is changing. Be prepared for the new normal. Gold will undoubtedly benefit in the shake-out and could move to much higher levels once the main virus scare is behind us – but when that will be is probably still too early to predict.