LAWRIE WILLIAMS: March madness in equities. gold and other precious metals

Two big measures taken over the weekend have raised the coronavirus effects on global equities and precious metals.  The first has to be the U.S. Federal Reserve’s second ‘emergency’ base rate cut, this time of 1%, taking U.S. base rates down to near zero, coupled with other concerted action by key global central banks in order to try and salvage some respite for coronavirus hit industries.  The second is that confirmed coronavirus cases outside mainland China, and resultant deaths have now exceeded those officially reported in the country - and the rate of infections is continuing to rise fast globally.

I really don’t know what to make of the latest gyration in the U.S. equities markets and the recent huge fall in the dollar gold price, given that I live in the UK.  However I’m very aware that markets around the world tend to take their cue from what happens on Wall Street.  My tendency is to look back at what happened in the last big market meltdown – just over 10 years ago – which seems to have been forgotten by the collective U.S. investment sector which last week saw the Dow fall by around 2,000 points in one day, yet claw most of that back a day later, while gold plunged around 6% in a single day – yet is still hugely outperforming equities year to date.  And things can only get worse before they start to get better.  This is the position we have been taking all along as anyone who reads my articles here on sharpspixley.com will know.  But this is panning out even more severely than I had been predicting.

Here I bow to Michael Lewitt, a right wing (but mostly anti-Trump) newsletter-writer in the U.S. who, to my mind, although pretty outspoken, talks a huge amount of sense and I commend anyone to subscribe to, and read, his Credit Strategist publication.  For straight talking investment advice, whether you like his politics or not, it has few, if any, equals IMHO.

Lewitt is convinced that in terms of an equity meltdown we ain’t seen nothing yet.  In his latest special additional note to his regular newsletter he avers “ I am now convinced that we are likely to see the major indices fall more than 50% from the all-time highs they reached only a month ago.”  I couldn’t agree more.  The coronavirus incidence will get worse before it gets better.  It set back the Chinese economy hugely, which in turn has already had an enormous global impact on the supply chain for goods and components many major Western companies rely upon for their profitability and, as a result, has already adversely affected a number of key industrial sectors and the companies involved in them.  Some will be taking such a massive hit to their bottom lines that they may take years to recover, if ever. 

Europe is in virtual lockdown and how long before the U.S. has to follow – some major cities are already at the first stages of this - interrupting manufacturing and travel,  leisure activities, sport and conferences etc., all  of which are big business nowadays.  Disney parks and others have already been shuttered and mega tourist destinations like Las Vegas, New York, Florida, southern California, National Parks etc, will see their incomes from visitors slow to a trickle.

Think airlines which have had to cut back some of their most profitable routes as country after country has gone into lockdown, or has had major travel restrictions imposed.  (A Bloomberg report states a warning from an industry consultant which reckons that the gopandemic could bankrupt most airlines worldwide by the end of May unless governments and the industry take action to avoid such a situation developing.)

The massively growing cruise industry will also be in peril– who will now want to book holidays on floating hotels which seem to be breeding grounds for contagious viruses leading to weeks of enforced quarantine even if one does not fall ill on board? 

The tourism industry in general where numbers travelling will be enormously reduced will be hugely affected.  The associated hospitality sector; oil and gas where falling demand has led to almost unheard of price declines; the tech sector which has come to rely on components and whole units manufactured in some of the most affected areas of the world which have seen manufacturing plants idled and still working at reduced capacity, will all suffer very badly – perhaps catastrophically in some cases.  The list of likely-to-be seriously affected industries is almost unending.  The whole world is going into recession – or is it a depression?  Bankruptcies are likely to soar and the numbers of people out of work will rise accordingly – probably by millions, despite whatever action governments may take to mitigate the situation.  The virus effects are likely to be beyond people’s worst fears – truly a Pandora’s Box has been opened.

Is there any light at the end of the tunnel?  The virus incidence does seem to have been stemmed in China and South Korea – two hugely impacted economies.  If this pattern follows elsewhere we could be over the worst in a couple of months, but the overall impact will be much longer lasting. 

Will the financial world ever be the same again?  The potential for a total meltdown of global economies is far in excess of that of 2007-2009 which was in effect just a debt crisis.  There is much more at play this time.  The effects will be longer lasting as the world’s central banks have far less scope for intervention.  Perhaps the days of ‘helicopter money’ as a means of boosting economic consumption will not be far ahead!  It has already happened in Hong Kong.  How long before it is rolled out elsewhere?

On the likely re-continuation of the equities market meltdowns regardless of any Administration or Fed measures to allay the situation, Lewitt has this to say: “Everyone would do well to ignore the folks on television telling you to buy. The smartest ones are very cautious; the dummies are Wall Street shills whose job is to convince you to do things you shouldn’t do on the best of days – and these are far from the best of days.”

Indeed Lewitt’s prediction of a more than 50% fall in equities could well prove to be a conservative estimation.  Once this kind of downturn starts it is difficult to see an end as investors panic sell to try and preserve any wealth they can.  Even traditional safe havens like precious metals are vulnerable given so much of today’s business is done on credit and stretched investors have to sell good assets along with bad to preserve any semblance of liquidity.  But perhaps the saving grace for gold, if not for the other precious metals, this time around is that gold as an investment asset class had very much fallen out of favour with funds and equity investors.  Consequently there might not be nearly as much in potentially weak hands as there was back in 2008.

But even so, gold remains vulnerable to further falls – and the other precious metals even more so – as we are already seeing today.  As I write, gold has dropped below the key $1,500 level and is down around 4%, but European and Asian equities are falling even faster and we expect Wall Street to follow suit.  Another 10% fall in the Dow might be on the cards despite Administration and Fed attempts to talk it up. On other precious metals silver and platinum prices in particular are being decimated and palladium is off around 10%.  Bitcoin, which some saw as another possible safe haven (not us I’m pleased to say) is down around 50% from its recent peak.  Thus the carnage across all asset classes continues and could accelerate as the potential for perhaps even more heavy-handed government interventions in Western economies takes place.

The above is very much a doom and gloom scenario with wealth across the board being enormously eroded.  True gold is falling along with everything else, but not by nearly as much in percentage terms so it is protecting one’s wealth better than virtually all other asset classes.  If it follows past patterns it will also be the first to recover, but unless it gets confiscated and revalued upwards as it was in 1933, it may well not recover nearly as far and as fast as it did in 2008/9.

16 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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