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LAWRIE WILLIAMS:- Prediction: Wuhan virus could boost gold and silver, trigger equities meltdown.

China is quite probably under-reporting the true extent of the Wuhan-centred coronavirus and may well be hiding its real origins!  Surely it cannot be coincidence that Wuhan is the location of an institute dedicated to research into viruses of this nature.  Also it is largely unknown, even in China, that apparently the very first identified victim of the virus is reported to have had no contact with the market blamed for the virus initiation.  Is the market thus a convenient scapegoat for what has actually been an accidental virus release from a state-sponsored institution?

The above is, of course, speculation, but what is apparent is that the virus spread inside Mainland China has been virulent in the extreme.  Cases are still rising exponentially within China’s borders and the mortality rate may well be far higher than claimed.  The incidence of cases is already far higher than for the SARS virus outbreak of 2003 and itr is early days yet! Perhaps we won’t really be able to make comparisons until the virus spreads to countries outside China where reporting of infection and mortality rates may be more accurate. 

We think it inevitable that instances outside China will rise dramatically over the next few weeks (we hope we are wrong!) given how many Chinese have been on the move over the New Year holiday and the apparent transmittabilty of the virus even before symptoms become apparent.

Even if the draconian travel restriction measures taken by the Chinese, and in other countries, are successful in limiting the virus’ global spread, China’s huge position at the epicentre of world trade, and a consequent reduction thereof, will almost certainly drive global GDP into recession on its own.  China is by far the largest importer/consumer of many, if not most, commodities, including oil, and there are already signs that this trade is being decimated.  Indeed China trade with the rest if the world already appears to be in strong decline despite Chinese Government attempts to bolster it and it should be taken into account that many big multinational concerns rely heavily on China trade and goods manufacture including stock market darlings like Apple and Tesla.

The above possible virus effect mitigation assumes no serious spread of the virus overseas, and overseas cases have now been confirmed in at least 24 countries (and rising) plus the semi-autonomous Chinese states of Hong Kong and Macau.  Most of these cases have affected Chinese travellers – but perhaps more seriously some cases have been proven to be from person to person involving people who have not been to China at all.  Given the disease has been shown to be infectious before a carrier shows any symptoms, massive growth outside China is a real possibility.  The World Health Organization (WHO) thus declared the disease a global emergency on Thursday.

While some leading banks have suggested that the virus will lead to a 0.3 to 0.4 percent drop in Q1 global GDP, we suspect that this could be a huge underestimate and stock markets could dive as a result.  Equities are looking heavily overbought and vulnerable to a severe crash as many observers and economists have been predicting.  The Wuhan virus could well be the trigger leading to a global market meltdown as we warned here at the beginning of the week (See: What Would An Equities Collapse Do To Gold?.  The powers that be have desperately tried to keep equities markets up with the Dow making unlikely recoveries from early falls on Wednesday and Thursday and with a concerted attack on silver and gold (which tend to be economic bellwethers.)  Yesterday (Friday) these attempts largely failed and the U.S. Dow Jones index crashed by a massive 600 points (over 2%), the NASDAQ was down nearly 150 points and the S&P 500 down 58 points, while gold and silver rose fairly strongly, although the latter’s gains were still a little muted under the circumstances.

Now all eyes are on what will happen on Monday when the markets reopen.  We’ll have a couple of days more figures available on virus incidence growth and fatalities and if this continues rising at the kind of rates we have been seeing we could be reporting more market downturns.  The Dow and other U.S. indices may, however, recover a little initially, as is usual after major downturns, but under these circumstances, given a likely escalation in virus statistics, they may not.  And if they do continue to fall we could see a major panic exodus from equities.  This could be the trigger that sets off the start of a huge equities bear market – some suggest this could replicate, or exceed the market falls seen in the Great Depression/Wall Street crash of 1929 with markets not then really recovering for 10 years.  The powers that be, particularly in the U.S.,  will do all they can to prevent this happening.  After all a market crash could be disastrous for the Trump Administration in an election year.

Gold and silver should do well initially in such a scenario, but could be brought down temporarily as institutions and individuals attempt to preserve liquidity by selling good assets with bad.  We saw this happen at the tail end of 2008 when markets also crashed, but these precious metals were quickest to recover and went from strength to strength over the following few years.   It’s an ill wind that blows nobody any good!

01 Feb 2020 | Categories: Gold, Silver, China

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