LAWRIE WILLIAMS: Silver’s suspicious take-down; gold recovering
Despite the likely global economic effects of the Wuhan coronavirus, the gold price was forced lower over the past couple of days and the silver price really tanked – both moves flying in the face of reason in our opinion. A recent analysis in China suggests that infections will likely peak some 10 days hence, but given the infection appears to be transmissible during its incubation period when the sufferer may be showing no symptoms at all, we think this could be a substantial underestimate. Even if the virus outbreak can be largely contained in China, which it has been so far, the worldwide economic effect would be substantial and likely result in a global recession. If cases outside China start to take off, for which there is every chance given the Chinese New Year travel impact, much of which had taken place before the spread had been recognised as serious, then the global effects would be even more worrying.
We suspect there has been a concerted effort in the West, and in the USA in particular, to try and downplay the likely effects on the economy of the Wuhan coronavirus. This will have taken the form of moves to support the equities markets and to downgrade the monetary precious metals – gold and silver. Silver, being a tiny market money-wise, even in comparison with gold, is far more vulnerable to this kind of manipulation and indeed took a heavy hit yesterday dropping by nearly 4% from peak to close on the day. Gold also closed down around 1% on the day, so any engineered decline was not nearly as successful on the much larger market for the more costly metal. Today silver has been kept depressed so far, while gold, although trending higher, has not been allowed to make any significant gains as yet.
Looking at the growth to date of the Wuhan virus, infections appear to have been increasing at an alarming rate, although the mortality rate has not been as high as the SARS virus of 2003 or the more recent MERS virus of 2012, but it is early days yet and transmission rates seem to be trending way in excess of SARS and MERS – both also similar in many respects to the Wuhan outbreak with deaths occurring due to respiratory complications. The Wuhan strain appeared just ahead of the start of the Chinese New Year holiday which sees millions of Chinese travelling to spend time with friends and family in other parts of China and around the world. Given that the latest virus appears to be contagious before any outward symptoms occur and the Mayor of Wuhan estimated that some 5 million Wuhanese had gone on their New Year travels before the seriousness of the outbreak had been realised, the scope for virus person-to-person infection is enormous.
So far reported infections appear to have been rising at a geometric rate of around 2.2 persons infected from each virus carrier. This suggests that unless the virus spread can be brought under control – and the Chinese have been taking unprecedented steps to try and do so – the world could be faced with hundreds of thousands of cases in a relatively short space of time. The vast majority of cases, and all the deaths, reported to date have been in Mainland China, but one anticipates that global incidence will rise – possibly dramatically.
The World Health Organisation (WHO) will meet tomorrow (Thursday) to discuss whether the virus constitutes a global health emergency - which we suspect it will now we have seen a rising n umber of cases outside Mainland China. We suspect the figure may well already be higher given that countries like North Korea, which has a border with the Chinese mainland, has not so far reported any cases, but the government there has a reputation for secrecy and with malnutrition apparently rife there we would not be at all surprised if the secretive state has had both incidences of infections and deaths!
Should the WHO designate the virus as a global health emergency we suspect markets will sit up and take notice, with equities falling back sharply again, with a possible boost for gold and silver as safe haven metals. Other commodities will likely fall given so many are dependent on Chinese demand and, even if the virus does not spread significantly outside the country, the Chinese economy itself will be heavily disrupted.
Overall, however, still put your faith in gold and silver as investments likely to benefit from the virus spread Portents were looking good even before the virus outbreak with the various geopolitical factors which have driven investors back into the monetary precious metals. Gold is already showing some strength again despite apparent attempts to suppress it and although silver is lagging behind we suspect it will rapidly begin to play catch-up. The U.S. Fed at this week’s FOMC meeting has kept interest rates unchanged, but Fed chair Powell’s statement suggested that the Wuhan virus was in its early stages and could yet severely impact the Chinese and global economy – implying the U.S. economy would likely not be immune to its effects. U.S equities were mixed today, giving up some earlier gains, With the WHO decision on whether to announce a global emergency coming tomorrow, together with the next update on virus spread and deaths therefrom, we could see an interesting second half of the week as far as equities and precious metals are concerned. The Trump impeachment process seems to be taking an interesting turn too. Hang in there with gold and silver would be our advice. There could be fireworks ahead.