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LAWRIE WILLIAMS: Virus uncertainty to affect gold and equities – perhaps drastically.

Forgive me going on again about the likely effects of the Wuhan coronavirus on the global economy but in my view the consequences thereof are hugely significant, even if the virus spread can be largely confined to the Chinese mainland as at the moment.  I refer you here to a recent article by the extremely astute Ambrose Evans-Pritchard, writing in the UK’s Daily Telegraph.  He notes, inter alia, as follows: “The Chinese economy is 17pc of the world economy and deeply integrated into international supply chains. It was just 4.5pc of world GDP during the SARS epidemic 2003, which some like to use as a reassuring template. You cannot shut down China for long these days without shutting down the world.”

He goes on to point out specifically that: “The scale of disruption in China is already staggering. Hyundai, the fifth-biggest global car maker, has been forced to close all its factories at home in Korea for lack of key components. Volkswagen, Toyota, General Motors and Tesla have all downed tools at their Chinese plants, as has Apple’s iPhone supplier Foxconn.”  We also heard yesterday that Fiat Chrysler in the U.S. may have to halt production due to a lack of component availability from the Chinese manufacturers on which it relies.

Reports suggest that as much as 90% of Chinese manufacturing exports have already been shut down as city after city goes into quarantine lockdown.  Despite protestations to the contrary the scale of shutdowns in China is more than unprecedented and the official statistics to date, even if they are not being massaged as many observers suspect, show over 40,000 confirmed cases of the virus and over 900 deaths so far and still rising, although perhaps at a reducing rate if Chinese data are to be believed.

Outside China, Hong Kong and Macau there are, so far, over 130 confirmed cases in 24 countries and, thankfully, only 1 death but it is early days and this may well be the tip of the iceberg (Reported cases in the UK doubled to 8 this morning).  Markets are only beginning to catch up with the potential seriousness of the problem and this morning’s equities downturns in Asia and Europe may well spill over to the all-important North American markets and a drop in equity indexes could become a rout.  So many companies rely on Chinese manufactured goods that this kind of disruption is bound to have a hugely negative effect on other countries’ economies.  Further an increasingly panicked global population may eschew any Chinese goods for fear that they may be tainted with the virus, however unlikely this may be.

So be prepared for a general equities meltdown – led by high-flying stocks like Apple and Tesla which both have heavy dependence on Chinese manufacturing to maintain earnings levels.  Initially at least this should benefit gold and silver, but they may, as we have warned, also turn down sharply in a general liquidity crisis as good assets need to be sold alongside weak ones. 

Other commodities will also be heavily affected.  We are already seeing a very sharp downturn in crude oil demand and price, but China is also the leading consumer of many other commodities and the top supplier of many, if not most, strategic metals and disruptions here are bound to have a huge global impact.  Particularly with China-dominated strategic metals supply.  Alternative sources are often not available at all, and even where they are additional supplies to meet demand cannot just be turned on like a tap.

Down the line we’d be nervous about all commodities including the major safe-haven precious metals.  China is the world’s largest gold consumer and demand there is sure to be disrupted and unless this can be replaced by increased demand in the West and from Central Banks we are going to see a demand downturn in any case.  Perhaps the timing is lucky in that new mined supply appears as if it may have peaked, while lower prices, if they materialise, will probably reduce recycled supplies and perhaps see a consumption pick-up in India where high gold prices are said to have adversely affected local demand.

Add to that the apparent build-up of investigations into JP Morgan’s activities in the gold and silver futures markets on COMEX which, in theory at least, might see any such activities halted or reduced and under normal circumstances this might lead to positivity in precious metals prices.  But with all the unknowns revolving around the potential virus spread, who knows in this time of social media’s undue influences on the markets.

Regarding the latter, I would steer you towards Grant Williams’ latest Things that make you go hmmm... newsletter.  Grant is an incredibly astute commentator on matters affecting global markets and his latest edition, primarily looking at the social media influence on the Tesla stock bubble, with parallels on Donald Trump’s use of social media to enhance his Presidential renewal bid, is well worth a read.  Do subscribe to this - it is an excellent read and also incorporates copy from other commentators on various aspects of the global economy (the Ambrose Evans-Pritchard article which incorporates the quotes used earlier in this article came from the latest TTMYGH newsletter). 

It will be interesting to see how U.S. markets view the latest coronavirus figures.  No doubt social media will try and put an optimistic spin on the latest Chinese figures.  The powers that be in the Trump Administration have a vested interest in trying to keep up the pretence that all is well with the U.S. economy and that the virus problem in China will have little or no effect.  In our view wishful thinking.

10 Feb 2020 | Categories: Gold, China

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