LAWRIE WILLIAMS: What would an equities collapse do to gold?

The world has been teetering on the brink of recession for some time and the rapid growth in China of the latest coronavirus, which appears to have been initiated in the major city of Wuhan, with its population of over 11 million, could well be the trigger that brings a full scale global recession into play.  The nature of this latest pandemic ,with apparent highly infectious human to human transmission, has the potential to decimate global growth if it spreads outside China – which it is almost certain to do – or even if it can be largely contained within China, given that that nation is such a strong participant in global trade that its effects on world GDP could be severe.

What has to be worrying for general equities investors, who have had an almost incredible run over the past few years, although this has been heavily dominated by tech stocks, is that there have now been several consecutive days of equity index downturns virtually the world over.  Could this be the start of the global equities collapse predicted by many investment managers and economists?  It would probably take a trigger like the coronavirus problem to initiate a global equities downturn and a few more days of equities falls could see gain-taking by quick-to-moveinvestors which, if it were to continue could lead to panic selling and an equities rout.

So far the market downturn seems to have had the opposite effect on gold and silver, both of which have seen solid price rises bringing both precious metals to within close range of the recent highs seen after the U.S. assassination of top Iranian general, Qasem Soleimani.  Platinum Group metals though have not fared so well given the industrial nature of their demand, particularly in the autocatalyst sector.  The Chinese virus outbreak, and the draconian measures being taken to try and control it within the country, are estimated to knock points off the Chinese growth rate which is likely to have a hugely adverse impact on what is currently the world’s largest market for new motor vehicles.

Should equity markets collapse, then gold and silver could be brought down with them, although not as far and for not as long.  We saw this happen back in the Great Financial Crisis in 2008 whne gold and silver fell back sharply as funds, chasing liquidity in the light of a collapse in their equity investments, needed to sell strong assets like gold to stay afloat.  This would likely happen anew should equity values crash and if an equities collapse is as disastrous as some experts are predicting, the precious metals setbacks could be even more severe this time around.

Back in 2008 though, savvy investors used the precious metals price falls to build their positions in them at ’bargain’ prices and were well rewarded for so doing given gold and silver’s rapid bounceback and advance to new record levels over the next two to three years.  This could all happen again , although if the pundits are correct the falls could be even more severe this time around.

The new Chinese virus, which has big similarities to the SARS outbreak of a few years ago, could not have occurred at a worse possible time, coming right ahead of The Chinese New Year holiday which normally sees tens of millions of Chinese travelling to be with friends and family.  This could be even more of a problem because the virus appears to be contagious before any symptoms occur and many Chinese will already have been on the move for the holiday unaware that they may have already have contracted the virus.  Some estimates have suggested that as many as 5 million Wuhan residents may have been on the move before the Chinese lockdowns on Wuhan, and several other major cities, were imposed to try and stop the virus spread.  Probably too late in retrospect.

At the time of writing, virus infections, and subsequent deaths, in China appear to be rising exponentially, with around 2,825 confirmed cases and 81 deaths, but so far there have been only around 61 recorded cases outside Mainland China, and no deaths.  We should expect these figures to rise though and the extent to which this happens will likely determine the overall effects on the global economy - and maybe on the gold price!

To put it into context, the somewhat similar SARS coronavirus between November 2001 and July 2003 caused an eventual 8,098 cases, resulting in 774 deaths reported in 17 countries, so it is early days yet on the latest coronavirus outbreak.  With so many Chinese travelling over the holiday period we can probably expect upwards of 10,000 likely cases at a minimum but perhaps the mortality rate may be lower.  This all pales into insignificance of course when compared with the so-called ‘Spanish flu’ pandemic at the end of World War 1 which is estimated  to have killed between 5 an 10 million people worldwide!

27 Jan 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).

e: lawrie.williams@sharpspixley.com