Gold Pulled Back, But Coronavirus Did Not

While viruses are counted among the simplest forms of life, they have quite a bearing on its advanced forms. And the coronavirus epidemic is, unfortunately, alive and well. What are the implications for the gold market?

Coronavirus Infects Europe

The coronavirus epidemic is, unfortunately, making its presence well known. Actually, it spreads quickly around the globe. The worldwide number of confirmed cases has reached almost 90,000, while the death toll has surpassed 3,000 people. 

Three important developments have occurred over the weekend and since our last edition of the Fundamental Gold Report. First, the World Health Organization reported on Sunday that “the number of confirmed cases in Hubei province, China, has increased for two successive days after a period of decline.” It means that the epidemic in China may not be peaking yet, especially as China counting methods (excluding asymptomatic infected individuals) may underplay extent of outbreak, according to Caixin.

Second, the new coronavirus infections soared across Europe on Sunday. The situation is particularly grave in Italy, where confirmed cases jumped 40 percent in 24 hours to 1,576 (and to 1,713 on March 2), adding a great burden on the country’s healthcare system. However, the number of infections have also jumped in France (to 130 cases), Germany (130 cases), Spain (74 cases), and the UK (36 cases). As the whole continent will be infected soon, the economic effects will become greater. The French government has already admitted that the effect of the coronavirus will be larger than previous estimates and promised to provide the necessary support to companies. With slower economic growth across France and the whole continent being already fragile, guess what Christine Lagarde will do? Yup, she will hurry with help and the ECB will remain accommodative or even ease its monetary policy even more.

Third, the more decisive spread of the coronavirus across the United States is a matter of time. The number of cases has increased to more than 80, while two people have already died. The governor of Washington, where these deaths occurred, has already declared a state of emergency. The Vice President Mike Pence admitted that we “could have more sad news”. These developments will lead to the intensification of fear among Americans, spurring possibly some safe-haven demand for gold. 

Implications for Gold

What does it all mean for the yellow metal? Well, from the fundamental point of view, growing fears that the spreading coronavirus will weigh on global growth, the dovish central banks, a weaker US dollar and the stock market volatility should all support gold prices.

We are, of course, fully aware that the price of gold plunged on Friday, as the chart below shows. But we warned our Readers that a downside move was likely, given the scale of previous huge rally. The sell-off could be, thus, a normal profit-taking for those wishing to cash in on the runup. 

Chart 1: Gold prices in 2020 (London PM Fix, in $)

Another issue is that the greenback strengthened on Friday against the euro, maybe because investors focused on the much more grave epidemiological situation in Europe. However, the epidemic should arrive in the US as well but with a certain lag. And even with the scale of the outbreak smaller than in Europe, the new coronavirus will negatively hit the profits of US international companies. 

Should we panic? No, after all, the risk of the coronavirus-related death to the average person remains low. And each year, between 291,000 and 646,000 people worldwide die from seasonal flu. So, when the fears recede, a move lower in the gold prices is likely. 

However, we are rather before the peak of the epidemic and related worries, so there is more room for gold to shine as a hedge against viruses, especially if the Fed reacts and cut interest rates just as a vaccine to the new economic disease. 

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