As coronavirus panic intensifies around the globe — the list of countries touched by the virus has climbed to nearly 60, more than 86,000 people have been infected and over 2,900 have died — what is next for the markets?
The gold price was almost unchanged last week after a roller-coaster ride during the fastest-ever correction on Wall Street that left the Dow Jones down 12 per cent.
Gold ended the week at $1,586 (Dh5,825) an ounce, exactly the same amount as it started the previous Friday. But last Monday the yellow metal surged to $1,665, its biggest leap in price in more than a decade, before returning safely back to earth, mainly in late trading on Friday.
US treasury bonds worked much better as a hedge against the collapsing stock market: 10-year treasury yields fell 25 points to below 1.2 per cent for the first time ever, stoking up bond prices that move in the opposite direction to yields.
That said, holding gold last week was one of the very few safe havens in a nasty storm. This saw the Dow Jones make a historic record points loss for a single day on Thursday.
Other gold-related investments did not fare as well. Silver was off over 10 per cent. Shares in gold and silver producers were dragged down along with the rest of the stock market. Bitcoin and the dollar fell.
Bullion holders must be wondering whether their luck can last, or is it time to sell?
Probably not. Friday’s Wall Street sell-off looked like the end of this correction with shares first plunging deeply at the open with losses of over 1,000 points, but then attracting late bargain hunters to close a more modest 357 points down.
How will investors viewing their battered portfolios this weekend take the news? To some extent, this will hinge on how the US coronavirus scare pans out.
The first US death was confirmed in the state of Washington at the weekend — a man in his fifties who had underlying health conditions but who hadn’t travelled to any affected areas. There are now 24 cases of infected people in the US, excluding 47 others with the virus who had been repatriated from Wuhan or from the Diamond Princess cruise ship.
The main problem for US stock markets is not the virus-induced panic but massive overvaluation and a possible socialist candidate for president. The parabolic recent price moves in stocks like Apple can only ever end badly, and these stocks do have a lot more room to come down.
Yet the US Federal Reserve is bound to respond with interest rate reductions and extraordinary monetary policy. Before last week one rate cut was expected later this year. That has now trebled to three cuts, with the first in March almost certain.
Quantitative easing and other monetary tricks will also be back on the agenda. Public spending to counter an economic downturn — with actual production down — might well prove inflationary. For example, Hong Kong gave all its residents $1,200 to spend last week.
Nevertheless, this should all help share prices to stabilise — and this is a US presidential election year. Such policies will definitely be a great support for precious metals, albeit prices will likely be very volatile.
Think how gold prices trebled and silver prices moved up five-fold from the sell-off in 2008 to the highs of 2011. That happened in the wake of the last global economic bailout by the Fed and China. Will it really be any different this time?
If you want to diversify into gold the easiest way to do it is to buy a suitable gold-backed exchange traded fund like GLD, BAR or SGOL. This is a lot simpler than lugging gold bars around, solves the security problem and offers instant liquidity.
Be more careful about rushing to invest in the shares of gold producers as like last week they get dumped as the stock market falls. Gold share ETFs like GDX and GXDJ also closed sharply lower.
Wait for the stock market sell-off to show clear signs of reaching a bottom. This could take three to six months. But gold prices will likely carry on upwards regardless. My prediction for the highest gold price is on US presidential election day.
As for silver ETFs, there is the iShares Silver Trust (SLV). Last week’s losses in silver left the ratio of gold to silver at a near record 95 by comparison to the long-term average of 55.
That sets silver up for massive outperformance against gold in the near future. When it comes this will likely be right out of the blue, so stocking up on silver now and riding with its notorious volatility should pay off handsomely.
Gold and silver are still on a path that leads to much higher prices.
Peter Cooper has been writing about Gulf finance for two decades