The 2019 novel coronavirus (2019-nCoV) is a new virus that causes respiratory illness in people and can spread from person-to-person. This virus was first reported on Dec 31, 2019 in Wuhan, China.
Coronaviruses are a large family of viruses that are common in many different species of animal. Rarely, animal coronaviruses can infect people and then spread between people such as with MERS (3 - 4 out of every 10 patients have died, which translates to a fatality rate appox. 35%) SARS (fatality rate 9,6%), and now with 2019-nCoV (current fatality rate 2,1%, this is likely to change though).
There is currently (as of Feb 10, 2020) no vaccine to protect against 2019-nCoV. There is no specific antiviral treatment for.
Coronavirus and Gold
Can the coronavirus have impact on gold prices?
Can gold help to protect one or one’s assets against the virus-related market turmoil?
And can the link, between gold and something as far from the market as a virus, be detected at all?
The long-story-short is that while gold won’t treat any symptoms, buying gold may protect one from the short-term decline in the stock market that is likely to result based on market participants’ fear associated with the virus.
Let’s start with how can the link between gold and coronavirus be examined at all.
The virus is new, but the virus scare isn’t.
We’ve already experienced something similar. Remember the time when everyone was gravely scared of ebola, and then after a few weeks this wasn’t interesting anymore as nothing really changed? Of course, by “nothing really changed” we mean how the society, countries, and markets work on a general basis. To those, who were affected and their families, these were terrible times, and our compassion goes to people affected by ebola and those affected by the coronavirus (or any other kind of virus). Still, it is our responsibility to analyze the events as they unfold and report to you their analysis, with the emphasis on the precious metals market, so that’ what we’ll do.
History rhymes, so the markets are likely to react to similar scares just as they have been reacting to the previous ones. It just like with any other news that causes the market to react. The situations are not identical, but the emotions that they generate are. The more similar the price triggers are, the more likely are the effects to be similar.
Consequently, in order to determine if the coronavirus crisis is likely to make any major and lasting (!) impact on the markets, let’s check what did the other – similar – crisis cause. And by similar crisis, we mean the ebola scare of 2014.
How can we measure if people got similarly scared? When people get scared of something they know little about (and most people are not epidemiologists…), they look for information online. Google Trends allows to check the popularity of a given search phrase over time. Let’s see if people were similarly scared in 2014 as they are right now (charts courtesy of Google Trends).
Virus Scares and Gold
After periods of relatively little interest, it suddenly spiked as people got concerned and scared. In fact, at the 2014 peak, people were searching for ebola more than they are searching for coronavirus right now. It seems that people were more scared of ebola in 2014 than they are scared of the coronavirus right now.
Or – which is more likely true – the fear has not yet peaked this time.
Why would this be more likely? Because we should also take into account the increased usage of Internet worldwide as well as increased use of social media in general. It’s becoming increasingly easier to share content, reactions, and emotions online. That’s quite likely why the spike interest in ebola of 2014 is so much bigger than the spike interest in h1n1 that we saw in 2008. Consequently, we can expect the coronavirus interest to peak at levels greater than those at which the ebola interest peaked in 2014.
Let’s zoom in for details.
Ebola and Gold
The interest started to rise after July 20th, 2014, but it soared most profoundly between late September and mid-October, 2014. It could be the case that what we saw so far is only the initial rally in the interest and that it didn’t peak yet.
And how did gold react when the ebola scare was getting more serious, and what happened once the fear subsided? What did stocks and the USD Index do?
Gold price actually declined throughout most of the scare, and only rallied during the final part of the scare – when the search interest for ebola peaked. There was also one small corrective upswing at the beginning of August.
The USD Index did the opposite – it was rallying for most of the time and only corrected in the final part of the scare.
The, however, was very sensitive to the changes in ebola interest. declined visibly, reacting clearly and strongly to both increases in ebola interest. During the peak interest, stocks declined about 10% from their previous 2014 high. So far (as of the end of January, 2019), stocks have declined only about 3.3% from their recent high.
Gold moved higher by about 6% in the final corrective upswing and it took about 2 weeks.
Fast forward to the current (we’re writing this on the first day of February, 2019) situation. People are scared of the coronavirus and gold has been on the rise for about 2 weeks since its last very short-term bottom and it’s up by 3.8%.
Based on the way how scared people got in 2014 and how the markets have reacted, it seems that the peak-interest and peak-concern was not yet reached. This quite likely means that – based on the information available on the first day of February 2019 – theand the bottom for the stock market and the USD Index might not yet be in.
The above chart features also one more very important thing. Namely, the medium-term rally in the USD Index and stocks, as well as the medium-term decline in gold were not affected at all. This means that all the medium- and long-term trends that have been in place before the coronavirus outbreak, are likely to remain intact.
Of course, all the above makes sense only if the coronavirus is contained and doesn’t translate into a full-blown world crisis. This is a very likely outcome in our view – practically all other similarly scary threats were contained without real market impact in the past decades. The damages (in monetary terms) done by hurricanes, floods and similar natural disasters have been much greater historically and they didn’t cause changes in long-term market trends. That’s unlikely to happen this time.
Coronavirus and Gold - Summary
Coronavirus’ impact on the markets is likely to be short-lived and the temporary impact on the stock market is likely to be particularly negative, but the temporary impact on gold is likely to be positive. Consequently, gold’s short-term gains might help to offset stock market’s declines. The implications are unlikely to extent beyond the short-term, though. Once the situation is contained and the fear fades away, the previous trends are likely to return.
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