This text was written at the end of February, so it does not take into account many developments that occurred since then. More timely analyses you will find in theor in the April edition of the .
We all know that viruses infect humans. But can they infect the economies? Can the SARS-CoV-2, responsible fordiseases outbreak, push the global economy into recession? We initially downplayed such as risk, as we thought that media as usual wind up public hysteria and that the whole epidemic would end faster than it began for good, just as it was in case of Ebola or Zika outbreaks. The slowing number of new infections in China with limited cases abroad only confirmed our belief that there was nothing to panic about.
However, now we are more concerned about the potential social and economic implications of the COVID-19. The turning point was the emergence of hundreds of new cases outside. At the end of February, the number of infections in the US, Singapore, Iran, Japan, Italy and South Korea have increased significantly. In particular, the confirmed cases in South Korea have shot up to more than 1140 (as of February 25), in Italy to 323 cases and in Japan to 862 cases, as the chart below shows.
Chart 1: Total confirmed cases of COVID-19 in Italy (red line), Japan (green line) and South Korea (blue line) in February 2020.
The spread of the new coronavirus into Italy means that the COVID-19 is no longer an Asian problem. It makes it a European issue and possibly a global issue that could significantly disrupt global supply chains. The recent spread of the COVID-19 brings us also closer to the full pandemic stage.
While economically speaking, it means that four of the world’s top 12 economies (by nominal GDP), which represents together almost 27 percent of global GDP, are now fighting to contain the virus.
What’s more, these newly affected countries have been growing at a much slower pace than. Actually, Italy and Japan are already on the brink of recession, as the chart below shows. The former country contracted 0.34 percent in Q4 2019, compared to the previous quarter, while the latter plunged 1.61 percent due to the hike in the sales tax and a powerful typhoon. So, another quarter of negative growth will put the eight and the third largest economies in the world into .
Chart 2: Italy’s (red line) and Japan’s (green line) quarterly real GDP growth from Q1 2015 to Q4 2019.
Moreover,, which is the fourth biggest economy in the world, may follow suit, as it already . Given the scale that German economy relies on trade with China, it is likely to contract in the first quarter of 2020 (and maybe in Q2 as well if the new coronavirus outbreak is not contained quickly).
All it means, is that the world is just one step from recession., global growth in 2019 was just 2.9 percent, the slowest pace since the and just 0.4 percentage point above the 2.5 percent, which is considered to be the threshold of global recession (2.5 percent does not look recessionary for developed countries, but developing countries have higher average trend growth, which sets the trigger higher for the global recession). Actually, , the global growth was 2.4 percent last year.
Surely, the US looks like an oasis of growth among the slowing economies. However, the drop in Chinese demand and supply disruptions in China, the global industrial hub, may also hit America. Actually, private sector firms across the US signaled. The IHS Markit Flash U.S. Composite PMI Output Index declined from 53.3 in January to 49.6 in February, driven by the first contraction in service sector output (the IHS Markit Flash U.S. Services PMI™ Business Activity Index decreased from 53.4 in January to 49.4 in February) in four years. Excluding the government shutdown of 2013, the American business activity declined for the first time since the global . Of course, one negative reading is not conclusive enough, but it shows that even the US is not immune to global slowdown.
What does it all mean for the gold market? Well, investors became more concerned about the prospects of global economic growth and scrambled for the US government bonds. As the chart below shows, the 10-year Treasuryhave declined below 1.40 percent, for the first time since July 2016. As a consequence, the has again inverted.
Chart 3: 10-year Treasury yields (blue line, left axis) and the spread between 10-year Treasuries and 3-month Treasuries (red line, right axis) from January 2019 to February 2020.
The inversion of the yield curve could force theto cut the – after all, they slashed three time in 2019 just in response to the previous inversion of the yield curve. Indeed, this is what the traders expect right now. The of an interest rate cut in April FOMC meeting have increased from to 24.6 percent on February 19 to 65.6 percent in February 26. The combination of slower economic growth, higher recessionary risk, lower bond yields and of the federal funds rate are fundamentally positive for the gold prices.
Surely, this effect may turn out to be temporary if the new coronavirus is contained quickly, but the recent increase in cases outside China suggests that the epidemic may last longer with higher and more persistent economic impact than previously thought. Given that it is likely to spread also to the US, as the Centers for Disease Control and Prevention has warned recently, or even to transform into a real pandemic (which is defined as a truly global epidemic), there is further room for safe-haven inflows into gold.
If you enjoyed the above analysis and would you like to know more about the links between the coronavirus epidemic and the gold market, we invite you to read the Marchreport. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our . If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe.
Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments Through Diligence and Care