By Samson Li
Last week the gold market was in a chaos. Logistics slowed down due to COVID-19, along with several European refiners closing down to prevent employees exposed further risks under the virus, all have negatively impacted the flow of physical gold. At the same time, European investors purchased COMEX gold that will expire in April, locking up their purchasing prices. The market does not short in gold, but due to various logistic reasons, the CME decided to introduce new gold contracts to ease the potential delivery problems. Recently there is also a rumour that and European investment bank has asked its clients not to ask for physical delivery, indicating it is getting challenging to get the hands on the physical metal. Meanwhile, physical gold holdings of SPDR Gold Trust has increased by 6.2% (or 56.5 t) during the week of 20th-27th, to 964.7 tonnes.
In order to successfully forecasting the price outlooks of various metals, one should have a good handle on how the epidemic will evolve. From a longer term perspective, regions that have high density of population but relatively inferior medical system, will be at huge risks of high death rates, which in turn will pull up the global average death rate, and thus providing support to the dollar. However, from investment perspective, one only needs to closely following how the pandemic will evolve in the U.S., at least for now. While the U.S. has already topped the world in terms of total confirmed cases, one important to note is its relatively low death rate:
Despite its still well below global average, the U.S. death rate has jumped from 1.2% to 1.8% last week.
According to The Institute for Health Metrics and Evaluation (IHME), an independent research center at the University of Washington, has forecast that the U.S. could be at its worst situation by mid April, and how many beds and ventilators could be in shortage in the country.
They have also forecast by early August, there could be over 80k (median) deaths caused by COVID-19 within the U.S..
Source: IHME
Meanwhile, Dr. Anthony Fauci, the lead members of the White House Coronavirus Task Force, have also changed his tone, from ‘coronavirus is nothing to worry about’ in January, to ‘U.S. deaths from coronavirus could reach 200,000 with millions of cases’ the past Sunday.
While the difference of the death estimates seems to be quite large based on these two opinions, one thing is certain though: as of writing, there are less than 2,500 deaths recorded in the U.S. that is COVID-19 related. In another words, we should expect the number of deaths within the U.S. to accelerate within the next 2-3 weeks.
Indeed there are plenty of reasons to worry. For example, number of cases in South Korea and Japan, which seemed to have been under control, looks like are coming back again with daily new cases have been on the rise again.
On the other hand, there are reasons to be somewhat optimistic on the outlook, as people will eventually getting numb to the epidemic, as long as the number of confirmed cases in the U.S. have already past the initial rate that always grow in exponential.
If we examine at the VIX and S&P500 performance in 2008, the VIX formed a ‘double top’, and the U.S. equity didn’t hit the bottom until the VIX reached its second peak. Therefore despite the market’s fear might have retreated, do not expect the prices of risky assets have already hit the bottom, especially the U.S. may not hit its worst in terms of the virus until sometime in the next few weeks.’
Source: Eikon
In 2008, after the VIX has topped at 89.53 (on the 24th Oct), the index has fallen to 44.25 (on the 4th Nov), then have rebounded back and peaked at 81.48 (20th November), completing the double tops. In another words during the 2008 Global Financial Crisis, the VIX retreated by 51% in 10 days after reaching the first peak, then spent another 16 days before reaching the second peak (which at the same time, has marked the bottom of the U.S. equities).
And last week, the VIX index has retreated by 58% from the peak (85.47 on 18th March), to the lowest point at 36.24 (24th March), in a matter of six days.
As a result, there is a possibility that the U.S. equity market might have finished its technical rebound last week, and will resume its decline in the following weeks, which is in line with the epidemic situation expected in the U.S..Indeed, the S&P 500 has already recovered some 34% from its trough last week. In a typical bear market, equities can bounce back by a third or a half of the initial loss, before falling down again.
More importantly, China listing companies will begin issuing their first quarter financial reports, and we are willing to bet that the market will still be surprised by how bad these companies would be. Their bad earnings reports could be a precaution on what their Western counterparts will look like in the upcoming second and third quarters, which could spark another round of equities sell offs.
Despite the ‘shortage’ of physical gold, the price seems to have settled between $1,580 and $1,650 – more sellers were willing to take profits at prices above, but at the same time there were more buying waiting below $1,600/oz level.
In theory, the more money the Federal Reserve has printed out of thin air, the faster its balance sheet will grow, which should be in line with the change of the gold price. However, if one examine the trend carefully, their relationship is not that high, especially during the period of 2011-August 2019, the gold price should have advanced higher along with the growth of the Fed’s balance sheets, instead of falling by a significant between 2011 and 2015.
Nevertheless, gold should still be a no-brainer beneficiary as the Fed has introduced ‘QE Infinity’ to save the financial markets. Last week the Fed’s balance sheet has increased by $586 billion (or 12.4%), to $5.2 trillion. That is equivalent to printing $84 trillion per day, or $60 million per minute! At this pace, the Fed’s balance sheet should be able to double within this year, and does this mean gold’s potential upside could possibly be a double from the current levels?
Despite gold may have some short term downside if the financial market panics again, at the same time it also have some serious long term upside, possibly seeing above $2,000/oz level within the next 12 months, and with a longer time horizon, we could see the gold price closer to $3,000 than $2,000.
