In our last ‘What impact could the coronavirus have on the gold price and financial market’ article published on the 7th February, we warned of the risk of market optimism and investors underestimating the virus risk, and that general equities were bound for corrections. The gold price has mostly been performing in line with our expectations, rising by close to 5% in just 20 days, though it may be losing steam in recent days. In this article, we speculate whether the COVID-19 could create severe damage to the financial system similar to or even worse than what was seen during the 2008 Global Financial Crisis, and what impact on the gold price this may have.

By Samson Li

In our last article, we assumed COVID-19 would at least have an as big impact as SARS to the financial system. Therefore, we used how the gold price performed during the SARS period as a rough guidance on how the gold price may look this time:

Source: Eikon

Using the closing price of gold on the last day in 2019 as the starting point ($1,517/oz), a 10% increase indicates a gold price of $1,668.7/oz, and a 19% increase translates to $1,805.2/oz.

However, there are several points to confirm the belief that this time the impact may be more severe:

• Some infected do not show any symptoms yet may still be contagious. – this vastly increased difficulties to prevent the virus from spreading.

• 14 days of quarantine may not be enough – there are cases to suggest that the incubation period could last well over 14 days.

• The cured may continue to be contagious – There are reported cases throughout the world that even those infected who have been seemingly fully recovered, continue to test positive.

Now the virus seems to be spreading overseas, the market has begun to take notice. The S&P 500 lost 11.75% between the 13th – 27th of February, wiping out all the gains it had this year; The FTSE 100 and Nikkei 225 have lost 8.3% and 7.3% respectively in the same time span.

In our last report in early February, we suggested that as the financial market was underestimating the negative impact COVID-19 could unleash , gold as a safe and one of the best bets and hedges would be a beneficiary. Indeed, the gold price has already ram up 4.6% between the 7th and the 27th of February, although it has been losing steam lately. The gold price has attempted to break above $1,650/oz four times, but so far have all failed to sustain this price level.

Despite the resilience of the gold price, prices of both silver and platinum, which historically have high correlation with gold, were down by 1.9% and 6.0% respectively. This time around, it appears the market has decided to treat silver and platinum as industrial metal rather than a monetary metal, more so for the latter. Palladium is the only exception, with the price rising by over 24.9% in the first 27 days of February, but the price also started to free fall on the final day of the month.


Despite the plunge of the general equities market, the gold mining equities sector has been relatively strong, thanks to the support of the gold price. While during the same period of 13th-27th, the gold mining equities index lost just 2%, with all the damage done on the trading day of the 27th, which the index losing 7.0% in a single trading day. The sharp fall in gold equities in one day is surely concerning (especially the gold price was relatively stable) as it signalled that there is panic in the market, as well as increasing in demand for liquidity. Both of which could possibly drive the gold price lower due to market capitulation.

To the financial markets, gold is not the ultimate safe haven, rather cash is due to the large size of the pool and massive liquidity. Therefore, at times when market panics, the gold price falls along with the equities market (though falling at a different magnitude) as traders are scrambling for cash, even though in theory gold should perform well. Traders have to sell winners (gold in this case) because they have suffered from margin calls in other positions, or simply took profits to compensate the losses realised in other positions. For the potential downside risk in gold short term, we can examine the performance of gold during the initial stage of the Global Financial Crisis in 2008:

Source: Eikon

The gold price essentially lost 35% from its short-term peak at $1,038/oz (on 17th March 2008) as the market panicked and bottomed at $733/oz in October. This consolidation took seven months to complete, followed by a strong rebound in price that separated itself from the continuing deterioration of the equities market.

We are not suggesting the gold price will see a heavy consolidation that will take another seven months, but a lot will depend on how the virus situation evolves.


Therefore, while China’s ability to combat COVID-19 remains important, one needs to closely monitor the progress in other countries as well. Obviously, another important country that needs to be monitored is the United States.

No wonder the market has the jitters as the number of cases in the United States is rising like a straight line (though the base is still low). If the virus has spread out in the U.S. while the market begins to see a contained situation outside of the country, the dollar could be heading lower (and thus a higher dollar gold price).

Another two important countries to examine are Singapore and Thailand.

The reason that keeping tracks the number of cases in these two countries is important because there is hope that like the SARS virus, the cases of COVID-19 could fall sharply when the weather starts to warm up. However, as the number of actual cases in Singapore and Thailand are still rising, hot weather may somewhat limit the activities of the virus but not be able to eliminate it like SARS.


During a market capitulation, throwing the baby out with bath water is common as traders panic and liquidity tightens. During the SARS period, the price of gold retreated from $388.5/oz to $318.75/oz (an 18% decline) in slightly more than two months followed by a strong rebound. Another risk working against the gold price is the low business activities in China as demand for gold has dried up and the Chinese gold price is currently not only trading at a discount to the LBMA gold price, but the discount has also been widening. Judging by the historical gold price performance during the SARS period as well as the Global Financial Crisis, the current correction in the gold price may takes months to complete followed by another leg up.

However, a curious case is that according to Eikon’s Fedwatch function, the market now fully expects the Federal Reserve to cut interest rates at the March meeting, and the benchmark level could fall to approximately 0.257% at the end of 2020, which is approximately 85% less than the 1.75% at the beginning of the year. It will be interesting to see how the gold price will react just before the Fed meeting in March, as we do not think the gold price has fully reflected the potential aggressive rate cuts by the Federal Reserve this year.

Source: Eikon