Chek the Channels
Gold’s Appeal is Driven by More than Coronavirus Fears
(Note: companies that could be impacted by the content of this article are listed at the base of the story [desktop version]. This article uses third-party references to provide a bullish, bearish, and balanced point of view; sources are listed after the Balanced section.)
Year-to-date through March 4, 2020, gold futures prices have risen 7.0%, following a gain of 16.5% in 2019. Most recently, gold prices have responded to the economic risks posed by the Coronavirus 2019 (Covid-19) and ensuing market volatility and uncertainty that has followed the virus’s spread globally. However, many believe that gold has a host of macroeconomic and market factors working in its favor. These include the path of real interest rates, the outlook for U.S. dollar strength relative to other currencies, balance of trade and U.S. government fiscal policies; all of which influence the price of gold.
With the rise in precious metals prices, mining stocks may be an attractive way to gain exposure to silver and gold given the disproportionate percentage impact higher commodity prices may have on a company’s bottom line and valuation for a given percentage increase in the commodity itself.
While past pandemics such as Severe Acute Respiratory Syndrome (SARS) in 2003, H1N1 Influenza Virus (Swine Flu) in 2009, Middle East Respiratory Syndrome (MERS) in 2012 have acted as short term catalysts for gold prices when investors sought safe haven assets, investors should view longer-term fundamentals when evaluating precious metals investments.
The Case for Gold Investments:
Pandemic threats enhance gold’s appeal. During past pandemics, gold prices benefited as investors turned to precious metals for a haven.
Lower interest rates are supportive of gold prices. On March 3, 2020, the Federal Open Market Committee lowered the target rate for the federal funds rate by 50 basis points to a range of 1.0% to 1.25%. The action was taken to counter risks to economic activity posed by the spread of the Coronavirus.
Increasing government deficits and debt. According to the Congressional Budget Office, the U.S. government’s public debt is now greater than $22 trillion, its highest level in history. According to the U.S. Treasury Department, the deficit amounted to $984.4 million in fiscal year 2019 and was $398.2 through January of fiscal year 2020. The government’s fiscal year begins in October. The Congressional Budget Office projects the federal budget deficit will be $1.0 trillion in 2020 and average $1.3 trillion between 2021 and 2030, representing 4.6% of gross domestic product in 2020 to 5.4% in 2030.
Looking out for the next recession. Precious metals equities may provide a hedge against volatility in the equity markets and offer diversification benefits. Many believe the bull market that began in 2009 is in its late innings and a recession could be just around the corner. These concerns have only been magnified by the coronavirus’ impact on economic activity which is well documented. Travel has been slowed, global supply chains have been disrupted and to date, the virus is still spreading globally.
The Case for Non-Gold Assets :
Coronavirus will be contained. Like past epidemics and/or pandemics, massive resources on multiple fronts are aimed at containing such health threats. If past epidemics are any indication, the coronavirus will be eventually contained although the timing is uncertain.
Better than expected economic growth. With the U.S. Presidential election on the horizon, the Trump administration is doing everything in their power to maintain economic growth and the health of the stock market. The Federal Reserve has already stepped up and the government has ample means at its disposal (i.e., spending) to stimulate the economy. Therefore, the economy could get past the coronavirus and worries about a recession could recede.
Dollar retains its strength relative to other currencies. Despite rising government deficits and debt along with relatively low interest rates, the dollar has remained relatively strong. With recent trade frictions and global instability, the dollar has benefited from a flight to quality as other countries
Gold prices will likely hold recent gains and/or move higher as investors increasingly include gold as part of a well-diversified portfolio. While fears of global pandemics often lead investors to seek safe-haven investments, the impacts can be short-lived depending on their longer-term economic impacts. With the coronavirus, it likely intensifies many of the factors that are already supportive of gold prices, including lower interest rates, worries about global economic growth and increased government spending. Rather than relying on short-term drivers of precious metals prices, investors should evaluate longer-term fundamentals and reap the benefits of diversification with investments in precious metals mining equities and/or bullion.
Monthly Treasury Statement, Receipts and Outlays of the United States Government, For Fiscal Year 2020 through January 31, 2020, U.S. Department of the Treasury, January 2020.
The Budget and Economic Outlook: 2020 to 2030, Congressional Budget Office, January 2020.
Is Investing in Gold Worth It In 2020, Forbes, Tyler Gallagher, March 3, 2020.
Coronavirus Epidemic Emphasizes the Need to Buy Gold, CCN, Ayush Singh, January 22, 2020.
The Coronavirus: Killer Bug and Economic Pandemic, Red Rock Secured, Sean Kelly, March 4, 2020.
Here’s the Investment Strategy Bridgewater’s Ray Dalio is Using to Deal with the Coronavirus, Cnbc, Patti Domm, January 30, 2020.