Contexts and forecasts!
The gold price and the Coronavirus have one thing in common in the last weeks: the curve goes steeply to the NORTH! Both in the spread of the virus and in the development of the gold price there is currently no stopping. In one point, however, there are serious differences: While states are trying to contain the rapid spread of the coronavirus, Italy has already closed its borders and the whole country is already under quarantine, meanwhile even the big banks are behind the rising gold price. Instead of stepping on the brakes and countering as usual with short sales of paper gold, everyone is betting on further rising prices and thus stoking the price fireworks even more. If you look even deeper and look at the enormous explosive power of the current crisis, gold is still drastically undervalued.
The coronavirus as a trigger for falling share prices
The coronavirus is spreading exponentially and we are only at the beginning of its development. To slow down the spread, measures are being taken that we in Europe would have considered absolutely impossible just a few weeks ago. Not only individuals are quarantined, but entire countries (see Italy) are sealed off. People's personal freedoms are being curtailed in a way that we otherwise only know from dictatorships.
On the one hand, our healthcare system is threatening to collapse; on the other, the economy is coming under massive pressure as a result of the extreme measures. Sectors such as tourism are completely crushed, production chains are interrupted, event organizers and cultural enterprises have to temporarily cancel everything and are left with high losses. We are at the beginning of a crisis, the extent of which we are not yet able to assess or grasp.
The coronavirus, or rather the reactions of politicians and the protective measures for our healthcare system, are causing massive damage to the economy. If the economy were healthy, it could probably withstand the artificial deep sleep of a few weeks without long-term damage. But the system was already in such a fragile state before Corona that the virus is now brutally crushing it.
On March 9, the Dow Jones Index plunged by more than 7% right after the opening. Shortly thereafter, trading was suspended for several hours. Even trading in government bonds was suspended. The last time this measure was taken was 10 years ago. As share prices plummeted, so did yields on government bonds.
The central banks are reacting with panic and, after the interest rate cut last week, are even planning a further interest rate cut in mid-March, in the hope of providing companies with more cheap money and cushioning the falling prices. Here, however, most of the powder is already shot and it is questionable how much positive effect this measure will have now. The opposite is more likely: the panic reaction of the Fed unsettles investors even further and all run towards the exit.
Facts about the coronavirus
Collected by Dr. Sebastian Maurer Stroh, a researcher and bioinformatician working in Singapore. He researches the latest virus mutations from influenza to Ebola.
- COVID-19 is frightening because of its rapid spread.
- Panic is exaggerated - but hygiene is appropriate.
- The mortality rate of 6% is not correct - because the many cases with a mild course of the disease are not recognized as corona. It is similarly deadly as the normal flu with 0.1 %.
- Elderly people and people with weakened immune systems have the highest risk.
- Children are often carriers and show few or no symptoms.
- The chain of infection will soon be broken by the measures, but will flare up again later.
- most infections have only mild symptoms!
How is the crisis affecting the price of gold?
We have a toxic mix of: no or negative interest rates, falling stock prices, high debt levels, no return from seemingly safe assets like government bonds, and general panic and uncertainty. Historically, investors always turn to commodities in such situations, i.e. oil and gold.
There is a problem with oil, however. On March 9, the Monday that was so devastating for stock prices, the price of crude oil also plunged 34%. That's the steepest intraday price drop in the history of the crude oil market. Since the beginning of the year, the oil price has halved. If you calculate the price of crude oil in grams of gold, we are currently at an all-time low. Crude oil has never been as cheap as it is now!
Of course, this slump has political backgrounds, but it is not a matter of collusion, but rather a lack of collusion. Since the outbreak of the coronavirus and the reduced demand for oil in China, the price of crude oil has therefore been under pressure since the beginning of the year. The OPEC states wanted to support the oil price by a coordinated cut in production. The discussions of these states failed on weekend however and Saudi Arabia wants to increase its production on the contrary even still and lower the oil price thus further. Nobody profits from a crude oil price of 30 US dollar per barrel! In the USA, this just about covers the production costs, which are far higher here than in Saudi Arabia. This only shows how strong the imbalance in the world economy is.
Oil is therefore currently off the table as an investment. It remains: Gold.
Why does the price of gold rise in times of crisis?
Gold is the investment par excellence for times of crisis. Gold maintains its value even in crises, wars and times of inflation. If the volatility and uncertainty on the stock markets increases, investors flee to the safe haven of gold.
There are also psychological reasons for this. Gold is tangible. It is stable. Unlike highly complex financial products, you can understand gold and trust its value.
If we look back over the past decades, the gold price has benefited from every major uncertainty or crisis.
Global contexts and growing uncertainty
In my opinion, the hysteria and panic about this virus is far exaggerated, listen to experts and professional opinions. The reason that there were such massive outbreaks in Italy was one thing above all: greed.
Particularly in the clothing industry based in northern Italy, thousands of cheap Chinese workers were employed as cost-cutting measures in order to retain the "Made in Italy" label - and at the same time to be able to profit from the low labor costs. This army of seamstresses and tailors, in addition to the savings, has brought a viral gift from their homeland. The delayed reaction of the Italian authorities and the underestimation have contributed to the epidemic spread of the virus.
In addition to the almost forgotten flood of refugees heading our way from Turkey, a virus that is crippling supply chains and entire sectors of the economy such as tourism and transport is now hitting an already weakening economy. An economy that, under ever-increasing cost pressure and tax burdens, has been looking for global savings potential.
This mix of sociopolitical, sociopolitical, security, economic and health factors has a highly explosive potential when combined. As if our political leadership were not already overburdened with one of the issues at most, there are now several - and all of them at once. This raises questions upon questions:
- How do you stop an epidemic without causing a panic?
- How did you prepare medically?
- How do you maintain safety in the cities? With which personnel?
- How do you avoid supply bottlenecks?
- How to avoid panic selling and price falls on the stock markets
But one thing will be certain - uncertainty. And with uncertainty, gold always wins.
Gold price forecast for 2020: Are we facing a price explosion?
In euros, the gold price is chasing one all-time high after the next. But the price has also risen sharply in dollar terms recently. This is due on the one hand to the strong demand for gold, and on the other hand to the weakening U.S. dollar, which has lost massively in value against other currencies such as the euro in recent weeks.
If we consider the extent of the crisis, however, gold is still drastically undervalued. The stock market crash will also have real economic consequences. Unemployment will rise, purchasing power will decline, companies will go bankrupt, loans will no longer be serviced - and the crisis will already spill over into the banks. We are at the beginning of a crisis with enormous destructive potential. From the current level on the stock markets, it could still go down by a good 50 or 60 percent. The key interest rate in the USA will also soon be zero or negative. There is no end in sight to the oil crisis.
What does this mean for the gold price? There is only one direction here, and that is up. Experts see the price at 5,000 euros by the end of the year.