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Wednesday, 12 February 2020

Gold Soon To Be The Premier Asset
















Gold climbed for a fourth straight day as investors weighed the unfolding corona virus crisis, including a blunt warning from the head of the World Health Organization about the potential for more cases beyond China.

Prices rose as the global death toll from the outbreak topped 900 and the WHO Director-General Tedros Adhanom Ghebreyesus voiced concern over the spread from people with no travel history to China, saying “we may only be seeing the tip of the iceberg.” Beijing will spend at least $10 billion to fight the outbreak.

Bullion’s trading near the highest since 2013 as investors assess the impact of the disease on global growth and appetite for risk, although concerns over weaker physical demand for gold in China is capping gains. The effects of the virus have presented a “new risk” to the outlook, according to the Federal Reserve, and the issue will probably be front and centre when Chairman Jerome Powell kicks off two days of Congressional testimony on Tuesday.

We have been time and again talking about the corona virus, its effect on China and on the global economy as a whole and what are the possible consequences of the same. Well even though this virus is confined to mainland China, it’s having spill over effects globally.

The recent lockdown has deeply affected the international supply chains. It’s like shutdown down the world. So many companies rely on Chinese manufactured goods that this kind of disruption is bound to have a hugely negative effect on other countries’ economies.  Further an increasingly panicked global population may eschew any Chinese goods for fear that they may be tainted with the virus, however unlikely this may be.

Let’s have a look as to how this lockdown is affecting the other parts and various industries-

The scale of disruption in China is already staggering. Hyundai, the fifth-biggest global car maker, has been forced to close all its factories at home in Korea for lack of key components. Volkswagen, Toyota, General Motors and Tesla have all downed tools at their Chinese plants, as has Apple’s iPhone supplier Foxconn.
There were news that Fiat Chrysler in the U.S. may have to halt production due to a lack of component availability from the Chinese manufacturers on which it relies.
Reports suggest that as much as 90% of Chinese manufacturing exports have already been shut down as city after city goes into quarantine lockdown.  Many observers suspect, show over 40,000 confirmed cases of the virus and over 900 deaths so far and still rising.
Apart from China, cases if corona virus have been reported in Hong Kong and Macau too. So far over 130 confirmed cases in 24 countries and, thankfully, only 1 death but it is early days and this may well be the tip of the iceberg (Reported cases in the UK doubled to 8 this morning).

Markets have stated to realize the serous effects this virus will have on the financial markets. We are expecting a met-down in the equities markets. Major market led by  high-flying stocks like Apple and Tesla which both have heavy dependence on Chinese manufacturing to maintain earnings levels, will lead to a downturn in Asian and European equities markets. This might initially benefit gold and silver but they can turn down sharply as good assets are generally sold along weak side ones during a liquidity crisis.

Down the line we’d be nervous about all commodities including the major safe-haven precious metals.  China is the world’s largest gold consumer and demand there is sure to be disrupted and unless this can be replaced by increased demand in the West and from Central Banks we are going to see a demand downturn in any case.  Perhaps the timing is lucky in that new mined supply appears as if it may have peaked, while lower prices, if they materialise, will probably reduce recycled supplies and perhaps see a consumption pick-up in India where high gold prices are said to have adversely affected local demand.

In such uncertain times fold is usually the go-to asset.

During the recession and inflationary crisis of 1978-1980, gold skyrocketed again, jumping 29% in 1978, 120% in 1979, and 29% again in 1980. During the crash of 1987, gold jumped 24%.

Another gold rally struck from 2002 to 2003, just after the collapse of the Dot Com Bubble, rising over 40% as the U.S. went to war with both Afghanistan and Iraq. It was also around this time that central banks began amassing gold reserves once again, but primarily among eastern nations like China and Russia. This gold buying spree has only expanded in recent years, with banks buying more gold in 2018 than they have in over five decades.

The next major gold market rally, triggered from 2009 to 2012, is well remembered by most of us. Prices jumped around 70% total during the onset of the credit crash.

Again, because central banks are buying exponentially, and because the global economic system has been in a constant state of distress since the crash of 2008. Gold prices are not going to drop back to pre-crisis levels when our economy is perpetually unstable and none of the problems from 2008 have been fixed.

Gold rallied from $1,200 in September of 2018 to nearly $1,600 in the span of a year, and central banks are continuing to buy regardless of the price increases. They seem to know something that most of us only suspect.

With the historic trends displayed plainly here, it is easy to predict what will happen next.
The corona virus outbreak is about to be labelled an official pandemic.
The Fed’s repo market stimulus has failed to quell liquidity issues within the U.S. banking system
U.S. corporate debt and consumer debt is at all-time highs,
The UK has just left the European Union with a No Deal Brexit (as predicted)
The U.S. is initiating a troop build-up in the Middle East to surround Iran.

It was last during World War I that so many crises happened simultaneously. Not since World War I have we seen so many crisis events happening simultaneously.

It only makes sense that gold will once again become the premier asset for defending your savings.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.

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