Everyone seems to be fleeing for the exit right now. At a time of global fear, gold is proving its mettle as part of your portfolio. When the world is losing perspective, it is time to inject some – and one obvious point is that gold is a safe haven during these difficult, globally nervous times.
The spread of the coronavirus – Covid-19 – now seems to be much faster outside China than within its country of origin. The head of the World Health Organization (WHO), Tedros Adhanom Ghebreyesus, says almost eight times as many cases have been reported outside China as inside in the previous 24 hours, adding the risk of coronavirus spreading at a global level was now very high.
Certainly we seem to be just a few steps away from a global pandemic not so much of Covid-19 but of Covid-19-inspired fear. With the number of cases now exceeding 90,000 and more than 3,000 deaths – a mortality rate of more than 3% – that fear seems justified. But set that against data for common-or-garden seasonal influenza, which, according to the Montreal-based Centre for Research on Globalization, accounts for five million ‘severe’ cases worldwide and 650,000 deaths annually and Covid-19 anxieties seem overplayed, at least for now.
Nevertheless global stock markets lost some $6 trillion in the week ending 28 February (but have since rallied), and the gold price swiftly sped to a seven-year high of $1,689/ounce. It has since eased to $1,643/ounce, the decline explained by some as caused by a large seller of gold selling to cover margin calls in other tumbling investments. Gold has gained 6% in US dollar terms and 8% in Sterling this year. It would be comforting to say that the spread of Covid-19 is a clear buying ‘signal’ for gold and to some extent that is true. When all other assets seem to be in meltdown, gold traditionally is regarded as a safe haven. Certainly the head of global commodities research for Goldman Sachs, Jeff Currie believes that “while so much about the current environment remains unclear, there’s one thing that isn’t: gold, which – unlike people and our economies – is immune to the virus.”
Gold’s ‘immunity’ to the virus is thanks in part to it being beyond any centralised control. The global macroeconomic outlook has certainly darkened considerably, but with interest rates either negative or close to zero, there is little policymakers can do to provide counter-balancing stimulus. Biggest news is that the US Federal Reserve cut its benchmark interest rate by a half-percentage point in an effort to support the economy in the face of the spreading coronavirus. It was the biggest rate cut since 2009 and sent a strong signal that it will not hesitate to do what it can to contain the economic repercussions of Covid-19. The Bank of England’s outgoing governor Mark Carney told the UK Parliament’s Treasury Committee this week that Covid-19 will cause an “economic shock that could prove large but will ultimately be temporary” yet will not be as bad as the 2008 financial crisis. He added: “The Bank will take all necessary steps to support the UK economy and financial system”. So far, Australia and Malaysia have cut interest rates because of the coronavirus outbreak. The OECD has said a prolonged outbreak of Covid-19 could halve the forecast global growth rate from almost 3% to 1.5% this year. Hong Kong’s government has taken the highly unusual (and certainly inflationary) step of introducing ‘helicopter money’ by pledging to give by mid-2020 HK$10,000 in cash to every permanent resident aged 18 and above. This will cost Hong Kong the equivalent of $10 billion. Paul Chan, Hong Kong’s finance minister, expects a budget deficit of $139.1bn for 2020-2021, accounting for 4.8% of gross domestic product, which would be the largest deficit on record. Macau is to give residents shopping vouchers and Singapore is to give residents up to $300 in a one-off payment. Making money cheaper, which is what interest rate cuts do, do nothing to combat the virus but the hope of policymakers is that they will provide a stimulus to keep economic activity going.
Yet the supply/demand macroeconomic shocks that trail in the wake of Covid-19 include a probable dent in the demand for gold jewellery, certainly in China. According to Zhang Yongtao, CEO of the China Gold Association, “people are not in the mood to shop for jewellery. Stores and shopping malls are closed because of the virus. The sales of gold jewellery and bars will drop substantially this year.”
So while in general Covid-19 so far seems only moderately lethal, it has nevertheless prompted a knee-jerk selling of most assets and a shift into gold. It is an ill wind that does no-one any good and disease and death are never cause for celebration, but it needs to be accepted that gold in these uncertain times is proving its merit.
Yet Glint Pay does not advocate obtaining and using its Mastercard on the basis of what will inevitably prove a temporary (although perhaps longer-than-expected) globally disruptive event. You have the Glint Pay Mastercard for the long-term because gold is real money. In our view, the ‘helicopter money’ in Hong Kong is a straw in the wind – the cheapening of paper money which this act signifies is alarming. Giving away paper money generates more demand in an economy without creating more supply and threatens to stoke inflation; and if that ‘virus’ spreads it will indeed be momentous for gold.