How the Pandemic of Coronavirus Is Helping Gold Investors - Outside View by PersonalFN

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How the Pandemic of Coronavirus Is Helping Gold Investors
Mar 5, 2020

My sister, who is based in Shenzhen with her family and is a lecturer in a respectable school, flew down from China in January this year and is, now back here in India with her family until the pandemic of novel Coronavirus or COVID-19 (a pneumonia-like virus causing cough, fever and shallow breathing) diminishes. The situation is rather "worrying" she says.

Legendary investor, Warren Buffett, has also used a similar expression, calling the Coronavirus "scary stuff" in an interview to CNBC recently.

Here's how the epidemic of COVID-19 --- which stated started in Wuhan (located in Central China's Hubei province) --- has spread Coronavirus not just across China, but even outside of China, according to the World Health Organisation's (WHO's) latest situation report as of March 1, 2020.

Globally, the confirmed cases of Coronavirus or COVID-19 have risen to 87,137 --- 79,968 in China, and outside of China 7,169 in 58 countries. The death toll in China has gone up to 2,873 and outside of China to 104.

Graph 1: Epidemic curve of confirmed COVID-19 cases reported outside of China,
by date of report symptoms and likely exposure location
(Source: WHO's Situation Report-41 on Coronavirus disease 2019)

And as per WHO's risk assessment, China is exposed to very high risk, while at the regional and global level too, the risk assessment is revised from high to very high.

In China, the manufacturing hub for the entire world and mainly an export-oriented economy, many factories, offices, are not fully functional, says my brother-in-law who heads production at a reputed manufacturing firm.

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With travel bans imposed by many nations, tourism has taken a hit, trade and retail businesses have suffered. And schools, colleges, and universities, too have been advised to remain shut until further orders.

The situation is getting really quite serious...

The virus has spread in much of Europe - in Germany, in France, the United Kingdom, Spain, Belgium, and many more continents.

I was reading a New York Times Reports that says Coronavirus has stalled Milan and Italy's Economic Engine. In Italy, 1,128 confirmed cases of COVID-19 are reported going by the WHO's latest situation report on the disease. Not just companies and restaurants are choosing to remain shut, but even certain smaller towns south of Milan have been locked down, as per the New York Times Report.

Among the Western Pacific Region, significant confirmed cases are reported by South Korea (3,736 confirmed cases), followed by Japan (239 confirmed cases), Singapore, Australia, Malaysia and a few more.

In the South East Region, Thailand has reported 42 confirmed cases, followed by 3 in India, and 1 each in Sri Lanka and Nepal.

In the Middle East region, Iran, Kuwait, Bahrain, and the United Arab Emirates (UAE), 593, 45, 40, and 19, respectively, confirmed cases of COVID-19 are reported.

And in the region of the Americas, 62 confirmed cases of COVID-19 are reported in the United States (US), followed by 19 in Canada, reveals the WHO data of March 1, 2020.

The ramifications...

As you may know, in this day and age of globalisation, trade is very much interlinked. And China plays a dominant role in global trade.

With the epidemic of Coronavirus spreading across nations, I see widespread supply chain disruptions, resulting in bottlenecks in doing business. This is because several components, raw materials, and finished goods are sourced from China by most economies.

And the longer this disruption lasts; it will have bearing on businesses, their earnings, and overall economic growth.

Currently, perhaps, the only ones who are doing roaring business in this adverse scenario are mask and vaccine manufacturers (pharmaceutical companies).

Table: The impact of Coronavirus on global equity markets
Index% Change in YTD (CY 2020)*
RTS Index (Russia)-16.1
Sao Paulo Bovespa (Brazil)-9.9
Hang Seng (Hong Kong)-7.3
FTSE 100 (U.K.)-12.8
S&P BSE Sensex (India)-7.2
CAC 40 (France)-11.2
DAX (Germany)-10.3
S&P 500 Index (U.S.)-8.6
Jakarta Composite (Indonesia)-13.4
Nikkei 225 (Japan)-10.6
Shanghai Composite (China)-5.6
*Data as of February 28, 2020
(Source: ACE MF, PersonalFN Research)

Over the last couple of months, recognizing the aftereffects of this pandemic on the global trade, global economy, and global growth prospects; the equity markets have caught the flu and are currently panting for a positive breather. Investors' wealth has been eroded in equities, so far on a year-to-date basis.

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But Warren Buffet, while he has called Coronavirus "scary stuff"...offered a piece of advice recently while speaking to the media: "I don't think it should affect what you do in stocks", he said.

How has gold performed?

Gold has fared well over the last couple of months -- posted an absolute return of nearly +8.5% on a year-to-date basis (as of February 28, 2020) in rupee terms.

Graph 2: The gold rush sent prices to a record high

Even in the US dollar term, the price per troy ounce of gold has hit a record high (hovering over the US $1,600 per troy ounce going by the LBMA gold AM fixing data) and posted an absolute return of around 7%.

The reason for this gold rush is that while the US dollar continues to be resilient, smart investors have approached gold as a reserve currency; because there appear no signs of respite soon from this deadly pandemic.

Will gold continue to display sheen going forward?

Well, in all probability it will; the spotlights would continue to be on gold; because this epidemic may not end any time soon.

Jim Rogers speaking to the Business Standard said, there could be bankruptcies as a consequence of this virus. Also, the possibility of the world economy being pulled into a recession cannot be ruled out.

Jim expects gold to be "much higher in a few years" from where it is now.

In my view too apart from the deadly Coronavirus that has pervaded uncertainty, the following are some of the factors likely to prove supportive for gold:

  • Growth concerns in many parts of the world. The International Monetary Fund (IMF) expects China and the rest of the world to be impacted by this global health emergency. China could put recovery at risk even in the case of rapid containment of the virus observes the IMF.
  • The central bank across the world would adopt an easy monetary stance to support growth.
  • A record-high global debt-to-GDP of nearly US$ 253 trillion (and estimated to increase to exceed US$ 257 trillion by Q12020, mainly driven by non-financial sector debt) according to the Institute of International Finance (IIF).
  • Trade war tensions due to protectionist policies followed.
  • Geopolitical tensions in many parts of the world.
  • The US Presidential elections later this year, in November 2020.
  • Increased stock market volatility.
  • And the potential risk to the inflation trajectory in the course of the Coronavirus epidemic (owing to supply chain disruptions).

Even the World Gold Council (WGC) expects the market risk and economic growth interaction to impact gold prices this year. Mainly, the following factors will keep the focus on gold as per the WGC:

  • Financial uncertainty and lower interest rates
  • Weakening in global economic growth
  • Gold price volatility

The uncertainty brought about by the novel Coronavirus and its potential impact on public safety and economic growth could be added to the list, says WGC. Recognising the heightened global financial and economic uncertainty, even the central bank across many nations aren't taking chances and are stacking up gold.

Graph 3: Gold has displayed its lustre in the long run

In my view, it makes good sense to buy gold strategically and be a smart investor. The long-term secular uptrend exhibited by gold is something that invites attention and highlights the importance of owning gold in the portfolio with a longer investment horizon.

Gold plays its role as an effective portfolio diversifier, a store of value during economic uncertainty, safe haven, and a shield against inflation in the long run.

Allocate at least 10-15% of your entire investment portfolio to gold and holding it with a long-term investment horizon ...that will be a smart and a sensible strategy. Invest in gold the smart way through gold Exchange Traded Funds (ETFs) or gold savings funds.

I have said this before, but I will say even now: Go ahead and buy gold.

Author: Rounaq Neroy

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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