A person wearing a protective face mask walks past a digital display at Kuala Lumpur International … [+]
© 2020 Bloomberg Finance LP
Ever since the new coronavirus reared its ugly head, the upbeat performance of global equities markets has confounded investors.
At the same time, the virus continues to rapidly spread around the world.
The past two days saw an explosion of infections in northern Italy, where 150+ new cases suddenly appeared. The virus has killed 8 people in Iran, and South Korean President Moon Jae-in, (who is dealing with 600+ cases) just put South Korea on the highest possible alert.
Suddenly, there is a rush to safety. Gold reached a 7-year high of over $1660.00 per troy ounce, bonds are surging, and yields are falling.
Gold price movements over the past 3 months
Will This Trend Last?
Maybe, maybe not.
A lot of professional market watchers seem confident that by the end of 2020, coronavirus will be long in the rearview mirror.
This confidence is rooted in a couple of assumptions:
· The coronavirus will not last long into the spring and summer
· Pent up demand will more than compensate for lost economic activity in early 2020
· If the epidemic does become protracted, governments will rush in to save the day
These assumptions could all prove to be true. Consider the following:
· Like most infectious diseases, coronavirus is more easily transmitted in cold weather where people stay in close proximity to each other
· The Chinese and global economy quickly recovered, and then some, following SARS in the early 2000s
· The Chinese government is already stepping in to support its equities markets and provide relief to borrowers who would otherwise struggle to repay their loans
· Additionally, according to recent minutes from the U.S. Federal Reserve’s January meeting, coronavirus is a risk that it is closely paying attention to, suggesting the possibility of lowering rates
But They Could Be Wrong
At the same time, this confidence could be misguided.
· It is far too soon to predict the outcome of coronavirus. It is also far more damaging than SARS ever was.
· Manufacturing supply chains are complex, international, and increasingly lean. If one component is missing, a single factory is offline, or there just is not room on container ships or an available driver to move raw materials recovery will take time.
· Additionally, there are few countries as connected to the global economy as China. It is the second-largest economy in the world, accounting for 16% of global GDP. It is also the world’s largest exporter and second-largest importer according to the World Trade Organization.
· Finally, governments are ultimately limited in what they can do to stimulate their economies. As an example, global interest rates remain at all-time lows, many in negative territory. This largely precludes monetary policy as an option, forcing governments to utilize fiscal measures such as tax cuts or stimulus programs.
Stay Positive, But Protect Your Downside
All of this data suggests that, at the very least, it not a given that the market will quickly recover.
With this in mind, responsible investors are trying to find ways to stay exposed to industries less reliant on commodities and manufacturing, such as IT, while protecting their downside by moving into safe haven assets, thus the record gold prices.
It is also important to remember a key lesson from the financial crisis: people need to protect their own future and wealth.
Crypto, and Bitcoin in particular is especially appealing in times like this. The asset maintains a strong correlation with gold, with the added benefits that it is easily transferable and divisible. It also has a hard cap of 21 million, making it impervious to inflation. Finally, after 10 years of competing narratives about whether or not Bitcoin is a currency, payment system, or store of value, the narrative is coalescing around the third option, driving demand.
Additionally, like Gold it has performed well on the year, up almost 33%.
Bitcoin price movements since Jan 1, 2020
At this point it remains to be seen how long the fight against coronavirus will last. That will be the ultimately arbiter of whether or not the flight to safety trend will be wise. However, at this point it is irresponsible to assume that the economy will instantly bounce back.