The Coronavirus seems well and truly on its way to becoming a global pandemic. What started in the Hubei Province as a local Chinese phenomenon that was affecting the international supply chain has now spread world-wide, and the number of cases will likely grow exponentially. As more countries experience substantial disruption, shut-downs, supply shortages and travel curtailment, the impact of a global slump are crystalizing. Amidst all this uncertainty, gold has been a stalwart of value, growing as other asset classes slump under the economic fallout of the coronavirus outbreak.
Economic outlook
A few weeks ago, when global markets were only concerned about whether Apple would be able to ramp up production of its iPhone following their cautionary trading update, the reaction was muted. It seems like the Apple warning was a harbinger of things to come. On Monday 2 March the Organisation for Economic Co-operation Development (OECD) warned that the spread of the coronavirus could halve global growth forecasts this year. Initial expectations were for growth of 2.9% in 2020, but the impact on China alone was likely to lower that growth by 0.5%, and if the epidemic was longer-lasting and more intensive, growth could slow to just 1.5%. The OECD is likely just the first international organisation to quantify the economic impact of the outbreak, which will affect assets and investments the world over.
One of the key impacts has already been seen in China, where the closure of factories and restrictions on movement have put pressure on supply chains. In order to improve efficiencies, most companies no longer stockpile products but work on a streamlined supply chain which is significantly impacted by these closures. Apple may be the most high profile case in point, but it is certainly not the last. This is impacting on the share price of major stocks which will have a knock-on effect on the whole market.
Travel and tourism disruption
Unsurprisingly travel and tourism stocks are badly affected. As countries and regions experience clustered outbreaks, travel to these areas is being curtailed, holidays are cancelled, major events are called off and losses are being severely felt.
The Global Business Travel Association has seen a sharp rise in companies cancelling business travel, with the likes of Nestle halting travel for its almost 300,000 employees and many more large companies cutting back as well. Travel company TUI shares have lost almost 40% in the last month and British Airways parent company IAG is also down 35% since the middle of February. The FTSE 100 initially rose in Monday morning trade, encouraged by the Bank of England promise to help stabilise the financial markets, but by lunchtime the index was again sliding. The FTSE 100 has fallen more than 11% in just two weeks.
A massive global pandemic would always have a negative effect on the economy, but the coronavirus was the spark that set off a market already poised to slide. In January, stock exchanges were in their tenth year of a bull market that began at the bottom of the financial crisis in 2009, and many market experts were already concerned about a recession in 2020 or 2021.
Geo-political uncertainty
In the UK, the Brexit can has been kicked down the road many times yet nothing has been resolved, and the possibility of exiting without a trade deal with the EU still exists. Meanwhile political uncertainty in a US presidential election year, global trade disputes and simmering Middle East tensions are all weighing on sentiment. Even if this sentiment improves briefly as central banks around the world try to stimulate their economies to ward off the impact of the coronavirus, depressed productivity and lower spending will inevitably hit companies and markets will have to react.
While people are stockpiling essentials, they will also be worrying about their assets, and rightly so, as the stock market declines have already shown any investments are precariously placed. The UK property market looked like it might be turning a corner at the start of the year, but this could change because of the coronavirus and its impact of the overall economic outlook. Lender Nationwide’s Chief Economist Robert Gardner said last week there are significant uncertainties, including the coronavirus, that could be a drag on the economy, and house prices.
Panic on the streets
Sadly such contagion and fear is creating panic elsewhere as the infection spreads across international borders, which in turn is affecting more and more businesses locally. We have seen businesses such as Flybe collapse on account of the effects of coronavirus. HSBC have evacuated their entire research department and parts of its trading floor on account of a staff member testing positive for the disease. The issue here is systemic and affecting a large number of people.
We are speaking to lots of clients from all walks of life that have altered their lifestyle. People are cancelling holidays and flights and panic buying food. Customers have reported that Ocado (the online UK food delivery company) had completely sold out of food on 04th March. Whilst many do not feel that panic buying is necessary, if people are clearing food off shelves then by not following suit you run the risk of not having milk for tomorrow morning’s cereal.
Economic slowdown
Overall we have the potential for a situation where many people and businesses could be earning considerably less. We have the same trend mirrored and echoed all over the world. Such ingredients that could create a powerful and prolonged recession across the globe especially if we weigh in the backdrop of Brexit, US elections and tensions in the middle east, Iran, Russia and China.
Most of the clients purchasing gold from Arabian Pure Gold are not looking to turn a quick buck. It is more about protection and an insurance policy against events that put wealth at risk. Gold has a proven track record of increasing during times of uncertainty which range from recession to war to systemic global health concerns like SARS and Coronavirus.
While most clients invest in gold as a long-term store of wealth against financial uncertainty, there are now a growing number of people reactively removing wealth from the stock market and banks to secure their assets in gold for the shorter term. Some are buying now with the intention of holding it only until the markets become a little more certain, rather than for several years.
There are many advantages to buying physical gold. For one, there is no counter-party risk, of the company or bank going bust. In an actual financial crisis, bank deposits are only protected up to £85,000 in the UK, and a sudden market crash or major banking crisis could cause overstretched institutions to fail.
Gold as a safe haven asset
In the midst of declining stock markets and property uncertainty, gold value has been rising steadily since the magnitude of the global epidemic started to become clear. In sterling terms the precious metal has increased by over 9% since the start of the year. The strength of this rise may be bolstered if central banks turn to rate cuts to try and stimulate a coronavirus-weakened economy.
Conventional wisdom says that gold market prices rise when rates are cut and fall when rates are raised. The theory is that as gold doesn’t pay any interest, when rates rise investors can get a better return elsewhere and shift out of gold. Whereas when rates are cut, the attractiveness of other assets declines and gold becomes more valuable, especially if the gold price is expected to rise. This simple symmetry doesn’t always work in practice as there are a multitude of factors affecting the gold price, but it is likely that any rate cuts will put extra impetus behind an already rising gold price.
Goldman Sachs recently suggested that there is “one thing immune from coronavirus” and that is – gold.“ As gold has a venerable history as a store of wealth, maintaining its value even as currencies and assets have fluctuated, more and more people are looking to invest in the precious metal.
Demand has soared at Arabian Pure Gold in the last two months, with a notable spike at the end of February when average weekly sales surged over 700%. Many are finance professionals who have been watching the markets with concern for some time. Still others are first time buyers looking to protect their hard-earned money. Since the outbreak in Italy, there has been a jump in Italian nationals living in Italy buying gold. Clearly, for Italy there was widespread concern about the spread of the virus and the effect of quarantines, shut-downs and lost tourist dollars on their already fragile economy.
Tax free investment
In addition, certain types of physical gold coins are legal tender for UK residents. This means they don’t attract any capital gains tax when you come to sell them after weathering any economic storm. Gold Sovereigns and Gold Britannias can be held for any length of time and then sold without incurring any capital gains tax, unlike ETFs or stocks.
Quite apart from the health implications, the coronavirus is having a very significant impact on global economies already. And it will get worse before it gets better, so investing in safe haven gold is a good way to protect vulnerable assets in these uncertain times.
