Economic data shows that the coronavirus crisis will be severe. To soften the blow, Trump announced his support plans for the economy. Will the stimulus package help? And when will gold finally rise?

COVID-19 Hits the US Economy

The global epidemic of COVID-19 has already hit the US economy. We start to see evidence how bad this crisis might be. First, retail sales dropped 0.5 percent in February. That's the biggest drop in a year. But it will change quickly - just think about the number in March or April!

Second, the US consumer sentiment fell from 101 in February to 95.9 in March. Again, expect much worse readings in the future, as the number covers only the beginning of the month when Americans just started to acknowledge the coronavirus threat.

Third, the Philadelphia Fed manufacturing index fell from 36.7 in February to -12.7 in March, the lowest reading since June 2012. So, forget about recovery in the manufacturing recession.

Fourth, initial jobless claims surged from 211,00 last week to 281,000 yesterday. It means that more Americans applied for unemployment benefits. So, prepare for the rise in the unemployment rate!

Fifth, as you can see on the chart below, the New York Fed's Empire State business conditions index fell record 34.4 points to -21.5, the lowest level since the global financial crisis. As the COVID-19 epidemic in the US was still in its early stages during the survey, the worst seems yet to come.

_{Chart 1: New York Empire State Manufacturing Index from March 2015 to March 2020}

Trump To The Rescue

On Tuesday, U.S. President announced a plan to send money to Americans as soon as possible to ease the negative economic shock from the coronavirus crisis. Trump said some people should get $1,000 as help with their living expenses because they cannot work under quarantine and social distancing. On Wednesday, he wrote on Twitter:

For the people that are now out of work because of the important and necessary containment policies, for instance the shutting down of hotels, bars and restaurants, money will soon be coming to you.

I also want one grand, can you send it to me as well, Mr. President?

The administration is also talking about a new stimulus package of around $850 billion to cover payroll tax cut, small business loans, and bailouts for airlines struggling from plummeting demand. However, Democrats, who control the House, prefer refundable tax credits for self-employed workers and ensuring that sick workers can get longer-term leave if needed rather than a cut in a payroll tax. It would be actually the third coronavirus aid plan to be considered by Congress just this month. Trump signed the first $8.3 billion package to battle the coronavirus two weeks ago, and he signed on Wednesday the second $100 billion package that would expand paid leave and unemployment benefits. Anyway, one thing is certain: the US government stimulus will be large!

As you can see in the chart below, the fiscal deficit for 2019 is $984 billion, or 4.6 percent of GDP. Before the COVID-19 pandemic, the budget deficit for 2020 was projected to be $1 trillion. It means that the stimulus will balloon the fiscal deficit to $1.9 trillion, or to staggering 8.8 percent of GDP, the level not seen since the Great Recession.

_{Chart 2: Federal deficit as a percent of GDP from 1970 to 2019}

But that's not all. To make matters worse, the tax revenue will plummet, while the GDP is likely to shrink this year. Nobody knows how much, but let's follow Goldman Sachs and assume that the annual GDP growth will decline 0.4 percent in 2020. So, the deficit will be even higher, definitely more than 9 percent of GDP! As a result, the federal debt will increase from $23 trillion, or 106 percent of GDP, in 2019 to almost $25 trillion in 2020, or 116 percent of GDP. Oops, we have a debt problem here!

Implications for Gold

What does it all mean for the gold market? Well, we are in a recession. The economy will be hit severely, especially in the first half of the year. The White House and Congress announced the stimulus package. But it did not help and calm the stock market - which is not surprising given the level of fear. What it will do, is to balloon the public debt and raise the likelihood of introducing the universal basic income in the future. All this means higher government expenditure, higher deficits and higher indebtedness. Soaring debt, combined with increasing money supply, very low real interest rates and global recession, is another fundamentally positive factor for the gold market. When the blood dries on the trading floor, investors will cease to sell gold in order to raise cash - and then we get the fundamental reason for the rally in gold to start. The similar dynamic occurred after the collapse of the Lehman Brothers - gold fell initially before rebounding sharply amid the loose monetary policy.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

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On Sunday, the Federal Reserve cut interest rates and restarted quantitative easing to stimulate economy hit by the pandemic of COVID-19. That's already its second move prior to this Wednesday's FOMC. What does it imply for gold?

It's Serious, Really.

Winter is not coming. Winter is here already. The situation does not look too good. Although the epidemic seems on the way out in China and South Korea, the situation in Europe and the US is deteriorating quickly. As you can see in the charts below, the new daily cases are quickly rising, making the total number of infected people doubling each 3-4 days. And please note that the chart shows only confirmed cases - the true number of infected people is almost certainly larger, especially in the US, where shockingly low number of tests have been conducted.

_{Chart 1: Daily new confirmed cases of COVID-19 in the US from January to March 14, 2020}

_{Chart 2: Daily new confirmed cases of COVID-19 in Italy (red line) and Spain (blue line) from February to March 15, 2020:}

Before I go on and analyze Fed's actions, I have to admit to while I was always concerned by the current epidemic as it leaped outside of China, I underestimated its health and economic impact. Surely, I'm not an epidemiologist and I wasn't the only one (think about the Italians, the White House or Spanish PMs' wife), but I should be smarter than the governments. It's of little comfort that the whole world and markets overlooked the danger for so many weeks, and we're all paying the price now.

One reason is that media are always panicking. Fear sells. They cry a wolf all the time, and when the true wolf comes, no one believes the boy that cried wolf too many times. Second reason was that when I analyzed the previous pandemics, such as SARS, MERS, or Ebola, they all were short-lived and their health and economic impact was limited. But, as I already suggested this likelihood, in one of the previous editions of the Fundamental Gold Report, this time is really different.

Why it is different? Well, it is because the new coronavirus is really smart. You see, Ebola was a stupid virus. It was very lethal, but it killed its hosts so quickly that it could not be with such ease transmitted to the others. MERS was not easily transmitted among people. And SARS was quickly contained because people transmitted the virus only well after they had symptoms. So, the authorities could easily track the infected people and isolate them. Problem solved. But the new coronavirus has a deadly combination of features. It is less lethal now than it was initially, and is more contagious. And people can transmit it before they have any symptoms. They can even have no symptoms at all!

All this means that containment is practically impossible. And comes with bringing the economic activity to a standstill. A very heavy price to pay. Let's face it. A high percentage of world's population will be infected. And many will die. We do not panic, but this is a fact. What we can done is to break its exponential trajectory, mitigate its impact and flatten the epidemiological curve, as the chart below shows.

_{Chart 3: The idea of flattening the curve.}

In this way, we can slow the rate of infection to prevent the healthcare system from the total collapse. The good thing is that the mortality rate is generally low, especially among children and the young and healthy. But the problem is there are many people with health issues. A great percentage of Americans are obese and not too few are smoking - which worsens their situation. All this means that it's probable that the pandemic will not be a short-term issue we can quickly deal with, but that it will stay with us for months (I recommend this podcast with Micheal Osterholm, expert in infectious disease epidemiology, especially the first fifteen minutes)...

Ok, What Did the Fed Do?

On Sunday emergency meeting, the Fed slashed the federal funds rate to zero, or to almost zero, to be precise:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective.

Moreover, the US central bank has expanded its repo operations and reintroduced the quantitative easing:

The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.

Will these actions help the economy? Now, they won't. Has the Fed's first cut helped to prevent the COVID-19 spread? No, it has not. If an entrepreneur cannot obtain the inputs badly needed for his factory, or if employees do not appear at work, the level of interest rates does not matter. Neither Powell, nor Lagarde, nor any other central bankers have any power to open production and service facilities closed due to quarantine or to push employees back to work, and consumers back to stores, cinemas, pubs and travel agencies.

Anyway, let's assume that the problem is related to the demand, not to the supply (as politicians and central bankers will probably argue). How should interest rate cuts help if people are encouraged to stay at home and, therefore, reduce economic activities? Which companies will start investing more in a period of reduced demand, supply chain disruptions, falling stock prices, and increased uncertainty in general?

Since ultra low interest rates did not help to revive exceptionally weak economic growth after the Great Recession, it will not help much now. Coronavirus affects the economy mainly by changing people's behavior - the actions of central banks will not change them. We deal with the healthcare crisis, not the liquidity crisis - so the extra liquidity will not help.

Implications for Gold

What does it all mean for the gold market? Well, panicked central banks reintroducing quantitative easing and ZIRP, combined with great fear and plunging stock markets, are fundamentally positive for the gold prices.

If so, why the heck the gold price has declined today below $1,500? That's a good question. As I said previously, cash is king in times of crisis. Investors desperately sell everything to raise cash to meet their margin calls. We see a replay from 2008 financial crisis, when the gold prices initially fell - but started to rally after a while. The epidemiology of COVID-19 suggest that this crisis will be larger than almost everyone initially thought. And the fact that the Fed acted in a panic mode just three days before the scheduled meeting suggests that we can expect really horrible data in the next few weeks. So, I think that the path of least resistance for gold is to rise in the medium term - the only question is when it will happen.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

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On Wednesday, WHO declared the current outbreak of COVID-19 as a global pandemic, while the US stock market entered the bear market as it had fallen over 20% from its peak. What's next in store for the yellow metal?

It's Global Pandemic Now

We are now officially in the pandemic stage! Although I have long written about the COVID-19 as a pandemic, not an epidemic, the WHO has finally admitted that situation is much worse. As WHO Director-General, Dr. Tedros Adhanom Ghebreyesus said yesterday:

WHO has been assessing this outbreak around the clock and we are deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction. We have therefore made the assessment that COVID-19 can be characterized as a pandemic.

It is the first pandemic sparked by a coronavirus. Surely, SARS and MERS were also of international character, but COVID-19 has spread wider. As of today's morning, the new coronavirus cases were reported in 118 countries. More than 124,000 people were infected, and 4,607 died. The situation is indeed serious. And, as you can see on this very informative website, the numbers are growing. But the geographical is not the only difference between an epidemic and a pandemic - another is that "we have never before seen a pandemic that can be controlled". Wow, Dr. Ghebreyesus can lift the spirit, can't he?

Not surprisingly, the stock markets did not welcome the move. The S&P 500 fell almost 5 percent yesterday. And, as the chart below shows, the index has already fell below 2,800 points, or 20 percent below its intraday record high from February 19, crossing the threshold for a bear market. Similarly, the Dow Jones Industrial Average also plunged 20 percent below its intraday record high reached on February 12, or below 24,000 points, confirming that the US stock market has entered the bear market for the first time since the Great Recession.

_{Chart 1: S&P 500 (green line, left axis) and Dow Jones (red line, right axis) from January 2 to March 11, 2020.}

Recession: Not If, but How Deep.

As the spectre of COVID-19 is haunting the globe, the analysts, economists and investors are shifting the conversation from whether there will be a recession in 2020, to the debate how severe the contraction will be and what shape the recovery will take. Yes, the epidemic in China is on the decline and the country is returning to its normal economic potential. However, as the novel coronavirus spreads across the globe, more governments take drastic steps to limit its reach, which will negatively affect the supply chains and economic activity. For example, yesterday Italy added new restrictions to the lockdown, closing all shops except supermarkets, food stores and chemists. The negative effects of such shutdowns are going to linger, making a quick, V-shaped recovery less likely. The more prolonged the recession, the better for gold.

To support the badly hit economies, the governments and central banks are pumping money into economy. The New York Fed increased the maximum offering of its daily operations in the market for repurchase agreements, or repo, to $175 billion. Meanwhile, Britain and Italy have already announced multi-billion-dollar programs to fight the COVID-19. The UK government has announced 30 billion pounds of fiscal stimulus and pledged 600 billion pounds by 2025 for infrastructure. And the Bank of England, following the Fed and the Bank of Canada, cut its interest rates by 50 basis points, from 0.75 to 0.25 percent.

It remains to me a mystery how the rate cut is supposed to help if at the same time, people are encouraged to stay at home and, what goes with it, limit their economic activity. Which companies are supposed to cheer the lowered interest rates in times of reduced consumer demand and disrupted supply chains?

Let's repeat: as the easy monetary policy did not manage to revive the economy after the Great Recession, it will neither help now, especially that coronavirus impacts the economy mainly through the changed human behavior - and the central bank actions will not alter them. It is good news for the gold market.

Some investors can complain that gold should rally higher given the current turmoil. It's true that the somewhat limited reaction seems to be disappointing. But people should remember two things: first, gold's relative performance versus other assets (think about equities or oil) is actually great; second, there are many margin calls on the marketplace right now and some panicked investors sell gold in order to raise much needed cash, just as we saw in the immediate response to the financial crisis - gold initially fell, only to rally later.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

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On Sunday, Italy registered a huge jump in new cases of the COVID-19, the stock market plunged, while the oil market crashed. Tuesday morning, and Italy is on lockdown. Meanwhile, gold jumped above $1,700. What's next for the yellow metal?

Gold Jumps Above $1,700

Last week, I wrote that:

from the fundamental point of view, the environment of fear, ultra low interest rates, weak equity markets and elevated stock market volatility should be positive for the yellow metal (...) the good news is that the markets expect further Fed's interest rate cuts on the way - it lays the foundation for future gains in the gold market.

And indeed, we did not have to wait long for more gains. On Sunday, gold jumped briefly above $1,700, reaching another psychologically important level, as the chart below shows. The yellow metal made it to this price point for the first time since late 2012.

_{Chart 1: Gold future prices from March 3 to March 9, 2020.}

Yes, you guessed, gold went further north amid the growing spread of the COVID-19. Data reported to the World Health Organization by March 8 shows 105,586 confirmed cases in the world, of which 24,427 originated outside China. Actually, over 100 countries have now reported laboratory-confirmed cases of the new coronavirus.

What is really disturbing is that Italy reported a huge jump in total cases and deaths from the COVID-19 on Sunday, a surge from 4680 and 197 to, respectively, 7424 and 366, as one can see in the chart below. The jump in figures comes as the Italy's government introduced a quarantine of 16 million Italians in the Lombardy region and 14 provinces and announced the closure of schools, gyms, museums, ski resorts, nightclubs and other venues across the whole country. In the US, more than 500 people have been confirmed to have the virus and more than 20 of them have already died.

_{Chart 2: Total number of confirmed cases of COVID-19 in Italy from February to March 2020.}

The spread of the COVID-19 increased the risk of a full-blown world pandemic and global recession. The expected economic slowdown slashed the demand for oil. To make matters worse, the OPEC and Russia did not agree on production cuts. Instead, the Saudi Arabia slashed its April official selling price and announced plans to raise production in a bid to retake market share. As a consequence, the WTI oil price plunged below $30, or 34 percent in the biggest crash since 1991, as the chart below shows.

_{Chart 3: WTI oil price from March 3 to March 9, 2020.}

Moreover, the stock market plunged again. The futures on S&P 500 went down 4.5 percent on Sunday evening in North America, and closed 7.5% lower (that's over 225 points down). It's not surprising that investors are fleeing equity and oil markets and increasing their safe-haven demand for gold.

Another positive factor for the gold prices is the collapse in the bond yields. The 10-year interest rates have plunged below 50 basis points on Sunday. As a reminder, in December 2019, the yield was slightly below 2 percent. It means a huge change. The bond market action implies that investors are expecting recession and the Fed's accommodative response. It would be hard to imagine better conditions for gold to shine.

_{Chart 4: US 10-year Bond Yields from March 3 to March 9, 2020.}

Implications for Gold

What does it all mean for the gold market? Well, I am of the opinion that the prospects for gold are positive. We have not yet reached the full-on panic. The epidemiological peak is still ahead of us. With Italy rolling out a massive quarantine, the fears over the COVID-19 impact on the supply chains and the global economy will intensify. Moreover, the biggest headwind to the gold market, i.e. strong US dollar, has been removed. As the Fed's interest rates cut worked to soften the greenback, gold can now benefit from both the safe-haven demand and the weak US dollar.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
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Yesterday, the Fed cut interest rates by 50 basis points. Not during a regular monetary policy meeting, but in a surprising move. But what are the implications for the gold market specifically?

Fed Cuts Interest Rates in Emergency Move

Last week, I wrote that the spread of the new coronavirus to Europe and the inversion of the yield curve make "the Fed more likely to step in and cut the federal funds rate, you know, "just in case". And in yesterday's surprise move, the Federal Reserve cut the federal funds rate by 50 basis points in response to the coronavirus threat. The decision was unanimous and it was communicated in the FOMC statement as follows:

The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1-1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Without doubts, the move is huge. First of all, the US central bank cut interest rates not by 25 basis points, as usual, but by half a percentage point. It was the first such cut since the Great Recession. And the FOMC slashed the federal funds rate before its scheduled meeting on March 17-18, which is a very rare move. Taking monetary policy decisions between regular meetings with a bigger than normal interest rate cut, implies that the Fed is scared as hell.

Or that the US central bank was simply told to slash interest rates. Maybe not coincidently, the move came the same morning that G7 officials offered unspecified measures to help impacted countries. And President Trump has been tweeting intensively in recent days, pressuring the Fed to act. In yesterday's morning, he wrote:

Australia's Central Bank cut interest rates and stated it will most likely further ease in order to make up for China's coronavirus situation and slowdown...Other countries are doing the same thing, if not more so. Our Federal Reserve has us paying higher rates than many others, when we should be paying less.

Fed's Cut and the Economy

Will the Fed's dovish action help to contain the virus? To ask such a question is to answer it. Will the Fed's panic move fix the broken global supply chains? Another rhetorical question. The monetary policy is powerless when faced with supply problems. When you cannot get the necessary inputs from Asia for your factory, whether the interest rates are 50 basis points higher or lower is irrelevant for you. So, the Fed's move is unnecessary and it will not help the global economy with the impaired supply chains.

What the Fed can do, is to trigger panic in the markets. Initially, the stock market welcomed the news. But later it turned sharply lower. It suggests that the Fed's panic move made traders feel more nervous about the coronavirus and its impact on the economy. Indeed, the CBOE Volatility Index has returned to nine-year highs after the move. After all, the Fed officials were talking all the time that they were monitoring the situation, that everything is fine, and then, boom, a surprise cut by 50 basis points! So investors could think "if they act like this, the situation must be worse than we thought". Powell justified the move by the material reassessment: he said during the press conference that "the coronavirus poses a material risk to the economic outlook".

Yeah, he suddenly realized it! For me, it looks like a panic response to the plunge in the stock market (Fed's put is always is place!) and to the inversion in the yield curve. As you can see in the chart below, the 10-year Treasury yield has dropped to a record-low of 1.1 percent yesterday and later (not visible on the chart) even below 1.0 percent.

_{Chart 1: US 10-year Treasury yield from March 2019 to March 2020.}

Implications for Gold

What does it all mean for the gold market? Well, from the fundamental point of view, the environment of fear, ultra low interest rates, weak equity markets and elevated stock market volatility should be positive for the yellow metal.

It's true that gold saw a major sell-off last week. However, its price jumped again to $1,640-$1,650 in a response to the Fed's move. The scale of a move might seem to be a bit disappointing, so investors should be aware of a possibility of further downside, as the precious metal will continue to feel some pressure from investors' liquidity needs. However, it might be just a replay of 2008, when gold was initially dumped in order to meet investors' margin calls only to rally later. The good news is that the markets expect further Fed's interest rate cuts on the way - it lays the foundation for future gains in the gold market.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhDSunshine Profits - Effective Investments Through Diligence and Care

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