While viruses are counted among the simplest forms of life, they have quite a bearing on its advanced forms. And the coronavirus epidemic is, unfortunately, alive and well. What are the implications for the gold market?

Coronavirus Infects Europe

The coronavirus epidemic is, unfortunately, making its presence well known. Actually, it spreads quickly around the globe. The worldwide number of confirmed cases has reached almost 90,000, while the death toll has surpassed 3,000 people.

Three important developments have occurred over the weekend and since our last edition of the Fundamental Gold Report. First, the World Health Organization reported on Sunday that "the number of confirmed cases in Hubei province, China, has increased for two successive days after a period of decline." It means that the epidemic in China may not be peaking yet, especially as China counting methods (excluding asymptomatic infected individuals) may underplay extent of outbreak, according to Caixin.

Second, the new coronavirus infections soared across Europe on Sunday. The situation is particularly grave in Italy, where confirmed cases jumped 40 percent in 24 hours to 1,576 (and to 1,713 on March 2), adding a great burden on the country's healthcare system. However, the number of infections have also jumped in France (to 130 cases), Germany (130 cases), Spain (74 cases), and the UK (36 cases). As the whole continent will be infected soon, the economic effects will become greater. The French government has already admitted that the effect of the coronavirus will be larger than previous estimates and promised to provide the necessary support to companies. With slower economic growth across France and the whole continent being already fragile, guess what Christine Lagarde will do? Yup, she will hurry with help and the ECB will remain accommodative or even ease its monetary policy even more.

Third, the more decisive spread of the coronavirus across the United States is a matter of time. The number of cases has increased to more than 80, while two people have already died. The governor of Washington, where these deaths occurred, has already declared a state of emergency. The Vice President Mike Pence admitted that we "could have more sad news". These developments will lead to the intensification of fear among Americans, spurring possibly some safe-haven demand for gold.

Implications for Gold

What does it all mean for the yellow metal? Well, from the fundamental point of view, growing fears that the spreading coronavirus will weigh on global growth, the dovish central banks, a weaker US dollar and the stock market volatility should all support gold prices.

We are, of course, fully aware that the price of gold plunged on Friday, as the chart below shows. But we warned our Readers that a downside move was likely, given the scale of previous huge rally. The sell-off could be, thus, a normal profit-taking for those wishing to cash in on the runup.

_{Chart 1: Gold prices in 2020 (London PM Fix, in $)}

Another issue is that the greenback strengthened on Friday against the euro, maybe because investors focused on the much more grave epidemiological situation in Europe. However, the epidemic should arrive in the US as well but with a certain lag. And even with the scale of the outbreak smaller than in Europe, the new coronavirus will negatively hit the profits of US international companies.

Should we panic? No, after all, the risk of the coronavirus-related death to the average person remains low. And each year, between 291,000 and 646,000 people worldwide die from seasonal flu. So, when the fears recede, a move lower in the gold prices is likely.

However, we are rather before the peak of the epidemic and related worries, so there is more room for gold to shine as a hedge against viruses, especially if the Fed reacts and cut interest rates just as a vaccine to the new economic disease.

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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Gold Pulled Back, But Coronavirus Did Not

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With new cases of COVID-19 outside China rising, the chances of a pandemic and global recession have increased recently. What are the implications for the gold market?

Coronavirus Spreads Over the World

Unfortunately, the new coronavirus remains the hottest topic of the news. Although the COVID-19 epidemic has been slowing down in China since the beginning of February, it has quickly spread to several other countries. The WHO's situation report from February 26 says that the infections of the new coronavirus has been reported in 37 countries. Actually, for the first time since the beginning of the epidemic on December 8, there have been more new cases reported from countries outside of China than from China. With so many countries, including the Western ones, struggling with the disease, the COVID-19 ceased to be Asian issue and has become a truly global issue. As world inches closer to the real pandemic, the financial markets could become even more nervous, so we could see more safe-haven flows into the gold market.

Recessionary Odds Increase

Although the COVID-19 outbreak has not evolved yet into the full-blown and officially declared pandemic, it has already infected the global economy. This is because the new coronavirus has hit not West Africa (as Ebola) or China's from 2003 (as SARS), but the very second biggest economy in the world (according to nominal GDP; according to the PPP, the largest!) which is the center of manufacturing and global supply chains. And although it is true that the COVID-19 is less lethal than previous viruses, investors should acknowledge that the majority of the economic costs associated with epidemics comes not from the increased mortality or morbidity, but from the behavioral changes of people who fear the infection, so they reduce their activities.

The world's economic growth in 2019 was barely above the recessionary threshold of 2.5 percent. The recent increase in cases in Japan and Italy, which are both large economies already on the brink of recession, should hamper the global growth. Instead of the recovery, we could, thus, see even bigger slowdown.

Although the US has looked Teflon-like so far, the recent IHS Markit report casts doubt about the resilience of American economy. According to the survey, business activity in the U.S. contracted in February for the first time in since the Great Recession (with the exception of the government shutdown in 2013) due to the disruptions caused by the new coronavirus. What is important, is that the decline was driven not only by the deteriorating manufacturing performance (yet still expanding), but also by the decline in the service sector.

Moreover, the long-term interest rates have declined, as the chart below shows. The 10-year Treasury yield has plunged below 1.4 percent, pushing the spread between long-term and short-term bond yields into negative territory again. The inversion of the yield curve increases the odds of recession. It also makes the Fed more likely to step in and cut the federal funds rate, you know, "just in case". Indeed, the markets expect the dovish move as early as in April.

_{Chart 1: 10-year Treasury yields (blue line, left axis) and the spread between 10-year Treasuries and 3-month Treasuries (red line, right axis) from January 2019 to February 2020.}

Implications for Gold

What does it all mean for the gold market? Well, the COVID-19 is beneficial for gold's outlook. Even before the epidemic started, the gold's prospects were positive due to the easy monetary policy and increased recessionary risk. The outbreak of the new disease may only strengthen these tendencies, i.e., slowing down already fragile global growth and push central banks to adopt an even more accommodative stance.

Moreover, as the chart below shows, the stock market volatility and the credit spreads have increased. Meanwhile, the US dollar has weakened recently, which makes the macroeconomic environment even more friendly to gold.

_{Chart 2: CBOE VIX Index (green line, right axis) and ICE BofAML US Corporate BBB Option-Adjusted Spread (red line, left axis) in 2020.}

Now, the key question is, of course, how persistent the effects of the coronavirus shock will be. If it is contained quickly, the risk-appetite comes back to the markets and investors may withdraw somewhat from the gold market. However, with new cases rising outside China, it is likely that the new virus would stay with us for some time, affecting the global economy beyond the first quarter of 2020, and, thus, supporting gold prices.

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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Gold rally goes on, reaching almost $1,700 per ounce. What the heck is just happening in the precious metals market?

Gold Rallies Above $1,680

Wow, what an escalation! On Thursday, we reported that gold jumped above $1,600. On Friday, its price surpassed $1,640, as the chart below shows. And today morning, it has rallied even further, reaching $1,684.

_{Chart 1: Gold prices in 2020 (London P.M. Fix).}

It means that the price of gold has already risen about 11 percent this year, and more than 8 percent since the coronavirus epidemic outbreak in China. It confirms that gold is a safe-haven asset.

Coronavirus Fears Mount

The new coronavirus, which has been officially named "COVID-19", caused a real emotional roller-coaster among investors. They alternately panic and calm down. When Apple announced lower profits than expected due to the coronavirus and disrupted manufacturing production in China, the stock markets plunged. But they rebounded later. And they plummeted again, because of the multiple outbreaks beyond China.

As of today's morning, there were 77,150 confirmed cases in mainland China and 79,434 confirmed cases in the whole word. The total death toll was 2,620, among which 27 deaths occurred outside mainland China. This number is still very low, especially compared to the grave situation in the country of origin, but one week ago, only five deaths had taken place outside China. Major outbreaks were reported in Iran, South Korea and Italy, where, respectively, eight, seven and three people died.

In South Korea, 70 additional coronavirus cases have been confirmed on Monday, bringing the country's total number to 833. Italy reports 157 total cases, while Iran 43. The government of South Korea has increase its anti-virus alert to the highest level, allowing temporary closures of schools and limiting flights to and from the country. Meanwhile, Italian authorities have put about a dozen towns in the northern part of the country into quarantine, closed public buildings, and banned public gatherings, including carnival events in Venice, in order to contain the biggest coronavirus outbreak in Europe.

The increase in cases in Iran, South Korea and Italy renewed fears that the new coronavirus is spreading globally despite all the travel restrictions. These concerns led to the sell-off in the global stock markets. Indeed, the Stoxx Europe 600 Index dropped 3.4 percent, while the South Korea's benchmark dropped 3.9 percent. Meanwhile, futures on the three main U.S. stock indexes were all down more than 2 percent, while the long-term bond yields sank to their lowest level since 2016. The S&P 500 has dropped around 1.4 percent since its peak, as the chart below shows.

_{Chart 2: S&P 500 Index in 2020.}

Implications for Gold

What does it all mean for the yellow metal? Well, the renewed fears are clearly positive for the gold prices. However, these fears may be a bit overblown. The coronavirus is slowing in China. Although it may be gaining traction elsewhere right now, it should be contained ultimately. So, when the fears recede, the demand for the safe-haven assets might decrease. The correction is, thus, possible. But correction does not imply the bear market. Actually, I am of the fundamental opinion that the bull market in gold has begun some time ago. And, importantly, the recent fears have pushed the long-term interest rates down. The yield curve has inverted again. This inversion will revive the recessionary fears and push the Fed to cut the federal funds rate at least once this year. After all, we would have already had a full-blown recession, but Fed quickly adjusted its monetary policy in a response to the inverted yield curve, providing additional accommodation. With fears mounting and yields declining, the US central bank could be forced to intervene again. In such an environment, gold should shine.

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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Ladies and Gentleman, gold has overcome yet another barrier, jumping above $1,600 amid the fresh FOMC minutes and the renewed fears about the coronavirus economic consequences. What's next for the yellow metal?

Fed More Optimistic about Global Economy

Gold bulls can be happy. As the chart below shows, the yellow metal has jumped above $1,600 amid the FOMC minutes and concerns about the coronavirus. Let's now analyze these two important developments.

_{Chart 1: Gold prices in 2020.}

The Federal Reserve released the minutes from its last meeting. They show that the US economy seemed stronger to the Fed in late January than they had expected. In particular, the FOMC members agreed that the labor market had remained strong over the intermeeting period, that economic activity had risen at a moderate pace, and that there were tentative signs of stabilization of the global economic growth. Hence, they were "generally cautiously optimistic about the effects on the business sector of the recent favorable trade developments and the signs of stabilization in global growth".

Moreover, the participants also were more optimistic about the inflation returning to the target. They generally expected inflation to move closer to 2 percent in the coming months as the unusually low readings of early 2019 drop out of the 12-month calculation. More upbeat inflation expectations should make the US central bank less dovish or more hawkish, which should be supportive for the yellow metal, especially since that gold is perceived as an inflation hedge.

And even more importantly, the FOMC members saw the balance of risks in a more favorable light than in December, as the risk of a full-blown trade wars or a hard Brexit diminished.

Participants generally saw the distribution of risks to the outlook for economic activity as somewhat more favorable than at the previous meeting, although a number of downside risks remained prominent. The easing of trade tensions resulting from the recent agreement with China and the passage of the USMCA as well as tentative signs of stabilization in global economic growth helped reduce downside risks and appeared to buoy business sentiment. The risk of a "hard" Brexit had appeared to recede further.

But what the Fed really enjoyed, was the reinversion of the yield curve and the following decrease of the likelihood of a recession:

In addition, statistical models designed to estimate the probability of recession using financial market data suggested that the likelihood of a recession occurring over the next year had fallen notably in recent months.

The fact that the yield curve has again inverted in January, must be a blow to Powell's heart. It means that the three cuts of the federal funds rate in 2019 did not improve significantly the situation. The specter of recession is still present!

Of course, the Fed is fully aware of the fact that important risks to the global economy persist or that new dangers emerge:

Still, participants generally expected trade-related uncertainty to remain somewhat elevated, and they were mindful of the possibility that the tentative signs of stabilization in global growth could fade. Geopolitical risks, especially in connection with the Middle East, remained. The threat of the coronavirus, in addition to its human toll, had emerged as a new risk to the global growth outlook, which participants agreed warranted close watching.

Coronavirus Strikes Back

Indeed, the coronavirus seems to be the most dangerous threat to the global economy right now. After a temporary relaxation that followed signs of slowdown of new infections, investors started to worry again about the implications of the coronavirus outbreak. The second thoughts came on Monday, when Apple, the biggest American public company, warned that it would miss its revenue target for the first quarter as a result of the coronavirus. Investors learned that global supply chains have many of its links in China and with much of the country being in quarantine, many global businesses may suffer for a while.

But was the Apple's warning really surprising? Not really. We have warned investors that China and the global economy may suffer in the Q1 or maybe even in Q2 (as there is some lag between development in China and the global economy) but that the economic growth should rebound later, when the epidemic is contained (and the data suggests that it indeed will be). And yes, the S&P500 has already rebounded, reaching for new heights.

Implications for Gold

What does it all mean for the gold market? Well, gold has jumped above $1,600 on Wednesday as concerns over the global economic impact of the coronavirus boosted the safe-haven demand for gold. But the real question is what's next for the precious metals market.

Well, the safe-haven demad should remain in place for a while due to the concerns about the impact of the coronavirus. However, we are of the opinion that the coronavirus will alter neither the long-term growth of China nor of the rest of the world. So, when the fears recede, there might be a correction in the gold prices.

But there might be not. We mean here the fact that although the coronavirus won't probably alter significantly the fundamentals of the global economy in the long-run, it could force the central banks to ease their monetary policy. The People's Bank of China has already provided accommodation. And the Fed - especially if there is a more prolonged turmoil in the stock market and a fresh inversion of the yield curve - may follow suit. Then, gold may shine even without the global pandemic.

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
Sunshine Profits - Effective Investments Through Diligence and Care

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Coronavirus, the topic du jour. It is still the major threat for the global health and economy. But we should not forget about other geopolitical and economic developments. What do they imply for the gold market?

Coronavirus, China's Economy and Gold Prices

The number of cases of coronavirus reported by the WHO have increased from 45,171 cases and 1,115 deaths by February 12 to 51,867 cases and 1,669 deaths by February 16, 2020. However, the number of new cases is slowing down, which suggests that the epidemic could reach a turning point within weeks. This is of key importance not only for the global health but also for the global economy, as the sooner the epidemic is over, the quicker China's economy will recover. As a reminder, the quarantines of the whole cities like Wuhan and other compulsory measures disrupted the supply chains and hampered the Chinese economy.

However, gold bulls should not count on the coronavirus to dramatically hit the long-term economic potential of China. The epidemic will cause only a short-term slowdown, but it should not decrease the long-term economic growth. Investors should remember that the epidemic will be contained eventually and that geopolitical events and external shocks have only temporary impact the gold prices.

Industrial Production, Inflation, and Gold

In the last few editions of the Fundamental Gold Report, I focused on the coronavirus outbreak, the major threat for the global health and economy. But don't forget about other important developments!

First, the CPI rose 0.1 percent in January, after increasing 0.2 percent in December, marking the smallest increase in four months. The analysts expected stronger move. However, the annual inflation rate moved from 2.3 percent in December 2019 to 2.5 percent, the highest level since October 2018. The core CPI, which excludes food and energy prices, rose 0.2 percent on a monthly basis and 2.3 percent on an annual basis, the same increase as reported in the previous 3 months, as the chart below shows.

_{Chart 1: Annual percentage change in the US CPI (green line) and the core CPI (red line) from January 2015 to January 2020.}

Although inflation edged up in January, it remains subdued. It means that the Fed is unlikely to raise the federal funds rate in the nearest future, especially now, when the economic damage caused by the coronavirus is unknown yet. Low inflation decreases the gold's appeal as inflation hedge, but it also implies that the Fed is likely to remain dovish, which is positive for gold prices.

Second, on Friday, the Federal Reserve reported that industrial production decreased 0.3 percent in January, marking the fourth decline in the past five months. It means that the industrial sector remains in the recessionary zone. However, the decrease mainly reflected unseasonably warm weather that held down the output of utilities and a significant slowdown in civilian aircraft production, as Boeing completely suspended the 737 MAX production after two deadly crashes in 2019. So, while the total manufacturing index declined 0.1 percent, it rose 0.3 percent, when excluding civilian aircraft. Moreover, the Manufacturing ISM index registered 50.9 percent in January, returning to expansion territory for the first time since July 2019. It offers some hope that the industrial sector will revive later this year. Of course, it would be better for gold if industrial recession not only remains with us but also spreads to other sectors of the economy.

Trump's Acquittal and Gold

Because of the coronavirus, I haven't yet analyzed Trump's acquittal in his recent impeachment trial. In February, the Republican-led Senate acquitted the President of abuse of power and obstruction of Congress, ending the impeachment saga.

What's next? Well, some analysts fear that Trump's victory could embolden him to further expand executive power while avoiding accountability. President has already fired a few officials who testified against him in the impeachment inquiry.

Trump's acquittal should also strengthen the President. Indeed, after the historic vote, Trump had the highest approval rating of his presidency - 49 percent in a Gallup tracking poll, which increases his chances to win the election in November. As Trump implies the status quo, his reelection should not impact the gold prices significantly. For the yellow metal, Sanders or Warren, with their radically progressive proposals, should be much better.

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
Sunshine Profits - Effective Investments Through Diligence and Care

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