The number of cases and deaths by the new coronavirus have escalated quickly. However, the fears subsided and the stock market rebounded. How did gold perform, and what can we expect from the king of metals next?

Should We Stop Worrying about the Coronavirus?

Well, that was a quick escalation. On February 2, when we wrote the first Fundamental Gold Report about the coronavirus, there were 14,557 confirmed cases and 305 deaths. Yesterday, the World Health Organization reported almost 45,171 cases and 1115 deaths. So, the number of infections and death toll of coronavirus have surged in recent days. Moreover, China has changed today its diagnosis methodology (to include "clinically diagnosed" cases), confirming 15,152 new cases and 254 additional deaths. Hence, as the chart below shows, the total number of cases in China has reached 59,800, while the global number has already surpassed 60,000.

_{Chart 1: Cases of Coronavirus in Mainland China}

Meanwhile, the US stock market reached record closing highs yesterday as the chart below shows. Are investors blind? Are they irresponsible optimists? Well, it's true that the Fed's cheap money enables traders to have fun while the world is burning.

_{Chart 2: S&P 500 (green line, left axis) and gold (yellow line, right axis, in $) in 2020}

But there is also a true ray of hope. Not counting today's spike in new cases in China caused probably by the change in the methodology, the number of new cases reported daily there has been on a downward trend since February 4. It means that transmissions are still occurring but at a slower rate, which gives hope that the outbreak may be approaching its peak.

However, it's far too premature to say that the containment is working - the case may be simply unconfirmed. And the virus may still spread outside China. Moreover, investors should remember that the economic impact of the new coronavirus is likely to be greater than in case of the SARS outbreak nearly 20 years ago. This is because: 1) it already killed more people than SARS did; 2) China's government has taken more drastic measures - for example, many Chinese factors have been shut - to contain the epidemic; 3) China's economy is now about four times greater than two decades ago. Some analysts slashed their forecast for China's growth in 2020 to as low as 5 percent. When the virus is contained and the factories reopen, there will be a rebound, but there is no doubt that we will see a serious slowdown in Chinese growth in the first quarter and in global growth in the next few months.

Powell Remains Optimistic

Federal Reserve chairman Jerome Powell testified before the Congress this week. He reiterated his confidence in the sustainability of the record-long US economic expansion, saying that "there's no reason why the current situation of low unemployment, rising wages, high job creation - there's no reason why it can't go on". Powell admitted that the outbreak of the new coronavirus will impact China and that there will "very likely be some effects on the United States." But he argued that it was too early to determine what those effects would be and would they lead to a material reassessment of the outlook.

However, Powell opened the door to increase asset purchases aggressively if needed. He said that the Fed has, aside the interest rates, two tools to fight the recession: forward guidance and quantitative easing. And that "we will use those tools -- I believe we will use them aggressively should the need arise to do so." That would be music to the gold bulls' ears!

Implications for Gold

What does it all mean for the gold market? Well, the coronavirus has not made gold rally. Investors probably are aware that the current uncertainty is temporary and once the coronavirus is contained, global growth will resume. What is important is that the central banks will remain very accommodative until there is some resolution on the coronavirus. The fresh liquidity will support the risky assets. It seems to be negative for safe-havens such as gold, but the yellow metal often moves in tandem with the stock market in times of monetary accommodation. The chart above clearly shows that although gold has not rallied like crazy due to the coronavirus, it has been resilient when the fears subsided a bit.

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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Amid the worries about the coronavirus and its impact on the global economy, the US yield curve has briefly inverted again. Recession, anyone? And what exactly does the inversion imply for the gold market?

Yield Curve Inverts Again

Ooops, it happened again - the yield curve has inverted! Please take a look at the chart below. It shows that at the turn of January and February, the spread between 10-year and 3-month Treasuries has dived below zero once again. It stayed below zero only for a couple of days before moving back into the positive territory. The inversion was shallow as the level of the spread did not plunge below minus 0.4.

_{Chart 1: Spread between 10-year and 3-month Treasuries from January 1, 2019, to February 5, 2020.}

However, the fact that the yield curve has inverted again after the October 2019 normalization, is of great importance. It shows that the underlying forces behind all the 2019 inversions are still in force. It shows that the Fed's easing of monetary policy did not heal the economy. The US central bank cut interest rates three times in 2019, partially because of the worries about the inversion of the yield curve. Initially, it seemed that these cuts helped, as the yield curve reinverted in October and stabilized in the positive territory for a few months. But now it should be clear that the Fed just postponed the inevitable. We mean here, of course, recession. We still do not know when exactly the next economic crisis comes - other indicators suggest the US economy remains strong - but the latest inversion of the yield curve shows that the recessionary fears are still justified, despite the temporary calming down. But, as we all know, it's always calm before the storm.

Coronavirus and Yield Curve

Now, let's dig deeper into the cause behind the recent inversion of the yield curve. Please take a look at the chart below. As you can see, the yield curve has inverted this time not because of the rise in the short-term interest rates, but because of the drop in the long-term bond yields.

_{Chart 2: 10-year Treasuries (green line) and 3-month Treasuries (red line) from March 2019 to February 2020.}

It show that investors worry about the prospects of the global growth amid the coronavirus outbreak. These concerns about the negative impact of the virus on the world's trade and pace of economic growth pushed investors from the stock market into safe-haven assets such as the long-term government bonds. After all, the impact on the global economy from the SARS epidemic reached up to $40 billion, according to this research, but as coronavirus is more contagious, its economic costs may be higher.

So, although the short-term interest rates did not spike, which could tighten financial conditions and trigger recession, the inversion of the yield curve is still positive for the gold prices. Investors expect that the growth will slow down or/and that the Fed will cut the federal funds rate again later this year. Indeed, traders bet that the US central bank will deliver one cut in July, but they have also increased their bets on two cuts.

Implications for Gold

When the spread between 10-year and 3-month Treasuries bottomed out, the price of gold jumped above $1,580. And the current fears about coronavirus may support it in the short-term. However, as we wrote on Monday, fears about previous virus outbreaks were overblown in hindsight. Therefore, the current anxiety may be only temporary. The yield curve has already reinverted (but another inversion is probable) while the stock market shook off the fears and rebounded. Hence, don't necessarily expect gold prices skyrocketing. However, the yellow metal performed greatly in 2019 due to the recessionary fears. So, if they settle in again on a more permanent basis, gold bulls would get an ally.

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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The World Health Organization has declared the coronavirus outbreak a global health emergency. What does it mean for the global economy and the gold market?

Will Coronavirus Kill Us All?

So it looks like not the recently feared nuclear war with the North Korea or Iran, but the virus outbreak will destroy humanity. Let it be, I won't complain, I work from home, so I'm less likely to become infected!

OK, but jokes aside. The current outbreak of the novel coronavirus (2019-nCoV) that was first reported from Wuhan, China, on 31 December 2019, is a serious threat. Indeed, the World Health Organization (WHO) has declared the coronavirus outbreak a global health emergency. It is only the sixth declaration of international public health emergency since 2009. The previous cases included: the swine flu pandemic in 2009, a polio outbreak in 2014, the West Africa Ebola outbreak in 2014, the Zika virus outbreak in 2015 and another Ebola outbreak in the Democratic Republic of the Congo in 2019.

As of February 2, there were around 14,560 confirmed cases of coronavirus in 24 countries, according to the WHO. You can see the global distribution of these cases in the map below. Virtually all cases (more than 99 percent) were reported in China. The WHO reports 305 deaths, of which only one is outside China (in the Philippines).

As the name suggests, the new virus is part of the coronavirus family, the source of two previous deadly epidemics: the SARS and the MERS. However, the mortality rate of the new virus is far lower than in previous outbreaks, as it stands at about 2 percent right now. Please compare it to the 2002/03 SARS outbreak (Severe Acute Respiratory Syndrome) which killed 774 people out of a total 8,096 infected (9.5 percent mortality rate) or the 2012 MERS outbreak (Middle East Respiratory Syndrome) which killed 858 people out of the 2,494 infected (34.5 percent). So, the coronavirus is less deadly than SARS or MERS, but it is more contagious.

Implications for Gold

What does the coronavirus outbreak mean for the gold market? Well, gold will not protect you against the infection. But the yellow metal can act as a safe-haven asset which protects against the stock market volatility.

Today, Chinese stock and commodity markets plunged in the first trading session after an extended Lunar New Year break. As investors feared the spread of the new coronavirus, they abandoned risky assets. The Shanghai Composite Index dove 8 percent, as the chart below shows. It has been its biggest daily fall in more than four years.

_{Chart 1: Shangai Composite Index over the last two weeks.}

The situation must be serious as the People's Bank of China said it will inject 1.2 trillion yuan ($174 billion) worth of liquidity in a response to the stock market turmoil. Indeed, after SARS, China suffered several months of economic contraction. Now, with China playing a much more important role in the global economy, the economic impact of the new coronavirus might be greater (however, the country is also better prepared to fight the virus outbreak). The China's GDP is expected to slow down from 6.1 percent in 2019 to 5.6 percent in 2020 because of the virus.

So, the plunge in Chinese equities is a good news for the gold bulls, as the fall in the Shanghai Stock Exchange during summer 2015 and later in January 2016 set off a global rout, pushing up the price of gold. So, although the coronavirus is not likely to cause an economic recession, it can mark a turning point. The US yield curve has inverted again for the first time since October...

However, investors should not buy gold counting on the pandemic. If you expect one, just get all the supplies such as food in, bar the door and don't leave the house. We might be optimists, but let's face the facts. Remember SARS? Remember Zika? Remember Ebola? People were terrified which each virus outbreak. But various public health actions have always stopped an outbreak, or it burned itself out. For example, SARS was basically gone by 2004. Of course, this time may be different, especially if the new coronavirus can be spread before symptoms manifest, but we believe that the risk so far still remains very low to the United States and other advanced economies.

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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The FOMC held its first meeting in both the new year and the decade, keeping interest rates unchanged. But why did the yellow metal move up regardless? Let's examine the implications for the king of metals.

Fed Keeps Again Federal Funds Rate Unchanged

Yesterday, the FOMC published the monetary policy statement from its latest meeting that took place on January 28-29th. In line with expectations, the US central bank kept the federal funds rate unchanged at 1.50 to 1.75 percent:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective.

As in December, the decision was unanimous, which shows that there is no appetite for further cuts (or hikes) among the US central bankers, at least not now. However, the price of gold still increased yesterday, as the chart below shows. We will come back to this issue later.

_{Chart 1: The price of gold (February futures traded in Comex) from January 28 to January 30, 2020.}

Although the Fed kept the federal funds rate steady, it hiked the interest rate paid on required and excess reserve balances from 1.55 to 1.60 percent, which was characterized by Powell as a "small technical adjustment" made necessary by all the liquidity flooding into the market.

Statement Is Little Changed...

The newest statement was practically unchanged from the December edition. There were only two modifications. First, the description of household spending was revised from "rising at a strong pace" to "rising at moderate pace". It's a dovish change, but it should not materially affect the gold market.

Second, inflation ceased to be "near" Committee's symmetric 2 percent objective and became "returning" to the target. Although a returning object can also be near the destination point, the Fed's intent behind the change is clear. The FOMC decided to acknowledge that inflationary pressure is weaker than it thought earlier. Although gold shines brighter in times of high inflation, the altered Fed's inflationary expectations imply that the Committee is not likely to hike interest rates anytime soon in the future. Unless we see inflation again "near" or "close", and later "at the target", we will not see an interest rates hike. Which is good news for the gold bulls.

These Are the Shifts in Composition of the Committee

With the beginning of 2020, the composition of the FOMC also changed, as the regional Reserve Bank presidents serve one-year terms on a rotating basis (with the exception of the New York Fed President who serves permanently). So, we said goodbye to James Bullard, Charles Evans, Esther George and Eric Rosengren, while we welcomed Patrick Harker, Robert Kaplan, Neel Kashkari and Loretta Mester.

What does this replacement means for the gold market? Well, two hawks who opposed all the 2019 cuts - Esther George and Eric Rosengren - are out this year. On the other hand, James Bullard, an ultra dove, who loudly demanded the cuts last year (and voted for a 25-basis points cut in June) will also not vote in 2020. The same applies to Charles Evans, a moderate dove. Instead, Neel Kashkari, another ultra dove, joined the voting group. We will also see this year Robert Kaplan, a centrist, while Patrick Harker and Loretta Mester are definitely hawks.

So, on balance, little will change. Two hawks out, two hawks in. One ultra dove out, one ultra dove in. On the margin, a moderate dove is replaced by a centrist, so the FOMC could become slightly more hawkish, but remember that these terms are not rigid and clearly defined - they are only indicative. So, dear precious metals investors, do not expect any revolution in the FOMC stance.

Implications for Gold

The January FOMC statement is little changed and pretty much as expected. So, it should not materially affect the gold market. However, the statement confirms that the Fed will remain on the sidelines in the first half of the year with rather dovish perspectives later on the way, which should be generally supportive for the gold prices.

Indeed, the US central bank is going to err on the side of the doves rather than the hawks, if pressed. This is why the futures market expects that the Fed will cut interest rates as early as in July. The odds of such a move increased from 26.2 percent on December 30, 2019 to 45 percent one week ago and to 62.8 percent currently. From the fundamental perspective, the more dovish expectations should support 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!

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A new day, a new record in palladium! Is there any stopping it from reaching another high? What's next in store for the white metal?

If you thought gold had a good year, you were wrong. OK, maybe not wrong, but palladium enjoyed larger gains. Just look at the chart below, which shows the price of palladium. As you can see on the chart below, this metal gained almost 50 percent in 2019, rising from $1,270 to $1,900!

And if you thought gold started 2020 well, you were also wrong. OK, maybe not wrong, but palladium was the real star (although not as great a star as rhodium which has gone really supersonic recently). Let's look at the chart below once again - the white metal skyrocketed from $1,900 to almost $2,500 in January!

_{Chart 1: Palladium prices (London Fix) from January 2019 to January 2020.}

Actually, palladium has reached a record high, as the chart below shows. Compared with April 1990, when our data series starts, the price of palladium increased almost twentyfold, from around $130 to almost $,2,500. It means that palladium is currently more expensive than gold or platinum!

_{Chart 2: Palladium prices (London Fix) from April 1990 2019 to January 2020.}

Surprised? You shouldn't be! After all, we wrote as early as in the July 2017 edition of the Market Overview that

the price of palladium should be supported in the near future. We know that the above-ground stocks of palladium are relatively plentiful (and may be greater than the market expects), but market deficits at such heights cannot last indefinitely - and when the market eventually tightens, prices will need to rise.

And in March 2019, we again commented on palladium, writing that it had better prospects than platinum:

the underlying structural deficit grew last year and, what is more important, is expected to widen in 2019, which will not be without significance for the price of palladium (...)

And given that the latter metal [palladium] has better fundamentals (platinum market is in structural surplus, while palladium market is in deficit), it still seems to be a better investment choice. Although it is true that the automotive demand for platinum should stabilize in the near future, and the rising price discrepancy should make platinum more attractive as catalyst, the autocatalyst producers say that they are not seeing broad-based substitution from palladium to platinum. Hence, the outlook for platinum improved, but the path for the palladium is still better.

It turned out that we were right again. As we explained in the past, the underlying cause of the spectacular rise in the price of palladium boils down to the fact that demand has been greatly outpacing supply. And why have we seen structural deficits? The first reason is the rise in the automotive demand for palladium due to the tighter emission legislation and stricter vehicle testing regimes. The key here is that palladium - in contrast to platinum used mainly in diesel engines which are out of favor - is used predominantly in gasoline vehicles (and in hybrid electric vehicles, which tend to be partly gasoline-powered). Second, South Africa's output of palladium has recently decreased due to power outages at local mines and tense political situation in this major producer of palladium.

Implications for the Future

Where is the palladium market heading? Well, given that it's likely to remain in structural deficit, price may go further north. However, the price chart of palladium looks parabolic, so - if history of parabolic price movements teaches us anything - it appears unsustainable. So, the correction is likely - actually, the price of palladium has already declined to $2,265 and the decline won't end at this level.

More generally, platinum might now the better choice than palladium at current prices. This is because the big hit from the Volkswagen diesel scandal has been already absorbed in the platinum prices. And with palladium trading twice as more than platinum, the substitution should kick in, supporting platinum relative to palladium.

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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