Will the Coronavirus Force China’s Hand on Gold?

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Mike Hammer | January 31, 2020 11:12am NYSE:GLD

NYSE:GLD | News, Ratings, and Charts

China is facing quite a predicament now.  Overnight the World Health Organization (WHO) declared that the coronavirus outbreak has reached “global emergency” levels. That makes it official folks; this is an actual big problem now.


The parameters of the situation are being refined every day.  Your friendly Gold Enthusiast, who majored in mathematical modeling of business in his undergrad years, of course, loves numbers and models. According to the best online sources (WHO etc), the important numbers for this situation are incubation period 5 days (how long after you actually “catch” the virus before you show symptoms); a 34% rate of contracting the disease if you are a carrier; and a 2% chance of dying if you contract the disease. The R-zero number – how many people each carrier infects – is currently set at 2.2. Of course, all of these are estimates and are subject to change at any time.

Those are some hard numbers. A lifetime of working with models taught this grizzled head that numbers define or describe situations, but it’s the results of situations are what drive markets.

So what are the likely results, and that will affect the price of gold since that is the focus of The Gold Enthusiast writings? We can look at the changes happening, peer down the chain of related events, and see what outcomes we can discern.

One big change has already happened and is increasing. Travel to and from China is becoming more restricted. Fewer people coming and going will have a large impact on many businesses, such as anything related to tourism, hotel, restaurant, gambling, and of course the travel industry itself.

Inside China, many areas are under local travel restrictions. Few companies are operating “in-person” right now as authorities urge or command travel limits. People are being told not to walk around outside, but to “stay in your home”. That makes it hard to go shopping for necessities like food, so one wonders if the situation will get to where people are starving in place. Or, how food is getting to stores if no one can go outside to go to work to drive the truck that transports the food…

Of course, you can’t have an entire population starve in place. So The Gold Enthusiast is pretty certain somewhere in China a committee or bunch of committees are looking at how to feed the people if this goes on much longer.

Obviously, if people have to stay at home they can’t work in factories. So they can’t manufacture all the things customers buy from China.  And that’s a LOT of things! So China is likely to take a big hit in GDP.

Big hits in GDPs lead to recessions.  That’s simple macroeconomics.

And as you may recall, there’s been a lot of noise the past few months about growing chances of a worldwide recession.  Some countries may already be in recession.

Well, this might push more countries that way. Including China.

Your Gold Enthusiast believes that if China is pushed into a recession, the US might not be far behind.  The US is too tied into China to not at least catch a cold from the effects of a Chinese recession.

So at the least, expect a bump in the economic road ahead.  If we’re lucky we’ll get off with just a medium-sized pothole.

One possible side effect is that China, in an effort to restore world confidence, may have to “unhide” some positives. Like, reveal that they’re holding more gold in reserve than they’ve let on. That would help offset any hits to the yuan or renminbi. And it would let some of us say we were right that they were holding some cards close to their vest, or even up their sleeves.

News is just out that gold imports to China rose from 3.0 tonnes in November to 41.3 tonnes in December.  Perhaps the first crack in the information dam?

This does NOT feel like an extinction-level event to your Gold Enthusiast, who’s seen the threat of AIDS, ebola, swine flu, triple-E, and a few others. The WHO, Doctors Without Borders, and others do a pretty darn good job at these things, and this Gold Enthusiast thinks they caught this one in time. Yes, it’s not pretty; Yes people are dying; Yes we wish it wasn’t happening.  But it just doesn’t look or feel like Black Plague proportions.

Let’s hope I’m right about that.  And don’t be surprised if gold goes a bit higher before this is all under control.

Signed,

The Gold Enthusiast

DISCLAIMER: No securities were mentioned in this article. The author is long the overall gold sector via positions in NUGT, JNUG, a few junior miners, and covered calls on part of the NUGT and JNUG positions. The author may trade options positions in NUGT and/or JNUG in the next 48 hours if market conditions warrant but have no plans to make any other trades in the gold sector in that timeframe.


The SPDR Gold Shares (GLD) was trading at $149.16 per share on Friday morning, up $0.69 (+0.46%). Year-to-date, GLD has gained 20.63%, versus a 22.06% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.


About the Author: Mike Hammer

Mike HammerFor 30-plus years, Mike Hammer has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87, the Crash of ‘08, and the Flash Crash of 2010. Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading Group.


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