While the threat of a global pandemic from the virus remains in play on the back burner, the front burner appears to have been occupied by the realization that the Chinese economy is likely to be thrust into a severe contraction with that development likely to spread outside its borders to the world economy. In fact, the US Federal Reserve Chairman yesterday indicated as much by suggesting a Chinese slowdown would be "felt broadly".
Even the Japanese Prime Minister indicated they are watching the impact on their tourism, while the head of the Bank of Japan has suggested the virus fallout will likely be bigger than the SARS outbreak. Therefore safe-haven interest in gold should result in April gold returning to and above $1600 especially in the event that equities fully lose their capacity to discount the spread of the virus outside China.
Adding further into the bull case for gold is the fact that the US Fed remains "troubled" with the current inflation rate. In other words, the Fed might be incentivized to take action preemptively against any headwinds from the virus, simply to protect against even more trouble from low inflation.
While a significant jump in Hong Kong December gold exports to mainland China in December could be the result of a variety of political issues, it is difficult not to see that development as supportive of gold. In fact, December Hong Kong gold exports to China jumped to 46.6 tons versus only 5.5 tons in November. Keep in mind, China several years ago added Beijing and Shanghai as import cities perhaps seeing the vulnerability to a single import outlet in troubled Hong Kong. We also think China decided to diversify its gold entry points in an effort to mask its central bank gold buying patterns.
Holding back the gold market this morning is a private service report this morning indicating Indian gold demand fell by 35% in the 2nd half on a year-over-year basis with that report indicating a precipitous decline in the 3rd quarter alone. While we don't believe analyst projects the infection rate in China might be 200,000, the amount of virus infections from the coronavirus has already exceeded that of the SARS outbreak.
Furthermore, the virus could not have arrived at a more dangerous period of the year as the massive 300 million-migration normally seen during the Chinese New Year produced a perfect environment to spread the virus to every corner of the country and perhaps throughout Southeast Asia. In our opinion, the virus will expand, seriously impede Chinese growth and might only be halted quickly by a vaccine breakthrough.
In conclusion, gold will probably see safe-haven interest hold the edge over the nagging threats of deflation and slowing physical demand. Traders holding long gold positions should stay long, but consider protecting against wild volatility with the purchase of long puts.
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Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Financial Services LLC, unless otherwise expressly noted.
