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The impact of the COVID-19 coronavirus has been unrelenting, and global markets are feeling the shockwave. While the stock market sinks, precious metals have risen amid the chaos. On Monday, February 24, April gold futures reached an all-time contract high overnight and shot up by an additional $30 per bullion ounce to over $1,678.80.
Gold hasn’t breached the elusive $1,700 threshold since 2012 in the aftermath of the global financial crisis. However, all signs currently point toward sustained growth in gold and silver prices in light of COVID-19’s spread into Europe and outside of the Asia Pacific region.
COVID-19, China, and the Global Supply Chain
The epicenter of the virus is in Wuhan, a city of 11 million, in the central Chinese province of Hubei. In the People’s Republic of China, there are over 75,000 affected and over 2,300 pronounced dead due to the virus, with most of the cases originating in Hubei province.
The effect of the coronavirus on the global economy will dwarf that of SARS, should the virus reach pandemic levels. In 2003, at the height of the SARS outbreak, China wasn’t nearly as integrated into the global supply chain as it is today. In 2020, virtually every Fortune 500 company relies on Chinese manufacturing to help produce their goods, Chinese tourists to drive consumer spending or Chinese markets to sell their product.
In other words, the more that China is impacted by the spread of the coronavirus, the more financial markets will suffer. Particularly, the stock market will see a sustained decline for as long as the virus spreads. The S&P 500 index plunged 3% on Monday while the Dow Jones sank 1,000 points. The Euro and the US dollar has also fallen likely due to the downward price movement in US and European equities.
The CBOE Volatility Index currently sits at a 6-month high, which indicates a high level of alarm among investors and market watchers. Due to China’s deep integration in the global supply chain, China’s quarantine operations and closure of major factories and production centers have made stock and bond market stability all but impossible.
The Systemic Risk of the Coronavirus
The virus is actively spreading throughout South Korea as well as Italy. Both countries have initiated unprecedented quarantine operations in an effort to prevent the spread of the disease.
Meanwhile, trader and investor fears have brought traditional financial markets to a standstill or worse. An increasing number of institutional investors are seeking out safe-haven assets to protect their wealth amid stock sell-offs and fear of a weakened US dollar.
Even commodity prices have squeezed under the grip of the coronavirus. Crude oil has dived down to $51 a barrel and the rest of the raw commodity market is feeling downward selling pressure. Beijing imports more oil than any other country in the world, which gives it significant sway over the price of crude. As more factories close, the price of oil will fall in step.
Commodity companies haven’t evaded the clutch of coronavirus fears. HBP Group, the largest mining firm in the world, is down 5.4% today and British Petroleum sank 3.5%. As China and other foreign industrial producers are grinding to a halt, demand for oil and other commodities will be severely depressed. The result, over time, is a drop in commodity prices as well as stocks in oil, gas, mining, and natural resources companies.
As China encourages more of its workforce to return to their jobs, international market watchers remain skeptical. If the virus spreads to foreign states and reaches pandemic levels, all industrial and commercial sectors will suffer sharp declines in output. It is this uncertainty that presents a considerable systemic risk for investors in the stock, bond, and forex markets.
When Will Gold’s Bull Run End?
There’s no telling how high the price of gold and other precious metals might rise in the year ahead. However, the systemic threat presented by the coronavirus has made a bull run for gold all but inevitable. Gold investors can expect near term upside, with technical analysts identifying a 3-month uptrend in gold prices. The next resistance point for gold futures is at the $1,700 barrier, but this shouldn’t pose a threat to gold’s growth trajectory if the coronavirus continues its spread.
While other commodities plummet, gold should continue to soar in the near and medium-terms. Institutional and individual investors are seeking safety in their portfolio, and they are turning to gold and silver to hedge against market volatility. For as long as the coronavirus presents a threat, demand for gold and other precious metals will continue to rise and will almost certainly be the best performer out of any investment vehicle or asset class over that span.
Protect Your Wealth With Alternative Assets
The COVID-19 coronavirus is on the cusp of provoking a humanitarian and economic disaster. If the international community cannot contain the spread of the virus, we may see an economic collapse unlike anything we’ve seen since the late-2000s financial crisis.
Now is the time to invest in gold and precious metals-backed assets. Taking a position in gold provides a hedge against the systemic risk of a coronavirus pandemic. While traditional markets plummet and the US dollar dives to multi-year lows, it’s critical that investors take the safe route and allocate a share of their portfolio to gold, silver, and precious metals-backed assets that hold their value during times of crisis.