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Coronavirus Crisis Shakes Up
Global Financial Markets!

A black swan event is one that is an unforeseeable surprise of large magnitude and consequences. Already, the coronavirus disease outbreak qualifies as a black swan event, asserts Patrick Heller, editor, Liberty’s Outlook, a monthly newsletter published by Liberty Coin Service.

The term “black swan” traces its lineage all the way back to 2nd Roman poet Juvenal. It became popular in financial circles in 2001 when former college professor, option trader, and risk analyst Nassim Nicholas Taleb described it in his book Fooled By Randomness and went into further detail six years later in his book The Black Swan.

A black swan event is one that is an unforeseeable surprise of large magnitude and consequences.

Already, the coronavirus disease (COVID-19) outbreak that began spreading in Wuhan, China over two months ago qualifies as a black swan event.

In a world that is becoming more interconnected every year, there really aren’t any more local disease outbreaks. The coronavirus is affecting 33 countries and territories around the world. The officially reported death toll as of February 24rd is already at 2,619, with 79,561 people infected. The accurate number is almost certainly much higher as not all sufferers are going to hospitals where they would be added to the statistics. Follow the daily count here.

Among the impact on the wider world already, we have:

• Two major women’s gold tournaments, in Thailand and Singapore, scheduled for later this month were cancelled

• The world’s largest electronics trade show that was supposed to occur in Barcelona, Spain was cancelled

• Entire cruise ships have been quarantined or barred from docking in ports; passengers and crews are running out of the medications that they had brought for a relatively short trip; cruise ship bookings are suffering

• There have been significant reductions in international air travel, especially to and from China

• The Shanghai, China Formula 1 Grand Prix Race scheduled for April 19 has been postponed, with no new date yet set

• A large bank in Singapore, DBS, sent 300 employees home when one employee was found to be infected with coronavirus; those that can will be expected to work from home

• US and Singapore postal services are having difficulty sending mail and packages to China as there are either no transportation services or those still operating will not accept items going to China

• The widespread closing of factories in China had led to parts shortages at factories in other countries that resulted closures around the world

• Many multinational businesses with operations in China have temporality closed, meaning the loss of sales and profits

• Many nations are barring admission of non-citizens if they have recently traveled to China Unfortunately, the coronavirus impact around the world, even in the best scenario, will get worse before it gets better.

Financial and Investment Impact

Drilling down to the impact on financial markets and investments, here are some of the developing stories:

1) The US Dollar. The US dollar, which had been weakening significantly late last year after the Federal Reserve Bank of New York in mid-September began injecting trillions of dollars (the cumulative total now exceeds $6.6 trillion over the past 22 weeks, which the regular media is mostly not bothering to report) of liquidity into the short-term market of loans to banks, has turned around. The US dollar thus far this year has been unusually strong against other currencies, particularly those of nations that are not them- selves economic powerhouses.

China, Japan, and Switzerland have been able to hold down the relative volatility of their currencies as people scrambled to get into US dollars as a safe haven asset. One result of the flight to the dollar is a drop in the US Treasury debt interest rate thus far in 2020.

2) The Eurozone and the United Kingdom. Recently, the United Kingdom formally exited from the European Union, with less progress on trade and other agreements than all parties had hoped to see in advance of the event. Even though the euro and the British pounds are major currencies, they have suffered more against the US dollar than might have happened if the governments involved had been able to take more time for negotiations instead of having to deal with the coronavirus crisis.

3) Chinese government ramping up inflation of the money supply. With sudden economic troubles, the Chinese government has injected billions of dollars of funds into banks and elsewhere in the economy to try to prevent any critical breakdowns.

Still, the Shanghai Composite Index has suffered worse than any of the other major stock indices that we track. Consumer prices are up substantially since the beginning of the year, with food costs reported to be at least 17% higher.

4) Lower China gold demand. China is the world’s largest gold consuming nation. The purchasing of gold and silver for gift giving purposes in celebrating the Chinese Lunar New Year is one of the peak times of demand. The coronavirus really began to spread in the week before the beginning of the multi-day Lunar New Year holiday, where the government quarantined millions of residents, closed down transportation services, and advised people to avoid gathering to celebrate the holidays.

As a consequence, gold demand almost immediately began to decline 3-4 weeks ago. As stores, schools, factories, and transportation services continue to be closed, this continues to disrupt sales of precious metals.

Plus, with rising prices and interruption of cash flow, many Chinese citizens have to pay more attention to paying for food and other life necessities first. The overall impact on gold demand is not clear right now, but it is certainly negative.

5) Lower China gold supply. China is also the world’s largest supplier of newly mined gold. With extensive quarantine operations nationwide, it is almost certain that gold mine output in that country has declined, though it may be some time to figure out to what extent.

6) Federal Reserve bank liquidity injections are propping up US stock prices. Normally, when the disruption wrought be the coronavirus crisis results in falling sales and profits for businesses, you would expect stock prices to pause or tumble. That actually happened on a few days recently. However, all of the funds that the Fed has been using to inflate the money supply, with its balance sheet up by more than a net of $400 billion since last September, are not reaching consumers. Instead they are pretty much going into paper investments, especially stocks. When demand for shares increases, prices go up.

If you check, you will see that the US stock market has had significant gains ever since the Fed started injecting liquidity into the banks in mid-September 2019. That is not a coincidence.

As I have explained before, governments, central banks, and sovereign investment funds now own more than 50% of the value of all publicly held stocks worldwide. That gives them an enormous incentive to prop up stock markets that otherwise would decline.

This propping up of the stock market cannot continue indefinitely. When sales and profits are declining, just how will US stock prices be supported? Note: the Russell 2000 Index, which reflects only share prices of smaller publicly held companies, was actually just under breakeven thus far in 2020. Is that a harbinger of what could happen to the Dow, Nasdaq, and Standard & Poor’s 500?

7) When factories close, demand for raw material inputs decrease. With the closing of so many factories in China and elsewhere, there has either been an outright decline in demand for raw materials, or investors are more likely to anticipate such a fall in demand. As a result, expect prices of many industrial metals and sources of energy to drop.

Platinum is almost exclusively an industrial metal as well. However, its price has been sustained with the extreme shortages of physical palladium, an industrial metal for which platinum may substitute. Silver has significant industrial demand, so there is almost certainly some pressure for its price to decline along with other industrial metals, but not to the same extent. That leaves gold, which is over-whelmingly a financial metal. Its price is up year-to-date. Many of these trends were already developing before the coronavirus appeared. The appearance of the disease may end up either accelerating or enlarging some of the problems that would have occurred anyway.

An Indication Of Precious
Metals Price Manipulation

When financial markets are uncertain and volatile, investors tend to seek safe places to place their wealth. Many increase their holdings of cash, especially of US dollars. There is also a rise in demand for bullion-priced physical gold and silver.

In order to help support stock prices, therefore, governments, central banks, and sovereign investment funds have an incentive to dissuade people from abandoning the stock markets. Artificially supporting stock prices is one way to achieve this goal. Another tactic would be to make the alternatives appear less enticing. If investors see stock prices falling and also see gold and silver prices going down, they are discouraged from cashing out their stock holdings.

Markets that are artificially held in check cannot be manipulated forever. Eventually the rigging tactics fail. When that happens, you normally see prices move much more quickly than typical.

The one thing to keep in mind, though, is that markets can continue to be manipulated far longer than almost anyone might expect to be possible.

Now What?

As you can see from the development of the coronavirus crisis, it is impossible to create a foolproof financial plan for the future. While stocks as an investment have a wonderful long-term track record of appreciation, it is prudent to diversity an investment portfolio. Many people own bonds for this purpose. But stocks, bonds, and currencies are all intangible claims of value that tend to rise and fall in tandem.

What would better serve as what I call “wealth insurance” is to have a small portion of one’s investment portfolio or net worth in tangible assets. Real estate is a popular form as many people own their own homes. However, real estate can be volatile in price and highly illiquid – just review what happened during the Great Recession earlier this century or what happened to British real estate right after the vote to leave the European Union.

The most popular safe haven tangible assets worldwide and over history have been physical gold and silver. Here are suggestions on how to establish your own “wealth insurance.”

How much of your total net worth should be in precious metals and rare coins:

Conservative: 10-15%; Moderate: 20%; Aggressive: 25-33%.

How much to allocate for each category of precious metals and rare coins:

Gold: Conservative: 40%; Moderate: 35%; Aggressive: 25%.

Silver: Conservative: 60%; Moderate: 55%; Aggressive: 50%

Rare Coins: Conservative: 0%; Moderate: 10%; Aggressive: 25%

My crystal ball is too cloudy to show me where precious metals prices are headed in the next few months. However, once they start rising in earnest, supplies are bound to dry up quickly. It would be safer to establish your holdings sooner rather than later, when you know supplies are adequate and premiums are reasonable.

Editor’s Note: Patrick Heller is editor of Liberty’s Outlook, published by Liberty Coin Service, 400 Frandor Ave., Lansing, MI. 48912. Liberty Coin Service has been a dealer in rare coins and precious metals since 1971. www.LibertyCoinService.com.

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