A volatile global economic climate could undermine the years-long stock market rally. Rising uncertainty could lead to a gold rally.
After a stunning rally to seven-year highs, gold’s price has undergone a minor correction. A flurry of green days since Feb. 5 saw the yellow metal rose to almost $1,690 per ounce. This was the highest price since January 2013.
Surging gold prices also coincided with a U.S. stock market crash as investors finally opened their eyes to a potential coronavirus pandemic.
It seems like the stock market crash even kept President Donald Trump awake as he tweeted about it from India.
Despite President Trump’s opinion, there are plenty of headwinds that can crash the U.S. stock market. A market crash will likely fuel another gold rally.
Chinese data have set off alarm bells in recent weeks. Despite the Chinese government’s best efforts, the world’s second-largest economy has come to a dead stop. The ‘world’s factory’ is not operating anymore, and businesses around the globe have started feeling the effects of it.
This is a tailwind for gold but is bad for stocks as supply chains are going to take a massive hit.
As the world enters a supply shock, 94% of the Fortune 1,000 companies are already witnessing disruptions in their supply chains. The situation will get a lot worse if the measures to contain coronavirus fail.
As per Nikkei, over 85% of Chinese small-and-medium-sized firms expect to run out of cash within three months. Worse, a third of these companies expect to run out of money within a month.
These businesses employ 80% of China’s workforce. So their bankruptcy can cause the entire Chinese financial system to implode. The repercussions of that will be felt across the globe and gold is the safest available option to hedge against it.
While coronavirus wreaks havoc in Europe, North America and Asia, another plague has been devastating Africa. The locust plague that recently hit Africa has been the worst in 70 years.
The true extent of coronavirus’ impact on Africa is still unknown, but the locust plague is devastating the continent. Estimates indicate that the locusts are devouring the same amount of food daily as 35,000 people. This is happening in a continent that suffers from malnutrition and starvation problems already.
While the world has its eyes set on coronavirus, this plague could sneak through and cause more devastation. Global stock markets are already under stress because of coronavirus and the locust plague could be the straw that breaks the camel’s back.
As the world battles two devastating plagues, investors have all the reason to abandon the sinking ship that is the U.S. stock market and turn to gold.
The minor correction from the highs may not last soon. Analysts at Citibank believe that gold price can rally to $2,000 per ounce within two years:
While negative real yields are also supportive for equity markets, gold can further outperform on a risk market unwind should coronavirus risks impact supply chains and thus U.S. earnings momentum. We still expect fresh nominal highs of US$2,000 per ounce to be breached in the next 12 to 24 months.
The economic headwinds will force global central banks to slash interest rates; monetary easing will cause the gold price to rally.
Lower interest rates will likely not help the stock markets this time. If companies are unable to operate due to coronavirus, printing money and lowering interest rates will have little effect.
Amid mounting global uncertainties, more investors appear to be turning to gold at the expense of stocks.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:36 PM