Investors Are Piling Into Safe Havens on Coronavirus Fears

U.S. factories rebounded strongly in February, suggesting the manufacturing recession may finally be behind us after the industry contracted for six straight months. The Philadelphia Fed Manufacturing Index jumped an incredible 20 points to 36.7, its highest reading since May 2017, while New York’s Empire State Manufacturing Survey rose more than eight points to 12.9, a nine-month high.

We won’t get the Institute for Supply Management’s (ISM) U.S. manufacturing purchasing manager’s index (PMI) until the start of March, but I see the positive regional surveys as a sign that the PMI could beat expectations.

The news also bodes well for President Donald Trump’s reelection bid. The weak U.S. PMI, under pressure from the U.S.-China trade war, has been the one significant drawback in an otherwise solid economy and stock market.

But now we may find ourselves in a “out of the frying pan and into the fire” scenario: The “Phase One” trade deal between China and the U.S. was signed last month just as we began to see the first reports on the novel coronavirus, now known as COVID-19. As of Friday evening, the virus had spread to more than 75,500 within China, and as many as 1,200 outside the country. And although the recovery rate looks promising—more than 18,000 people have survived infection in China, compared to 2,200 deaths—there’s concern that people may be underestimating the risk.

A $1.1 Trillion Hit to the World Economy?

In a note to clients this week, analysts at Oxford Economics said they believe that the threat COVID-19 poses to the world economy is currently underappreciated. In a worst-case scenario in which the infection escalates into a full-blown pandemic, as much as $1.1 trillion could be wiped from the global economy in the first half of the year alone.

Again, this is a worst-case scenario, but consider the economic effects if most major cities around the world were placed on lockdown as Wuhan is right now. Lower discretionary spending, lower demand, lower productivity and lower investment would all be likely consequences. 

The U.S. and eurozone would enter, as Oxford Economics lead economist Adam Slater puts it, “technical recessions.”

I’m not as much of an alarmist as Oxford is, but as I told Daniela Cambone this week, COVID-19 is already bigger than SARS and, in many ways, more closely resembles 9/11 because travel has been suspended. Wuhan, China, where the virus originated, is home to more than 11 million people. That’s four Chicagos. Shipping lines and ports have been impacted. Alphaliner, a shipping consultancy, estimates that 46 percent of scheduled departures from Asia to North Europe have been cancelled in the past four weeks.

Investors Are Piling Into Safe Havens on Coronavirus Fears

The Chinese government is taking action, though, with the Ministry of Commerce enhancing support for trade financing, according to China Daily. The article reads that China will “give full play to the role of export credit insurance to help companies cope with the impact of the novel coronavirus epidemic.”

Seeking Safety: Gold Miners at 52-Week Highs

It’s for this reason we’re seeing investors rotate into perceived safe havens and defensive stocks, starting with utilities. Energy producers were up 8.5 percent year-to-date through February 20, nearly double the performance of the S&P 500 Index over the same period.

Gold, which I believe to be the ultimate safe haven, rose for the ninth straight day on Friday, crossing above $1,650 an ounce for the first time in seven years. This comes in defiance of a stronger U.S. dollar, which has been edging closer to the psychologically important 100 mark relative to other world currencies. It’s rare to see both assets go up at the same time—the four-year chart below makes that clear—but COVID-19 has spurred the flight to safety and quality, of which gold and the greenback can be considered. 

Gold mining stocks have also broken out, with several hitting new 52-week highs this week, including Newmont Mining, Barrick Gold, Yamana Gold and Kinross Gold. Gold royalty and streaming companies, including Franco-Nevada and Wheaton Precious Metals, also hit fresh 52-week highs. Junior miners weren’t left out of the rally, either. The MVIS Global Junior Gold Miners Index climbed to a 52-week high, up more than 58 percent from its recent low in May.

For more on gold mining stocks, watch my interview with SmallCapPower’s Mark Bunting by clicking here!

 

Gold Market

This week spot gold closed at $1,643.07, up $59.01 per ounce, or up 3.73 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 8.35 percent. The S&P/TSX Venture Index came in up 1.94 percent. The U.S. Trade-Weighted Dollar rose 0.20 percent.

Date Event Survey Actual Prior
Feb-18 Germany ZEW Survey Expectations 21.5 8.7 26.7
Feb-18 Germany ZEW Survey Curent Situation -10 -15.7 -9.5
Feb-19 Housing Starts 1428k 1567k 1626k
Feb-19 PPI Final Demand YoY 1.60% 2.10% 1.30%
Feb-20 Initial Jobless Claims 210k 210k 206k
Feb-20 Eurozone CPI Core YoY 1.10% 1.10% 1.10%
Feb-25 Hong Kong Exports YoY -4.40% 3.30%
Feb-25 Conf. Board Consumer Confidence 132 131.6
Feb-26 New Home Sales 713k 694k
Feb-27 GDP Annualized QoQ 2.10% 2.10%
Feb-27 Durable Goods Orders -1.50% 2.40%
Feb-27 Initial Jobless Claims 211k 210k
Feb-28 Germany CPI YoY 1.70% 1.70%

Strengths

  • The best performing metal this week was palladium, up 11.52 percent as precious metals had a stellar week. Gold hit a seven-year high this week, holding above $1,600 an ounce to the highest since February 2013 largely on coronavirus fears. The metal also rose on speculation that the Federal Reserve will ease monetary policy before year-end. Gold remained strong even as the U.S. dollar also held strong, as the two historically have traded inversely. Palladium futures contracts rose as much as 8 percent on Tuesday as investors flocked to safe haven assets. Edward Meir, an analyst at ED&F Man Capital Markets, said in an interview with Bloomberg that palladium is “like the Tesla stock of commodities.” The metal hit an all-time high of $2,504.50 an ounce on Tuesday and then $2,835 on Wednesday.

  • Even though gold jewelry buying is down in India, the world’s second largest consumer, gold exchange-traded funds (ETFs) are gaining popularity, reports Bloomberg. The Association of Mutual Funds in India writes that Indians invested the most in gold ETFs in more than seven years in the month of January. Total assets managed by the 11 funds available rose to $870 million, which is 31 percent higher than a year earlier. However, that figure is still half of the all-time high reached in January 2013. Demand for physical gold in the country has fallen in recent months due to higher prices.
  • Several miners announced strong earnings this week. Kirkland Lake Gold reported record production of 279,742 ounces and record adjusted net earnings of $185.3 million in the fourth quarter. Kirkland CEO said the company plans on doubling the quarterly dividend in the second quarter of 2020, reports Kitco News. Newmont Corp. reported that its fourth quarter adjusted net profit nearly doubled from the same time a year ago to $410 million. This increase was largely due to the acquired Goldcorp assets and higher gold prices. First Majestic Silver reported that it produced a record 25.6 million silver ounces last year and hit record revenues of $363.9 million, up 21 percent from 2018. Lastly, Sibanye-Stillwater reported an 80 percent increase in full year earnings. The miner said strikes disrupted operations in the first half of 2019, but rebounded in the second half of the year due to higher metal prices.

Weaknesses

  • The worst performing metal this week was platinum, still up 1.11 percent. Anglo American, the parent company of De Beers, published year-end results and showed that moving to online sales cut the diamond maker’s revenue by 45 percent.
  • Bloomberg reports that a Berlin court convicted three men of stealing a 100-kilogram solid gold coin worth $4 million in 2017. The coin is called the “Big Maple Leaf” and was stolen from the Berlin Bode Museum. It was issued by the Royal Canadian Mint in 2007 and was the biggest gold coin at the time – as big as a car tire. Police have not found the coin and assume it was cut into pieces for selling in smaller parts.
  • OceanaGold Corp reported a smaller fourth quarter net profit than the same time a year ago, as revenue was hurt by the suspension of operations at its Didipio mine in the Philippines, writes Kitco News. Operations were halted due to restrictions on material movements imposed by local government. Oceana is working with the government to renew an agreement. The company did report strong gold production of 108,151 ounces in the fourth quarter, an increase of 20 percent from the prior quarter.

Opportunities

  • Egypt is hoping for a gold rush as it eases restrictions for mining companies. Bloomberg reports that mining companies have long complained that the country, whose mineral wealth is largely underexplored, has a system of royalties and profit-sharing agreements that make it hard to operate. Last month Egypt dropped the requirement that miners form joint ventures with the government and limited levies. Aton Resources Inc. obtained mining rights in the country last week, which is the first since Centamin Plc achieved rights more than 10 years ago.
  • Citigroup continues to update its bullish forecast for gold, reports CNBC. The firm said in a note on Wednesday that it believes market jitters will prompt invests to flee to safe haven assets, which could push gold prices to $1,700 an ounce in the next six to 12 months and $2,000 in the next 12 to 24 months. Ed Morse, lead analyst of the report, says “gold should perform as a convex macro asset market hedge, resilient during ongoing risk market rallies but a better hedge during sell-offs and volatility spikes.”
  • The trend for more sustainable jewelry continues to grow. A new brand called Do Amore creates custom engagement rings that are sustainably and ethically sourced, both the diamonds and metals, and the proceeds from purchases contribute to providing water to an underserved area. Bloomberg reports that more brands are highlighting the use of recycled gold and platinum and minimal carbon emissions to appeal to the millennial and Gen Z age groups. Do Amore uses recycled metals and lets customers see which countries they source materials from.

Threats

  • Nedbank CIB mining analyst Arnold Van Graan told S&P Global Platts in an interview that the palladium market isn’t necessarily a bubble, but that the price is overdone and there could be a correction. Van Graan said “I think we are going to correct to what is a sustainable price level.”
  • The coronavirus continues to remain a threat to global growth and many industries. Demand for gold jewelry has already been hit in China, where buyers are staying home and avoiding public places. IMF managing director Kristalina Georgieva said on Thursday that it is still too early to assess the impact the virus will have.
  • Economists say that the Federal Reserve needs to outline its plan for fighting the next downturn. Stephen Cecchetti, Michael Feroli, Anil Kashyap, Catherine Mann and Kermit Schoenholtz wrote in a paper for a University of Chicago Booth School of Business monetary policy forum that “going forward, low global bond yields likely will hamper any attempt to lower safe interest rates using either old or new monetary policy tools.” Bloomberg reports that the benchmark policy rate is now between 1.5 percent and 1.75 percent and inflation rose just 1.6 percent in 2019. The economists added, “If long-term nominal yields are already at very low levels when activity begins to slow, then the scope for using policies that aim at interest rates will naturally be limited.”

 

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 1.38 percent. The S&P 500 Stock Index fell 1.31 percent, while the Nasdaq Composite fell 1.59 percent. The Russell 2000 small capitalization index lost 0.52 percent this week.
  • The Hang Seng Composite lost 1.36 percent this week; while Taiwan was down 1.09 percent and the KOSPI fell 3.60 percent.
  • The 10-year Treasury bond yield fell 12 basis points to 1.47 percent.

 

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February 21, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Remainder of the article can be read at http://www.usfunds.com/investor-library/investor-alert/investors-are-piling-into-safe-havens-on-coronavirus-fears/

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