Two Schools of Thought: COVID 19’s Impact on Gold

- April 13, 2020 -

The current global Coronavirus pandemic which is only now showing some evidence of winding down has already made an enormous negative impact on the U.S. and global economy. So-called experts are predicting future economic impacts ranging from a short-term recession to a lengthy world-wide depression. Most financial pundits agree that both the equities and bond markets have and will continue to suffer negative long-term effects from this horrific event.

But what about gold? A global pandemic is new territory for the financial markets. We’ve seen how markets historically react to war, terrorism, recessions and bad economic news but a rampant life altering disease is both new and confusing in every aspect. As a result, there are two schools of thought on gold’s value in a COVID-19 world. Not surprisingly one group believes gold will regress in value while the other forecast is for a bull market in the yellow metal. I’ll present some arguments offered by both bulls and bears and let you decide.

The main argument for lower gold prices is that we are inevitably heading towards a lengthy period of deflation. Demand for gold may decline if investors fear deflation and move into nominal fixed payments, like U.S. Treasuries, considered by many a safe-haven investment. With non-existent interest rates and an unstable stock market, the paper asset crowd traditionally flees to cash, in this case U.S. Treasuries. There are those who believe that the U.S. Dollar has already bottomed versus other major currencies and that the Dollar still represents the strongest currency on earth. Considering the historical inverse relationship between gold and the Dollar, those betting on the future of the US currency feel gold will trend lower. During the financial crises of 1987 and 2008 gold prices initially rose but then drifted lower when a return to some semblance of normalcy began. Mainstream financial advisors believe that scenario will again play out over the next several months, time will tell.

However, gold ‘bugs’ have numerous reasons to think gold will minimally maintain its current levels and quite possibly test new highs. Many believe the Federal Reserve’s and other countries massive stimulus programs (translated: creating money from nothing) will ultimately prove inflationary. Gold usually reacts positively during inflationary periods. Volatile equities markets and non-existent interest rates will make even traditional investors consider gold for their portfolios. If a systematic banking crisis occurs due to the worldwide pandemic, gold is likely to retain its value or appreciate as it’s not part of the traditional fiat currency system. As I write this physical gold and other precious metals are in short supply due to mine and refinery closures. Shortages of tangible metal usually results in higher premiums for the consumer, effectively raising the price of gold ownership by 5% to 10% over the typical nominal premiums.

As mentioned, a global pandemic and its long-term effects are new territory for the world’s financial markets and the global economy. Considering all the current and potential future economic issues, both domestic and world-wide, we believe that precious metals can be a prominent part of a well-diversified portfolio.