Coronavirus

The butterfly effect describes the situation when the flapping of the wings of a butterfly causes (or influences at least) a tornado several weeks later in a completely different location. But after 2020, the better name could be perhaps “the bat effect” – somebody ate a bat in Wuhan and several weeks later the whole world started to suffer from the coronavirus. But don’t worry, the coronavirus won’t last long – it’s made in China!

OK, jokes aside. The coronavirus, or a 2019 novel coronavirus (2019-nCoV), is a new virus that causes respiratory illness, called COVID-19, in people and can spread from person-to-person. Although it was initially underestimated and considered to be just like flu by many people, the truth is that COVID-19, caused by the coronavirus, is more contagious (one person infects on average 2-2.5 person versus 1.3), it has longer incubation period (so people can infect others because they even do not know that they are infected themselves as they have no symptoms), higher hospitalization rate (19 versus 2 percent) and higher case fatality rate, as the chart below shows.

So far (as of June 23, 2020), the coronavirus killed almost half a million of people all over the world, including more than 120,000 in the United States itself (see the chart below). So, it’s a really deadly germ.

Another great problem with the new coronavirus is, ukhm, that it is new, so it is still poorly understood. And there is still (as of June 23, 2020) no vaccine to protect against the virus.

Coronavirus and Gold

As the chart below shows, the coronavirus was bullish for the gold prices. The yellow metal gained about 16 percent this year, most of these gains due to the global epidemic and the resulting Great Lockdown.

Although the price of gold plunged below $1,500, when the most acute part of the global stock market crash happened and investors were selling everything to raise cash, the drop was relatively mild compared to the stock market crash or the collapse in oil prices. The rapid spread of the coronavirus, radically accommodative response of the Fed (including slashing interest rates to almost zero), the implementation of economic lockdowns, and deep economic crisis pushed gold prices quickly to above $1,700. Actually, gold performed much better than many other assets, confirming its role as a safe-haven asset and portfolio diversifier.

What is important, is that the containment of the pandemic (or at least of its first wave) and the end of the economic lockdowns in the Western countries did not push the gold prices lower. Actually, the legacy of the coronavirus crisis will be subdued GDP growth, ultra dovish central banks, very expansionary monetary and fiscal policies, and negative real interest rates. These factors are likely to support the gold prices, although there will be both ups and down on the way.