The Precious Metals Week in Review – February 28th, 2020

1. Panic ensued this week as global stock markets finally reacted to the widening spread of COVID-19. The Dow Jones Industrial Average saw its worst sell-off, on a point basis, in history on Thursday and the carnage continued into Friday. Both the DJIA and the S&P 500 saw their worst week since the start of the financial crisis in 2008.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by 8,000 claims from the previous week’s revised level to hit 219,000 for the week ending February 22. The previous week’s number was revised higher by 1,000 claims. The four-week moving average rose by 500 claims to reach a new level of 209,750. The previous week’s moving average was revised higher by 250 claims. Unemployment data can be expected to remain volatile as the spread of COVID-19 around the globe may trigger closures at offices and companies in the U.S. similar to what has been seen in China, South Korea, Japan and other affected countries.

3. The COVID-19 virus has now spread to every continent on the planet except for Antarctica. The World Health Organization warned on Friday that the virus could soon reach “most, if not all” countries in the world. The global populace is beginning to overreact, panic buying protective masks and creating a shortage that is placing health care workers at risk of becoming infected themselves and thus furthering the spread of the disease among uninfected patients.

4. Stock analysts and the President alike are now calling for the U.S. Federal Reserve to act to head off further economic damage from the spread of COVID-19 by resuming interest rate cuts. St. Louis Fed President James Bullard countered the calls for further rate cuts, saying he would only consider additional rate cuts if the virus truly became a massive and global pandemic. Bank of America on Friday said that an emergency rate cut of 50 basis points at the March meeting may be on the table. Markets appear to be factoring in at least four rate cuts by the Federal Reserve this year as the world-wide economic slowdown resulting from the spread of the virus and the global efforts to combat the outbreak begin to affect economic growth.

5. In a rare move, Federal Reserve Chairman Jerome Powell released a statement late on Friday saying “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” The statement was released in the midst of a near 1,000-point decline in U.S. stocks on Friday and seemed to only mildly alleviate the collapse in equities. It is unusual for the Fed to directly release statements out of cycle, generally relying on speeches by officials at public events to give an indication to the markets of any impending action. The lack of significant reaction to Powell’s statement may be an indication that even if the Fed does take action it may not have any prolonged positive effect on the markets.

6. Earlier on Friday, former Federal Reserve Governor Kevin Warsh said on CNBC that he expects the Fed to coordinate action at a global level with the world’s central banks. Warsh said “This thing’s moving pretty darn quickly. At the very least, a statement on Sunday night before Asian markets open would buy them a little time and let us all learn a little bit more about where things are.” Warsh acknowledged that the Fed lacks sufficient ammunition to help markets in a crisis situation since their balance sheet and interest rates remain far from “normalized.” Warsh surmised that the Fed will likely need to act in concert with other central banks around the world who similarly lack ammunition to react to the growing crisis, saying “They’ve got a knife. There’s a gunfight. You might as well go find some friends that also have knives and see if you can’t do it together.”

7. The yield on the 10-year Treasury in the U.S. collapsed to record lows as equity markets collapsed on Friday. The benchmark rate dipped to 1.116%, which is the first time it has ever traded below 1.2%. The 2-year rate dipped to 0.874%, marking its lowest level since November of 2016. Yields on Treasuries move inversely to bond prices, which have been increasing as bond purchases have surged amid the outbreak.

8. Crude oil fell to its lowest levels in over a year on Friday as the spread of COVID-19 continued to trigger fears that there will be a huge slump in demand for oil. Brent crude, on its most actively traded contract, dipped to just over $50 a barrel while U.S. West Texas Intermediate (WTI) fell to the mid $40 per barrel range. The drop in U.S. crude was the largest weekly decline since early 2011. OPEC is due to meet in Vienna, Austria on March 5th to revisit the agreement between it and other non-member countries to reduce output of oil to help support prices but currently is not widely expected to call for additional production cuts.

9. The euro dipped against the U.S. dollar as trading opened for the week but soon began steadily trending higher late Monday afternoon. The euro accelerated its upward moves late Wednesday night and was carried to its highs against the U.S. dollar by Friday morning. A slight correction on Friday just prior to the market close was short-lived and the euro will still close out the week to the upside against the U.S. dollar. The Japanese yen bounced higher against the U.S. dollar at the start of trading and then it too began a steady climb higher that lasted through Friday. The yen also saw a slight correction just prior to the market close but will still close out the week near its highs against the U.S. dollar.

The spread of the COVID-19 virus has seized control of mainstream news outlets as it continues making its way out into the world. Every analyst on TV is discussing the effects that the virus will likely have on the globally connected economy. Supply chain disruptions are likely to occur throughout the world as more countries take steps to contain and prevent the spread of the virus within their borders.

China is only now slowly returning to work but is nowhere near full capacity. There also appears to be a possibility now that the virus can re-infect at least some individuals who have already been treated and supposedly cleared so even those who are returning to work in China may be forced back into quarantine situations should that trend appear to escalate.

The virus has now turned up on every continent on the planet with the sole exception of Antarctica.

Goldman Sachs revised its earnings estimate for the year for U.S. companies to 0% growth in 2020. Goldman’s head of U.S. equity strategies, David Kostin, said: “Our reduced profit forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, disruption to the supply chain for many US firms, a slowdown in US economic activity, and elevated business uncertainty.” Bank of America appeared to concur with Goldman Sachs, revising its projections for global GDP growth in 2020 to just 2.8%. BofA listed COVID-19 as the chief factor weighing on the global economy but noted as well that political uncertainty in the U.S. as Bernie Sanders takes the lead among the Democratic candidate field and the effects of the ongoing trade war between the U.S. and China are considerable factors for economic friction as well. If BofA’s projections prove accurate, it will be the first economic growth reading under 3% since the onset of the “Great Recession” in 2008.

The U.S. Federal Reserve is now widely expected to cut interest rates at its next meeting in March, with market expectations near a staggering 95% certainty level that there will be a rate cut of 50 basis points. Mohamed El-Erian, the chief economic advisor at Allianz, said on Thursday that even if the Fed cuts rates that it will not stop the financial markets from “freezing up.” El-Erian said “All that [a rate cut] is going to do is help balance sheets and give some minor relief to markets. It’s not going to encourage people in China to go back to work.”

All markets sold off as the month came to a close amid the spreading virus, even those that are traditionally called “flight to safety” or “risk-off” trades such as precious metals. The fact that it is the end of the month and many factors, such as options expiry and portfolio rebalancing, are at play in every market makes analyzing the true nature of the across-the-board plunge difficult. Sunday night’s market open in Asia will be important to watch for the true direction that markets may be taking in response to the spread of the virus.

On Saturday, South Carolinians in the U.S. head to the polls to vote in primary elections and if Bernie Sanders continues to gain a lead over the other candidates then U.S. equity markets could see further sell-offs on Monday. Bernie Sanders’ policies and the statements that he has made during his two election runs are clearly anti-Wall Street and anti-wealth. If Sanders becomes the Democratic candidate for the presidency then markets that are already jittery from the spread of COVID-19 could become even more volatile as analysts try to determine the probability that Sanders could emerge victorious against Trump and embark on the what some consider to be the greatest anti-wealth socialist programs seen since the dawn of Communism.

It will be vitally important to pay attention to global news outlets over the weekend for updates on the spread of the COVID-19 virus. If numbers of infections continue to spike in countries outside of China and equity markets appear that they may be poised to continue their selloffs on Monday, then a massive flight into safer assets could trigger a renewed surge in the prices of those assets. Gold, silver and other precious metals have historically been viewed as “safe havens” in times of economic and geopolitical turmoil and the fact that they sold off along with everything else on Friday could be a temporary phenomenon that may reverse just as dramatically if the global economic picture continues to darken.

If equity markets continue their selloff then demand for precious metals may rapidly outstrip supply as investors, already late to the diversification party, scramble to find safer havens in which to place their hard-earned capital.

Remember that precious metals should always be viewed as a long-term investment and that the key to profitability through the ownership of physical precious metals is to actually acquire and own the physical products and to hold them for the long term. Always remember that you should never overextend your ability to maintain ownership of your precious metals over the long term.

Trading Department
Precious Metals International, Ltd.

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