The Precious Metals Week in Review – March 13th, 2020

1. The slide in equity markets accelerated this week as the panic over the spread of COVID-19 truly set in across the globe. Drastic measures are now taking place all over the world to attempt to contain the spread of the virus, particularly in Europe and the U.S. Volatility in all markets moved to extreme levels as global uncertainty moved to unprecedented heights.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 4,000 claims from the previous week’s revised level to hit 211,000 for the week ending March 7. The previous week’s data was revised lower by 1,000 claims. The four-week moving average rose by 1,250 claims from the previous week’s revised average to reach a new level of 214,000. The previous week’s moving average was revised lower by 250 claims. Unemployment data can be expected to remain volatile as the spread of COVID-19 begins to trigger shutdowns and closures in the U.S.

3. Equity markets around the world sold-off en masse on Thursday as volatility surged in a global economy that is now faced with massive travel restrictions, event postponements and cancellations, factory closings, and other draconian containment efforts to try and stop the relentless spread of COVID-19. The U.S. Federal Reserve, having already announced an emergency interest rate cut of 50 basis points last week, announced a secondary plan to pump a total of $1.5 trillion into the financial system in an attempt to keep the U.S. economy moving forward despite the growing friction that the spread of the virus has caused. The Fed also pledged that “the terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.”

The Bank of Japan stepped in and injected 500 billion yen in response to the global market sell-off, while Norway’s central bank enacted a 50-basis point rate cut. The Bank of England also followed Norway and the U.S. Federal Reserve’s lead, announcing a 50-basis point reduction to its benchmark rate, taking it to 0.25% in a move that they hope will reduce the impact of the COVID-19 outbreak in their country.

4. The European Central Bank stepped into the fray with the rest of the world’s central banks and announced that it would expand its asset purchase program by an additional 120 billion euro. Markets were surprised that the ECB stopped short of cutting rates – they appeared to be hoping for a 10-basis point cut similar to the rate cuts that other central banks around the world have now embarked on. Interest rates around the world are already so low that none of the globe’s central banks have much room to maneuver, if they have not already taken rates negative.

5. The spread of COVID-19 through Italy has led that country to take the drastic step of essentially telling the entire population to self-quarantine. Residents in Milan, the financial capital of Italy, were ordered to close all shops except supermarkets, food stores and pharmacies. Similar steps were ordered throughout the rest of the country as Prime Minister Giuseppe Conte seeks to contain what has become the largest spread of the COVID-19 virus outside of China. The government has urged the public to limit its activities and those who are seen walking the streets are stopped by police, asked for paperwork explaining their presence, and urged to go home once they complete their business. Violators of the order to limit activity could reportedly face fines or even jail time.

6. The European Centre for Disease Prevention and Control (ECDC) said this week that other countries in Europe may see surges in virus cases similar to what China and Italy have seen. The ECDC urged countries to take proactive mitigation strategies to help protect those most vulnerable to the disease in order to prevent hospitals from becoming overwhelmed with patients. In Italy, one of the hardest hit countries outside of China, reports have surfaced that the number of patients needing ventilation have now exceeded capacity in the Intensive Care Units of some healthcare facilities in Northern Italy.

7. In the U.S., panic spread as celebrities and athletes announced that some of them were beginning to test positive for the virus. Events where large gatherings of people would be in attendance were suspended or cancelled out right one after another as the number of active cases in the U.S. climbed. Concerts, athletic competitions such as football, basketball and other games were all suspended, at all levels from high school to professional. Corporations began asking all of their workers that are able, to telecommute and stop coming into corporate offices to avoid additional exposure and spread of the virus.

8. Mohamed El-Erian, Chief Economic Advisor for Allianz, told CNBC this week that he expected the U.S. stock market to drop by as much as 30% from last month’s highs and that the spread of COVID-19 will almost certainly send the global economy into a recession. El-Erian said “We are going into a global recession. We are going to see a spread of economic sudden stops. The trouble with economic sudden stops is it’s not easy to restart an economy. You’ve got to get people to reengage. You’ve got to coordinate the restart. The economic damage is going to last.”

9. Saudi Arabia, after Russia failed to come to an agreement with OPEC+ to extend or increase production cuts in crude oil last week, started an all-out price war this week which sent the price of oil plummeting. Russia apparently refused to agree to further production cuts, while Saudi Arabia accused them of violating the existing cuts that were supposed to have run through the end of March anyway. Russia walked away from the negotiation table and Saudi Arabia responded by ordering a production increase to its maximum rate of 13 million barrels per day. The ensuing price war triggered a massive drop in the price of oil, over 30% in some cases. By Friday, Brent crude was at $34.04 per barrel and U.S. West Texas Intermediate crude was at $31.73 per barrel – both seeing their worst weekly performances since the onset of the 2008 financial crisis. U.S. shale oil production is clearly the target of the exercise, given that there is no way U.S. shale oil drillers can be profitable at these levels. Both Russia and Saudi Arabia appear to be digging in their heels in what almost seems like a joint effort to take the U.S. energy market entirely offline.

10. The euro gapped slightly higher against the U.S. dollar at the start of trading for the week but had peaked by late Monday and began a steady trend lower that lasted throughout the rest of the week. The euro appears set to close out the week at its lows against the U.S. dollar. The Japanese yen similarly gapped higher against the U.S. dollar at the start of trading and it too had peaked by late Wednesday night. The yen saw a sharper drop on Tuesday, bounced along essentially sideways in a narrow range through Friday and then accelerated its decline into Friday trading. The yen too will close out the week to the downside against the U.S. dollar.

COVID-19 remains the primary concern and the most important factor affecting every single market. The global spread of the virus has led to massive containment efforts and the curtailment of travel and leisure activities all around the world. The spread not only affects the travel and leisure industry worldwide but is also beginning to hit the bottom lines of multinational corporations as well as main street “mom and pop” operations like restaurants and small town shops alike as their customers are suddenly either not coming in, or holding tighter to their wallets and not spending at any sizeable scale when they do come in.

Many countries, including the U.S., are beginning to ban gatherings of any large quantity of people, which means the sports world will go silent and all the accompanying media outlets that depend on them for revenue must come up with alternate programming since live sporting events are also dwindling. Italy has implemented restrictions on the movement of its entire population and the U.S. late on Friday declared the outbreak of COVID-19 on its soil a national emergency which will, aside from enabling the government to come to the financial aid of individuals and companies that might need relief as their job opportunities and businesses dwindle, also enable it to take similar steps to restrict the movement of its population should the number of U.S. cases continue to surge.

The ongoing spread of COVID-19 has not yet made its way into the unemployment statistics for the U.S., but given the sheer amount of closures and event suspension announcements that took place this week, it is only a matter of time before that happens. As the world’s population is forced to engage in “social distancing”, the world’s restaurant, travel, lodging and leisure sectors are all going to suffer, along with the downstream markets that depend on them, like ad revenue and media outlets. The economic drag from such a massive reduction in movement and spending will be difficult to overcome, even if a vaccine is found that can effectively ward off COVID-19 by the end of the year.

Volatility in all markets reached extreme levels this week as fear turned to panic. As equity markets plunged, it seemed fairly clear that unprepared investors were selling anything and everything they could in order to generate cash to cover margin calls. The volume of panic selling that seemingly took place across all asset classes took down even those assets that are typically regarded as “safe havens” in times of economic distress, such as precious metals. Many other investors, who had already suspected that equities were long overdue for correction and prepared themselves by taking appropriate steps to diversify their portfolios, watched calmly on the sidelines as the buying opportunities they had been hoping would allow them to acquire additional physical precious metals for their portfolios at a discount suddenly appeared.

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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