Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Global Shutdown and Gold

Commodities / Gold & Silver 2020 Apr 11, 2020 - 05:00 PM GMT

By: Arkadiusz_Sieron

Commodities

Have you read Ayn Rand’s novel Atlas Shrugged? The main theme of the book is that – overwhelmed by growing statism – entrepreneurs at one point say finally “basta!” and announce a strike. The symbolic Atlas who carries the world, shrugs. As a result, the economy collapses, plunging the world into chaos. This what we are observing right now – the only difference is that Atlas has not shrugged but got infected. But the result is the same. The economy freezes. We invite you thus to read our today’s article and find out what does the global shutdown implies for the global economy and the gold market!

Have you read Ayn Rand’s novel Atlas Shrugged? The main theme of the book is that – overwhelmed by growing statism – entrepreneurs at one point say finally “basta!” and announce a strike. They disappear, leaving their businesses to their fate. The symbolic Atlas who carries the world, shrugs. As a result, the economy collapses, plunging the world into chaos.


This what we are observing right now. The workers do not go to work. Shopping malls are closed. Restaurateurs shut down their premises. Theatres, cinemas, gyms, swimming pools – they all are out of service. Other companies reduce their activities or even go dormant. The global economy freezes. The only difference from the Rand’s novel that it is not because of the strike but because of a self-defense effort. People want to protect themselves and others against a contagious pathogen. But the result is the same. The collapse of the economy.

The irony of the situation is that no one – including central banks with their easy monetary policy and governments with their fiscal packages – can do anything about it. This is because this is a health crisis. And the only way to win the battle with the coronavirus is social distancing and quarantine. Recession is actually not something we should cry about. We could avoid it, simply letting billions get infected and millions die. The economic lockdown is our only weapon – unless scientists develop a drug or a vaccine – against the pathogen. In a way, this sounds really heroic: we shut down the economy to protect people, especially elderly, from the invisible enemy. However, poetry is beautiful but can be very expensive – the costs of the shutdown are astronomical, trillion dollars per month.

Nobody knows for sure how deep the recession will be as it depends on how the epidemic will evolve (and how the governments respond) – and no one, not even epidemiologists among themselves, cannot determine it with certainty. Goldman Sachs expects the world’s real GDP to be 1.25 percent, a half of 2.5 percent considered a border line of a global recession. The IHS Markit is more pessimistic and expects only 0.7 percent growth for the world economy.

And what about the US? The IHS Markit thinks that the American GDP will fall by 0.2 percent in the whole 2020. Goldman Sachs is more pessimistic here: it says that the US GDP will shrink 24 percent in the Q2, which would be 2.5 times bigger than any decline in history, and 3.8 percent for the full 2020.

But all these forecasts might be still too optimistic. After all, the initial figures from China for January and February were much worse than feared. As the chart below shows, in these two months combined, industrial production fell 13.5 percent, well below of expectations of a 3.0 percent decline. Retail sales plunged 20.5 percent, also below expectations of a 4.0 percent contraction. And fixed asset investment collapsed 24.5 percent, much more than anyone thought.

Chart 1: Industrial production in China from March 2019 to January-February 2020


Yes, China imposed more draconian measures than other countries, locking down whole cities and regions. But thanks to these, it has said it already contained the epidemic and would thus enjoy faster recovery than others. Anyhow, a massive negative shock in China in Q1, followed by economic shutdown in Europe, the US and other countries will make this year’s performance the weakest since the Great Recession or even the Great Depression.

Importantly, the chances of a V-shaped recovery – a sharp decline following by an equally strong rebound – are getting lower. Instead, we should expect a U-shaped recovery or even – in some sectors – a L-shaped recovery, which means that we could stay in recessionary territory longer while the recovery will be weaker. This is because we are still several weeks before the epidemiological peak, so the shutdown will last for quite a while. Some companies will go bankrupt and not reopen after the end of epidemic. And consumers do not have to be willing to resume immediately spending and businesses hiring and investments as there might be the second wave of infections, especially if the social distancing and quarantine won’t work its magic.

Another issue is that all hidden problems that were invisible during the economic expansion and bull market – think about excessive indebtedness and zombie companies – will emerge to the surface and further deepen the recession.

What does it all mean for the gold market? Well, from the fundamental perspective, the gold bulls can open champagne. Unless the antiviral drug or vaccine is developed quickly and in a responsible way, the recession will be more severe than most people realize. And the recovery will come later and would be weaker than many analysts think, especially if the debt problem reemerges. Turning off the economy and turning it back on again is not a piece of cake – it’s more like restarting a nuclear reactor. It’s very easy to make a catastrophic mistake here – unfortunately, some countries will commit some kind of error along the way. It times of such a grave crisis, gold should eventually shine.

Thank you.

If you enjoyed the above analysis and would you like to know more about the link between the U.S. economy and the gold market, we invite you to read the August Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in