Investors Return To Gold As A Safe Haven

March 9, 2020
CEO & Chief Investment Officer @ U.S. Global Investors

Strengths

  • The best performing metal for the week ended March 6, 2020 was gold, up 5.56 percent. After getting hit last Friday with a virus-driven sell-off, gold rebounded on Monday March 2 to retake its safe haven status. Gavin Wendt, senior resource analyst at MineLife Pty., told Bloomberg that “gold’s fundamentals remain overwhelmingly strong and any near-term price corrections aren’t significant in terms of the bigger picture.” The yellow metal finished the week strong, hitting a new seven-year high on Friday of as much as $1,690 an ounce intraday.

  • Investors seem to be returning to gold. BullionVault’s gold index measuring the balance of buyers against sellers rose to 55.1 in February, up from 53.5 a month earlier, reports Bloomberg. Investments in commodity ETFs grew by 10 percent last week for the 11th straight week of inflows, led by precious metals ETFs.

  • Gold had its biggest one-day advance in almost four years after the Federal Reserve cut interest rates by 50 basis points to help mitigate the negative economic effects of the coronavirus. The rate cut led to Treasury yields plunging, which is historically good for the price of gold. The 10-year yield fell below 0.7 percent and the yellow metal could soon test $1,700 an ounce.

Weaknesses

  • The worst performing metal for the week ended March 6, 2020 was palladium, down 1.24 percent on news of declining car sales in China. After gold’s decline last Friday, RBC Capital Markets said in a note that the event “does not spell the end of gold-positive conditions, as investors seem to have cashed out to cover losses elsewhere.” Gold was headed for a great end to this week, but fell slightly as investors are likely cashing in gains to cover losses in the stock market.

  • India’s gold imports continue to fall amid record high local prices. Bloomberg reports that the country’s imports fell 44 percent from a year earlier to just 39.4 tons in February. The Perth Mint reported its gold coin and bar sales fell to 22,921 ounces last month, down from 48,299 ounces in January.

  • China’s massive decline in car sales in February sent palladium down early in the week. The precious metal is used to curb emissions from cars and has rallied significantly as countries are requiring stricter emission standards. Anglo American Platinum saw its biggest plunge in a decade after the company reported an explosion at a key processing plant and cut production estimates, reports Bloomberg. The company declared force majeure and said it would be unable to process material while the repairs on the plant occur. Both platinum and palladium jumped on Friday after the news broke.

Opportunities

  • Goldman Sachs remains bullish on gold. Head of global commodities research Jeffrey Currie said in a note that “gold has immunity to the virus.” Juan Carlos Artigas, director of investment research at the World Gold Council (WGC), said that “uncertainty surrounding the potential impact of COVID-19 on the global economy combined with the unscheduled 50-basis point rate cut by the U.S. Federal Reserve will likely support gold investment demand.”

  • With the U.S. cutting rates, other central banks globally could soon follow. Bloomberg’s Aoyon Ashraf reminded investors that in 2008 gold fell along with equities, but once the global rate cuts began the yellow metal had a crazy bull run to $1,900 an ounce – its all-time high.

  • Legendary investor Jeffrey Gundlach said Thursday in a CNBC interview that he thinks the Fed will cut rates by another 50 basis points at the next meeting in two weeks. The economic impact of the coronavirus continues to worsen, with the S&P 500 down 9 percent in the last 10 days and a growing number of companies have issued sales warnings. Gundlach noted that “Gold is the best thing to own now and is headed to new highs.”

Threats

  • Treasury yields plummeted to record lows as demand for haven assets grew due to the global health emergency economic fears. Long-bond rates had their biggest intraday drop since 2009, according to Bloomberg. Tony Farren of Mischler Financial Group said “we expected the virus to have a big impact. But it has gone way beyond our wildest expectations.” A credit crisis is brewing as companies fear hurt income and the ability to repay debt. John McClain, a portfolio manager at Diamond Hill Capital Management, said “this is what the start of a recession after a long bull market feels like.”

  • The coronavirus is a hotbed for lawsuits against hospitals, restaurants, day care centers and more. Many businesses could face claims that they failed to adequately protect people, according to Bloomberg. Some have already been filed, including the pilots’ union at American Airlines against the carrier to keep it from serving China.

  • As new information comes out daily about the coronavirus, it can be hard to know which of it is true or not. Two of President Trump’s aids said on Friday that the outbreak had been contained, even as the number of cases rose above 200 in the U.S. and test kits remain in short supply, writes Bloomberg’s Justin Sink. Larry Kudlow said “the vast majority of Americans are not at risk for this virus.” This contrasts with the view of Marc Lipsitch, professor of epidemiology at Harvard and director of the Center for Communicable Disease Dynamics, who said that it is likely that 20 percent to 60 percent of people worldwide will eventually contract the virus. President Trump signed an $8.3 billion emergency coronavirus aid package on Friday. Who will be paying for this? Bloomberg’s Ben Steverman writes that plunging interest rates and lower stock prices make it easier for the super-wealthy to pass on billions of dollars to their descendants tax-free. One wealth advisor noted in a Bloomberg story that their clients have more money than they ever could spend and that the super wealthy could deploy sophisticated strategies to transfer the wealth to their dependents while protecting those fortunes from the IRS.

Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. Under his guidance, the company’s funds have received numerous awards and honors including more than two dozen Lipper Fund Awards and certificates. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal. He is also the co-author of “The Goldwatcher: Demystifying Gold Investing.” Mr. Holmes is engaged in a number of international philanthropies. He is a member of the President’s Circle and on the investment committee of the International Crisis Group, which works to resolve conflict around the world. He is also an advisor to the William J. Clinton Foundation on sustainable development in countries with resource-based economies. Mr. Holmes is a native of Toronto and is a graduate of the University of Western Ontario with a bachelor’s degree in economics. He is a former president and chairman of the Toronto Society of the Investment Dealers Association. Mr. Holmes is a much-sought-after keynote speaker at national and international investment conferences. He is also a regular commentator on the financial television networks CNBC, Bloomberg and Fox Business, and has been profiled by Fortune, Barron’s, The Financial Times and other publications.  Visit the U.S. Global Investors website at http://www.usfunds.com.  You can contact Frank at: editor@usfunds.com.

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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