UPDATE: Gold at seven-year high on coronavirus fears

Goldex Team

Editorial content

Update: The price of gold has surged to its highest level in seven years as a significant number of coronavirus cases were reported outside of China over the weekend. Gold prices climbed more than 2% on Monday to levels not seen since 2013, with buyers driving prices as a high as $1,678.58 before falling back slightly.

Stocks across Europe were hit by the news, with Milan’s main index fell by more than 4%. Italy has seen Europe’s worst outbreak of coronavirus and the government has announced a series of drastic measures, with a lockdown in place in several small towns. Meanwhile, London’s FTSE 100 is down more than 3% in early trading.

With reports of a vaccine at least 18 months away, gold has established some serious momentum and could soon breach the $1,700 barrier, according to some analysts.

31st Jan: The first case of Wuhan coronavirus was recorded on December 8, 2019. Six weeks later, it’s spread across the world. At the time of writing, there were 7,711 confirmed cases in China, with 150 deaths. The infection has also spread to 15 other countries, including Canada, the US, India and the Philippines – and today it has been confirmed that two patients in the UK have tested positive for the virus.

These figures could be far higher – while some people are very ill with this new virus, others only show mild symptoms, so it’s hard to keep track. This difference in symptoms is also helping to spread the virus. Those who aren’t very ill won’t even know they have it, so may continue to spread it. Thus far, the old and the sick seem to be most at risk. There’s no cure – antibiotics don’t work on viruses – and researchers are racing to find a vaccine.

Of course, this isn’t the first novel virus to appear this century. In 2002, Severe acute respiratory syndrome (Sars) spread to 37 countries. Around 8,000 people became ill and more than 750 died. And along with the human cost, Sars also had a huge economic impact – wiping $40bn off global value and sparking a crisis in South East Asia.

So what impact is the Wuhan coronavirus likely to have on the markets, and on gold prices? Nobody’s certain right now – but all eyes are on China. “It just depends on the severity and the disruption that it causes,” Rick Kahler, president of Kahler Financial Group, told NBC. “The local markets, especially in China, are going to be first responders.”

Traditionally, gold is a safe haven in times of upheaval, so it makes sense that gold’s hit a peak over the last few weeks. It then slowed down as investors went for government bonds instead – another historically safe bet. But on January 30, it crept back up as Federal Reserve chair Jerome Powell referred to the coronavirus outbreak a “a significant thing which will have some effects on the Chinese economy, at least in the short term.”

Some are already spooked. In the New York Times, Peter S Goodman pointed out that investors have dumped stocks on exchanges from Asia to Europe to North America, putting their money in traditional safe havens. This pushed up the value of the yen, the dollar and gold.

He wrote: “In short, those in control of money took note of a growing crisis in a country of 1.4 billion people, whose consumers and businesses are a primary engine of economic growth around the world, and they chose to reduce their exposure to risk.”

The virus has arrived, ironically, at a time of relative optimism. Direct conflict between the US and Iran didn’t materialise. The US-China trade war is bubbling under. Concerns about an economic slowdown in China hadn’t yet been borne out.

But now, just the practical aspects of containing the virus are having a huge impact on the world’s biggest economy – which was already showing signs of sluggishness. Stopping flights, closing roads and restricting travel means that people are staying home and not spending. Raw materials can’t get to factories. Businesses are closing. Wuhan is a huge industrial centre: shutting it down could have impact on industries across the globe.

“The outbreak has certainly spooked Chinese markets,” wrote Simon Chandler for CCN. “The China large-cap ETF (NYSE:FXI) has been sinking downwards for over a week. At the same time, official figures have revealed a 41.6% decline in air travel, a 45.5% drop in rail travel, and a 25% drop in automobile travel.”

Whether or not this outbreak will prove worse than Sars, nobody yet knows – the situation changes minute by minute. Some experts believe that this will prove the tipping point for a long-expected global recession, while others say that this outbreak isn’t serious enough to cause lasting harm. But chances are that the yellow metal will be the choice of those seeking to quarantine themselves against the financial effects of Wuhan virus. After all, when China sneezes, the world catches a cold.

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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.