Will Coronavirus Second Wave Boost Gold Price? / Commodities / Gold & Silver 2020

Brace yourselves, winter is coming!This is what Ned Stark in the Game of Thrones told his people to prepare themfor the leaner times he saw coming. While one of the biggest threats in GOTwere the White Walkers, in our reality, the pandemic is again the greatest danger. As the chart below shows, the second wave of the coronavirus infections is no longer a mere possibility – it’s happening all over the Europe and in the United States (although in the latter country, we could also say about one big wave or threewaves). In particular, in France, Italy, Spain, the UK, and in the US, thenumber of daily new confirmed Covid-19 case per million people has soared muchhigher than the levels recorded in the spring. And we’ve just entered autumn,with winter yet to arrive.

Naturally, the question arises - Willgovernments lock the economies down again? Notlikely . And why is that, you might wonder. Well, the cynical answer wouldbe that governments are simply broke and they have no funds for supporting theeconomy during the next lockdown. The pundits call for fresh stimulus in aresponse to the spring’s GreatLockdown , so just think how much the government spending and the publicdebt would have to rise to sustain the economy during the SecondLockdown. It would simply be too much of a cost. After all, when you stop theeconomy, then the economy is, well, stopped. Without a functionable economy,the social fabric gets destroyed and, after some time, the civilizationcollapses.

However, there are also less cynicalreasons why the lockdown is less likely now, despite the fact that the numberof daily infections is higher than in the spring. Half a year ago, thegovernments and healthcare systems were awfully unprepared to handle theepidemic. From the very beginning, the lockdown was stupid and sub-optimalresponse – but it could be the only viable solution for the Western governmentswhich neither had implemented procedures for social tracing (like in Asiancountries), nor managed to conduct efficient and quick testing, nor secured thesufficient number of masks, respirators, disinfectants, hospital beds, etc.

Currently, the situation is better and the sanitary and healthcare systems are better prepared to handle the epidemic. Indeed, as you can see, despite soaring number of cases, the case fatalityrates and the number of deaths due to Covid-19 are significantly lower than inthe spring.

However, if the risk of a healthcaresystem collapse increases significantly, under the public’s pressure, thegovernments could be forced to reintroduce a lockdown (although it may not beas strict as the first one).

This is what the Israeli’s government didin September when the pandemic spiralled out of control. As you can see in thechart below, the daily number of Covid-19 cases (rolling 7-day average) reached700 per million people, more than three times the number in the US. But Franceis unfortunately approaching this level…

However, Israel’s case shows that the second lockdown wouldn’t be as bad as thefirst one . So far, we don’t have any hard data about the Israeli economy,but the data from Apple’s devices indicates that people’s mobility fell byaround 30 percent after the lockdown was introduced, compared to the 80-percentdecline in the spring. Similarly, the major Israeli stock market index (TA-125)plunged about one third half year ago and only (or “only”) ten percent inSeptember. The currency also weakened against the euro, but not above 10percent as in the spring, but by about 5 percent.

The softer reaction makes sense. Inspring, the coronavirus was completely new, and we didn’t know how dangerous itwas. As a matter of fact, we still don’t know many things about the new virus,however, we are now more certain about its fatality rate and how to effectivelycure the patients and handle the epidemic.

As I wrote in the June edition of the Gold Market Overview:

Thesecond wave does not have to bring similar effects as the first wave. As peoplehave become accustomed to the epidemic, its impact may be weaker (…) generallypeople react the most to new, unknown threats, so they should react lessvividly in the future to coronavirus-related risks, especially that theauthorities should be better prepared.

And this is indeed what we see now: people fear less than in the spring .The virus is no longer a new and unknown threat, it has now become a familiardanger. In other words, the economy has been adjusted to epidemic conditionsand subsequent shocks, although still painful, won’t be as shocking as thefirst one. It means that we will see a slowdown in the pace of economic growth,or even a decline in economic activity in the fourth quarter of 2020 comparedto summer, but it should be moderatecompared to the spring’s collapse .

What does all of the above imply for thegold market? Well, the replay of the Great Lockdown would be the best scenariofor the yellow metal. The moderate economy’s reaction to the second wave wouldbe the worse outcome for gold (although the rush towards cash, which make goldto plunge initially in the spring, will be also limited). However, even amoderate decline in economic activity would be a good excuse to maintainaccommodative stance by the Treasury and the Fed . In such an environment, gold shouldremain in the bullmarket , althoughprecious metals investors should be prepared for the declining impact of thecoronavirus-related threats on thesafe-haven demand for gold .

Thank you for reading today’s free analysis. We hope youenjoyed it. If so, we would like to invite you to sign up for our free goldnewsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all ourpremium gold services, including our Gold & Silver Trading Alerts. Signup today!

Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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