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Gold has Immunity, Silver has Ratio

On Monday Wall Street pared back losses from last week’s sell-off, the worst since 2008, but it was only the promise of lowering interest rates, the return of the “punch bowl” hearkening back to recession-era stimulus, that has temporarily ameliorated coronavirus fears and its growing threat to the global economy.

Despite poor global and US economic data, including a weaker-than-expected reading in the ISM manufacturing index and a record-low reading in China’s purchasing managers index (PMI) equities “closed up strongly on the hope that fiscal and monetary stimulus is on the way,” said Kathy Lien, managing director of FX strategy at BK Asset Management, in a note quoted by Marketwatch

Virus ‘uncontainable’ 

“This is spreading throughout the world and it will continue to spread throughout the world,” Isaac Bogoch, an infectious disease physician at Toronto General Hospital, told CBC.

Amesh Adalja, an infectious disease physician and a senior scholar at the Johns Hopkins Center for Health Security, said, “It’s not something that we can prevent from happening in the absence of a vaccine. It’s not containable in the way that those viruses were. So this will become endemic.” He added: 

“This is going to become like some of the other coronaviruses that we have. There are four of them that cause disease every year. This is likely to become the fifth coronavirus at that capacity.”

Economic fallout

PMIs not only in China have been seriously whacked due to the virus’ impact on supply chains. According to Zero Hedge the global manufacturing sector has suffered its steepest contraction since 2009. Out of 31 nations for which data was available, 15 saw their output contract. They include China, Japan, Germany, France, Italy, South Korea and Australia. 

On the other hand, gold has “immunity to the virus” and has outperformed other safe-haven assets like the Japanese yen or Swiss franc, said Goldman, via Bloomberg

Some economists think the coronavirus is so dangerous, it could cause the next recession. However, Harvard economic prof Kenneth Rogoff, writing for Project Syndicate, says unlike the two previous global recessions this century, the new coronavirus, COVID-19, implies a supply shock as well as a demand shock: 

[W]hen tens of millions of people can’t go to work (either because of a lockdown or out of fear), global value chains break down, borders are blocked, and world trade shrinks because countries distrust of one another’s health statistics, the supply side suffers at least as much.

Rogoff thinks the effects of this will cause massive deficit spending to shore up health systems and prop up economies, which will push up inflation. Price increases will be exacerbated by supply pressures - akin to the gasoline shortages of the 1970s - and a sustained retreat behind national borders, owing to a COVID-19 pandemic (or even lasting fear of pandemic), on top of rising trade frictions, is a recipe for the return of upward price pressures. In this scenario, rising inflation could prop up interest rates and challenge both monetary and fiscal policymakers.

US economy sickens

Reading between the lines, Rogoff is clearly talking here about the United States. The trade war between the US and China has already hit global growth (which in 2019 was only 2.9%), and now comes along a pandemic - what once seemed like a 15% chance of a recession starting before the presidential and congressional elections in November now seems much higher, he writes. 

A charge from Democrats that Trump proposed budget cuts to the Centers for Disease Control and Prevention was denied by administration officials. However according to ABC News, the president did propose in his 2021 budget, 10 days after the WHO declared coronavirus a public health emergency, a 16% reduction in CDC funding. ABC News adds:  

In fact, all of Trump’s budget proposals have called for cuts to CDC funding, but Congress has intervened each time by passing spending bills with year-over-year increases for the CDC that Trump then signed into law.

Not a word was uttered by Trump in response. No stern rebuke to Don Jr. for comparing Democrats to Pol Pot, Hitler or other architects of genocide. At a rally on Friday Trump accused Democrats of politicizing the coronavirus, calling it “their new hoax” after the Russian investigation and impeachment. Quoted in The Guardian, Trump said, 

We are doing everything in our power to keep the infection and those carrying the infection from entering the country. We have no choice,” Trump said at the Coliseum and Performing Arts Center. “Whether it’s the virus that we’re talking about, or the many other public health threats, the Democrat policy of open borders is a direct threat to the health and wellbeing of all Americans.”

According to ISM data from January and February, the US gauge of supplier deliveries rose to the highest since 2018, indicating supply disruptions from Covid-19. The imports index fell the most since 2009, and new order growth slowed to 9-month lows. Here’s Chris Williamson, chief business economist at IHS Markit, for his take on the alarming figures

“Manufacturing production and order book trends deteriorated markedly in February as producers struggled against the double headwinds of falling export sales and supply chain delays, both in turn often linked to the coronavirus outbreak.

While trade war fears have eased, helping push firms’ expectations for future growth to the highest since last April, coronavirus-related supply chain issues threaten to constrain production in coming months. At the same time, companies have become increasingly concerned that the COVID-19 outbreak will also hit demand, which is reportedly already cooling amid uncertainly leading up to the presidential election. Recent stock market volatility could also further dampen consumer spending and deter business investment.”

On Sunday Goldman Sachs projected GDP growth of just 0.9% in the first quarter and zero growth in Q2 - the worst six-month window since the Great Recession, US News reported

Plunging yields ---> rate cuts 

The upshot will likely be a 50-basis-point rate cut by March 18, followed by another 50 bp in the second quarter, for a total of 100 bp in the first half, Which means that the US Fed Funds rate will be just above zero as the US enters the second half, and has a high chance of tipping negative around the time of the election notes Zero Hedge with barely-disguised glee. 

On Monday Trump weighed in on the rate cuts, blaming Fed Chair Jerome Powell for being too slow to react (ie. to lower rates) and arguing that the central bank has put the US at a disadvantage during the outbreak. The Fed cut rates three times in 2019 as a reaction to slowing global growth and concerns over not high enough inflation. That was before the coronavirus. 

Paper vs physical gold 

Getting back to gold, the takedown on the gold price we saw last Friday may be puzzling to some, considering that gold normally does extremely well during stock market corrections. Roland Manley over at Bullion Star gives a comprehensive account of what happened and why. Without getting into the minutia, we can say that gold’s price movement is currently more driven by the “paper” markets ie. gold ETFs and gold futures, than by the “physical” markets ie. gold bars/ coins and gold jewelry. 

It’s also interesting to note, as Bloomberg does, that Over the last few weeks, gold buyers [gold shops that buy used jewelry] have seen a frantic push by individuals racing to sell their little-used jewelry in the U.S. and Europe amid worries that the extraordinary price rally fueled by the coronavirus since the start of the year may soon run its course. 

Gold-silver ratio soars 

As we wrote in Hi-yo Silver Away! silver is expected to do well this year through a combination of higher industrial and investment demand, and tightened supply owing to mine production issues and output cuts. 

Northern Syria hot zone 

Buried in the headlines over the election and the coronavirus is a hot war breaking out between Syria and Turkey in northern Syria. Last week, The National Post reported Turkey has deployed “swarms of killer drones” to strike Russian-backed Syrian government forces, in retaliation for the killing of 33 Turkish soldiers. Remember Turkey is a NATO ally and any attack on one NATO member is considered an attack on all its members: 

The tactic threatens to bring NATO member Turkey into direct confrontation with Russia, adding to strains in relations between Erdogan and Russian President Vladimir Putin as they prepare to meet this week in an effort to ease tensions over Syria. The two leaders have worked together to try to end the Syrian civil war, despite backing opposing sides, but have repeatedly stumbled over who should control the northwestern Syrian province of Idlib that borders Turkey.

Russia dominates the skies over Syria as part of Putin’s military support of Syrian leader Bashar al-Assad, deploying advanced S-400 missile-defence systems to secure the air space while its warplanes aid Syrian forces battling to take the last rebel stronghold in Idlib. Turkish forces back the rebels and Ankara says it fears a fresh exodus of refugees flocking into Turkey if Idlib falls to Assad.

Erdogan is reportedly urging US and NATO to halt the Syrian-Russian offensive in Idlib. On Friday the USS Dwight D. Eisenhower, a carrier strike group, crossed the Strait of Gibraltar and entered the Mediterranean, accompanied by multiple support ships. The US Navy says the presence of the USS “Ike” is for “conducting operations in the US 6th Fleet to support maritime security operations in international waters, alongside our allies and partners” but the timing is certainly suspicious. 

Could the Trump administration’s decision to pull troops from northern Syria have anything to do with this latest conflagration that threatens to engulf a NATO ally? 

Australian summers lengthening 

The finding is especially potent, considering Australia just experienced a devastating bushfire season that burned nearly 12 million hectares, killing 33 people and an estimated 1 billion animals native to Australia, Reuters said

We know from our research that a key aspect of global warming is that when the planet warms, dry areas get dryer, summers become longer and winters shorter. That may seem like good news to those in the northern hemisphere but it can only means more bad news for drought-stricken areas amid the global fresh water crisis we have written on extensively. 


I said it recently but I’ll say it again. We are moving closer to gold's Minsky Moment. Things are happening to cause instability in the global economy, including a worsening coronavirus, a slowdown in manufacturing, a denting of the largest economies, and a shooting war in Syria that threatens to involve NATO members.

We know that the US stock market is a bubble and all bubbles pop. The volatility over the past few days may not be a pop but it’s definitely a correction. 

We also know that much has been done by the Trump administration to fray existing alliances and to inflame tensions with trading partners-turned-adversaries, namely China, the European Union and even its two NAFTA “amigos”, Canada and Mexico.

Trump appears to be getting his low dollar but he’s also going to get a stock market crash. Why? Because we know the coronavirus is hurting supply chains, it’s killing global growth, and its effects are being felt in the US, reflected in weak manufacturing data and the lower dollar. As US corporate earnings drop, so will share prices, and most importantly, there won’t be extra cash for stock buybacks. Without buybacks there is nothing to prop up the stock market. Poof. 

How about bonds? At yields above 2%, investors have been piling into US Treasuries as a safe haven amid coronavirus fears and other geopolitical tensions. They are attractive in comparison to the trillions of negative-yielding sovereign debt sloshing around. But with a number of interest rate cuts predicted, bonds are starting to look like a poor investment. If foreign investors slow or stop buying US Treasuries, as Russia has done and China did last May, the United States is in real trouble. Without purchasers of US debt (Treasuries) the US has no way of financing its annual deficits and $23 trillion pile of debt, without printing money. Printing money on a large scale causes hyperinflation. 

Richard (Rick) Mills


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