It is slightly less than two months since the first case of coronavirus was reported in Wuhan, China and already too many questions linger. The markets are wondering how gold will react to an epidemic of this magnitude. Gamers are curious to find out if the pace of innovation in real money online casinos will go on unabated, and leaders are wondering if the growth recently witnessed in global economy will be sustained.
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For the average gold merchant, the appropriate place to start is in history. In 2002, a severe acute respiratory syndrome (SARS) ravaged much of China starting with the south of the country before eventually spreading to the whole world. It was later contained but the effects it left in its wake were devastating.
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Though the epidemiology and evolutions of the two contagious illnesses differ immensely, SARS data has several keystone indicators that can help the markets to predict the short-term future. In the case of gold, for instance, it is possible to apply the 2002-3 case to gauge the expected demand for jewelry in China and the price performance.
Demand for Jewelry
The demand for jewelry in China is affected by seasons. Q1 and Q4 experience heightened demand, while Q2 and Q3 are often lackluster.
The 2003 figures tell a harrowing tale. After a reconciliation of the actual demand with the seasonal averages, the demand and consumption of jewelry during 2003 fell far (10% - 15%) below the predictions.
The effect, however, was temporary since the demand started rebounding in the Q2 and had normalized by Q3.
Changes in the Price of Gold
Just as the demand, the turbulence in the price performance during SARS outbreak was felt. However, the effect on the price was inverted. While demand slacked below normal during Q1 the price was up 3% and attained an intra-quarter high of 16% during Q2.
Unfortunately, the outbreak of SARS coincided with the beginning of the U.S. war with Iraq. During the war, the value of the dollar was in a constant flux, as opposed to the usual trend where war boosts the exchange rate of the greenback.
Though SARS offers guidance in making a prediction about the demand and price trends of gold, it is important to factor in the changes in the Chinese economy in 2003 and now. In 2003, the Chinese economy was worth $1.7 trillion. It has grown almost nine-fold to $14.3 trillion providing 15% of the global GDP. The gold market in China has also swollen by 22% since 2003.
The narrative above points to two possibilities. If the epidemic is contained relatively fast, the impact will be limited. However, if it spreads further, it may affect investor sentiment and this may affect the global price.