Why the coronavirus could boost the gold price even more

Why the coronavirus could boost the gold price even more

The gold price hit new record highs against the euro and yen today, even as the U.S. dollar continues to hold up well against the other currencies. Meanwhile, the coronavirus continues to support the gold price, although stock investors are still downplaying its effect. The S&P 500 and other major indices are holding up well.

Quantifying the coronavirus risk

In a note this week, Goldman Sachs economist Daan Struyven put the economic impact of the coronavirus into perspective. He warned equity investors that although the long-term impact will be minimal, things could get difficult in the short term. He emphasized that the impact of the coronavirus will be temporary but quite large.

Additionally, he noted that many people have been comparing the number of coronavirus cases to the number of influenza cases. For example, the number of deaths from the coronavirus is approaching 1,400 worldwide. However, the number of people who die of the flu in the U.S. alone is about 290,000, while about 650,000 people die from the flu globally every year.

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Even though far fewer people die of the coronavirus than the flu, Struyven expects the former to have a much greater economic impact. He estimates that the outbreak will subtract approximately 2 percentage points from annualized global GDP growth in the first quarter. For comparison, large hurricanes in the U.S. subtract only about 0.2 percentage points from global GDP growth. Thus, he estimates that the impact of the coronavirus outbreak will be about 10 times bigger than the disruption caused by a major hurricane hitting the U.S.

Coronavirus impact on gold prices and beyond: China’s huge size taken into account

The reason for the massive impact to global GDP is China’s massive size. Wuhan, the city where the outbreak started, is home to about 11 million people, making it about the same size as Paris. Hubei province is home to nearly 60 million people, which is about the same as the entire Iberian Peninsula. Hubei’s economic output is about the same as the entire states of Massachusetts or Washington.

The coronavirus outbreak extended the Chinese New Year holiday, but that extension is impacting more than just China’s population. Struyven expects there to have an impact on the global workforce. He also noted that China accounts for about 0.3% to 0.35% of the global travel spending contributed to global GDP. Reduced travel is also weighing on the global economy.

It’s also important to point out that the impact of the coronavirus could last longer than many are expecting. The head of the U.S. Centers for Disease Control said this week that the disease could be around for about a year.

What the coronavirus means for the gold price

The coronavirus has been helping to support the gold price for weeks, and that continues to be the case. Although stock indices are still holding up fairly well, they finally started to falter today with small declines in the S&P 500, Dow Jones Industrial Average, Nasdaq Composite and Russell 2000.

Investors finally seem to be taking the impact of the coronavirus seriously, which is why the gold price is rallying, up past $1,583, while stock indices are in the red. Meanwhile, the dollar index is trading around the highest level in four months, although it usually is negatively correlated with gold. Both assets are being boosted by the flight to safety caused by fresh concerns about the coronavirus.

This week the yellow metal has struggled a bit, but today represents a significant breakout in the gold price. That could signal a continued move higher next week after the markets reopen following the three-day holiday weekend.

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