Coronavirus Crisis Pushes up Gold, Precious Metal Faces Supply Chain Issues

Investors turn towards safe-haven assets while COVID-19 derails the global economy

The coronavirus has pushed the global economy into a recession of historic proportions, Goldman Sachs said earlier this week.

The COVID-19 crisis has made investors search and invest in safe-haven assets like gold, market sources revealed in March since the precious metal acts as a hedge for investors during times of geopolitical, and economic crisis.

Goldman Sachs had told its clients to buy the “currency of the last resort” on Tuesday when gold continued to push higher.

The coronavirus crisis hit gold, among other asset classes, and caused a sharp fall of more than 12% from its early March peak of around $1,700 a troy ounce to $1,460 last week due to investors rushing for cash-is-king dollars by selling off all non-essential assets, including gold.

Goldman’s recommendation coincided with the announcement of the Fed on Monday that it would buy unlimited amounts of government bonds (and had tasked asset manager BlackRock to handle this), which caused the dollar to fall and gold to rise by more than 4%.

The investment bank furthermore said that gold was currently at an inflection point and could hit $1,800 over the next 12 months, which helped the precious metal to push even higher.

Looking at the global supply chain of the precious metal, three of the largest gold refineries globally announced on Monday in light of the virus threat that they have suspended production and refining of gold in Switzerland temporarily. The decision followed an order by local authorities to close non-essential industries to curtail the spread of COVID-19 in Switzerland. The refineries Valcambi, Argor-Heraeus, and PAMP, are all located in the Swiss canton of Ticino, bordering hard-hit Italy, where more than 10,000 people have died since the virus broke out in Europe.

Switzerland is one of the most important hubs for gold and precious metal refining. The three refineries process around 1,500 tonnes of gold a year in Ticino, which is a third of the total global annual supply, as well as other precious metals such as silver. Switzerland has, for decades, been one of the major hubs for these activities, including for gold trading in general.

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Global recession

Besides Goldman Sachs, Morgan Stanley economists last week also declared that the pandemic had triggered a global recession, with the debates now focusing on its likely length and depth.

Economists threw out their forecasts that the world could avoid tumbling into recession a day after US President Donald Trump conceded his country’s slump alone was set to be “a bad one,” for the first time since the financial crisis.

Goldman Sachs predicted a weakening of growth to 1.25%, while Morgan Stanley said a worldwide recession is now its “base case,” with growth expected to fall to 0.9% this year.

Sudden stop for US economy

“Over the last few days social distancing measures have shut down normal life in much of the U.S. News reports point to a sudden surge in layoffs and a collapse in spending, both historic in size and speed, as well as shutdowns of many schools, stores, offices, manufacturing plants, and construction sites. These developments argue for a much sharper drop in GDP in Q1 and Q2,” Goldman Sachs said last week.

The firm expected declines in services consumption, manufacturing activity, and building investment to lower the level of GDP in April by nearly 10%, a drag that the company expects to fade only gradually in later months.

“We now forecast quarter-on-quarter annualized growth rates of -6% in Q1, -24% in Q2, +12% in Q3, and +10% in Q4, leaving full-year growth at -3.8% on an annual average basis and -3.1% on a Q4/Q4 basis,” Goldman Sachs said.

Meanwhile, nearly 3.3 million Americans applied for unemployment help last week, triggered by COVID-19, amid a widespread economic slowdown. This unemployment number is around five times higher than the previous record set in 1982. The filing for unemployment aid numbers generally reflects the pace of any slowdown (or upswing) of the economy.


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