by Ivan Martchev

March 24, 2020

There are not very many all-time highs in today’s market, other than the trade-weighted exchange rate of the U.S. dollar, which on Friday registered a fresh all-time high. The previous U.S. dollar trade-weighted index was for goods only and was discontinued in January. The new one is for “goods and services” and has gained in an appreciable amount in the past month. I think this is a U.S. dollar short squeeze.

Trade Weighted United States Dollar Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There is a record amount of dollar borrowing, primarily by emerging market economies. The borrowing level, according to the Bank of International Settlements, is over $12 trillion. In a pandemic shock, as quarantines set in, those borrowings have to be serviced. As commodity prices are in a freefall and global trade is interrupted because of the pandemic, this record level of borrowings becomes a problem.

The COVID-19 pandemic has had the same effect on global trade that the Smoot Hawley Tariff Act of 1930 had on global trade in the 1930s: It collapsed global trade by better than 50%. I always thought the hard landing in China would cause a freefall in commodity prices, but in this case, it seems to be a manufactured quarantine that is causing a global recession and a resulting collapse in commodity prices.

Average Tariff Levels Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

A supply shock is a supply shock, whether it comes in the form of a quarantine or a steep tariff. In this case, the quarantine is a combination of a supply shock and a demand shock at the same time.

The bright side of the story is that it could be over relatively soon if the “flattening of the curve” that our quarantines target is achieved in the spring months, while Smoot Hawley took a couple of years to repeal.

Flatten the Curve Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The best case scenario is that of South Korea, where the number of new cases has been decreasing dramatically over the past month and even the number of sick people has been going down over the past two weeks as the number of recoveries is increasing. It is curious that the mortality rate in South Korea is very low, at 1.16%. Since many cases are asymptomatic, they may never know they got the virus. That number could be as high as one third of all cases. That means the mortality rate in South Korea is probably well below 1%, whereas the normal flu mortality rate is 0.1%.

New Covid-19 Cases in South Korea Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The problem with this pandemic is that even if it is ultimately five times deadlier than the flu, it causes serious issues for older people and people with pre-existing conditions, which would overwhelm the healthcare system, causing us to manufacture a quarantine recession in order to stop it.

Gold is Doing (Comparatively) Great

Despite the all-time highs in the trade-weighted dollar, gold bullion is doing great. There is some pullback in the price of gold, but nothing out of the ordinary and nothing like what happened with the other precious metals – silver, platinum, and palladium, which are all down dramatically. The primary reason is that gold bullion is the only truly “precious” metal, while the other three are primarily industrial. That is why silver is below where it was in early 2016, when gold bullion was around $1,100, not today’s $1,500.

Gold Continuous Contract Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I doubt that gold bullion will weaken further, even if the dollar gains, which is a function of when the quarantine-based recession ends, which could be in just two quarters. Gold is being driven by deficit spending, low or negative real interest rates, and overall stress in the financial system. Sure, gold could decline further in a liquidation of financial assets due to margin calls, but I doubt it will stay down.

The present liquidation panic in stocks is driving down the price of gold miners, which are priced as if gold bullion were near $1,200. The smaller-cap the gold mining stock, typically the bigger the sell-off. This, I am sorry to say, is normal, but liquidation in the stock market is very different from selling in the more professional commodity markets, which affects the price of gold bullion. Still, since I do not believe there is a meaningful downside for gold bullion from here, I believe this is an opportunity for investors in the gold mining sector as they will be the first to rebound when this panic is over.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The U.S. Dollar Is at An All-Time High

Sector Spotlight by Jason Bodner
The Market Officially Turned “Oversold” Last Week

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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