In some parts of the country, state government leaders are displaying great optimism about the near-term outlook for the COVID-19 pandemic. On the heels of President Trump’s issuance of suggested reopening guidelines, four states – Georgia, South Carolina, Tennessee and Texas – wasted no time in scheduling the controlled reopening of many businesses and industries.
As for markets, they’ve climbed significantly off of their closing-price 52-week lows achieved just a month ago. The S&P 500 index is roughly 26% above where it was March 23.
So all is well now, yes?
For one thing, the current coronavirus outbreak still presents a significant public health threat. As far as the economy is concerned, the sudden rise in the number of unemployed Americans could prove to be an enormous problem. Over the last four weeks, more than 20 million Americans have joined the ranks of the unemployed. There is now talk that one of the far-reaching consequences of the shutdown and unprecedented surge in jobless could be the collapse of the mortgage market.
Despite the upbeat assessments of some, many economists are unconvinced we’ll see a sharp rebound in the same way the economy has collapsed with great speed. The core problem – the virus outbreak – remains unresolved. And not only does a resolution to the health crisis remain out of reach, there’s now the prospect we’ll have to contend with another outbreak as soon as fall. The lack of any real light at the end of the tunnel is making it difficult for experts to envision a genuine economic recovery anytime soon. The projections of long-lasting uncertainty – even turmoil – are leaving retirement savers with a sizable dilemma about how to configure their portfolios over the foreseeable future.
A Second Wave of Virus Predicted
Dr. Anthony Fauci is director of the National Institute of Allergy and Infectious Diseases and perhaps the most visible member of the White House’s coronavirus task force. According to Dr. Fauci, there’s a good chance another wave of the virus will sweep across the country in the fall.
In light of this – as well as the fact the current outbreak remains uncontained – Fauci says any re-opening of the country will have to occur in phases. In a recent conversation with ABC News’ David Muir, Fauci put it this way:
“I kind of refer to it as kind of a rolling re-entry,” Fauci told Muir. “There’s not going to be like, a light switch that you turn on and off and say, ‘On this date, America will resume its normal activities.’ It’s just not going to (be) uni-dimensional.”
Economists are focusing on this uncertain resolution to the outbreak as they assess the prospects for economic healing. Nobel-prizewinning economist Joseph Stiglitz of Columbia University recently told Bloomberg that “we have no certainty the virus will be gone by the end of the second quarter.” He added ominously that if the outbreak “lasts through the summer, then all the effects will be amplified.”
Billionaire entrepreneur Mark Cuban recently appeared on CNBC to voice his concern that people who think the worst will be behind us shortly may be getting ahead of themselves. In a recent appearance on that network’s “Closing Bell,” Cuban suggested those rushing back into markets don’t fully appreciate the scope of the possible negative outcomes in store for the economy in the months ahead. “I just don’t think they are really factoring in what we are going to see on the other side,” he said. Cuban is particularly wary of just how countless numbers of battered businesses are going to recover and re-employ so many out-of-work Americans, saying, “We really don’t know how companies are going to rehire those they’ve furloughed or laid off.”
Citi Private Bank’s chief investment officer, David Bailin, also spoke to CNBC recently about his pessimism that conditions will improve soon. Bailin told “Squawk Box Asia” that he’s uneasy about the prospects of both a new wave of the outbreak and that the current wave could remain unresolved for some time. Bailin mentioned his concerns in the context of the markets anticipated fortunes.
“In the event that we have a very significant second wave of disease in the United States that cause a further shutdown of the economy … that clearly is not priced into the market,” said Bailin. “The other thing that may not be priced into the market is the fact that this virus may take another 18 to 24 months to really cycle through the globe, and ultimately have a vaccine,” he added.
Gold Could Be a Solitary Bright Light Amid an Otherwise Murky Outlook
As the outlook for the virus remains difficult to discern, the outlook for the economy looks just as murky. This leaves many retirement savers feeling as though they’re fumbling in the dark while the global crisis plays out.
Still, it’s important to recognize that steps can be taken to help mitigate the effects of the outbreak on portfolios. One option is to consider the addition of assets that have a demonstrated tendency to strengthen during crises.
One such asset is physical gold. Gold has the capacity to benefit savers in two important ways during times such as this. For one thing, as a safe-haven asset, gold will generally stand up to volatility far better than risk assets. At the outset of the crisis, gold did find itself caught up to some degree in the panic-driven selling that afflicted practically all assets as economic fears grew exponentially. As an evaluation of gold’s safe-haven property, however, that price action was a little misleading.
Analyst Christopher Louney of RBC Capital Markets addressed gold’s behavior at the beginning of the pandemic in a recent note. “Gold’s biggest stumbles during this crisis have been because investors were on a search for cash liquidity to cover losses and margin calls elsewhere, not because their attitude toward gold shifted,” he said.
Perhaps the more significant way gold can aid portfolios during crises has to do with how it responds to applications of drastically accommodative monetary policy. You may remember the metal’s historic 2 ½-year rise as the 2008 financial crisis unfolded and the Federal Reserve turned to quantitative easing (QE) to help stabilize markets. From 2008 to 2011, against a backdrop of two rounds of dollar-weakening QE, gold climbed over 160%.
This time, the Federal Reserve has said effectively it will do whatever it takes to save the economy from the effects of the pandemic. The Fed confirmed this commitment in a March 23 press release, declaring the central bank “is committed to use its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals.” On April 9, the Fed further underscored this commitment by announcing it would increase its crisis-based policy initiatives by another $2.3 trillion. In the same announcement, the central bank even went as far as to expand its list of eligible securities for purchase to include junk bonds. This leaves stocks as the only asset class the Fed is not purchasing directly.
From the March 23 Fed announcement through today, gold has jumped roughly 15%. And the Fed isn’t done yet. Goldman Sachs is just one of many firms projecting that “unlimited QE” will spark gold to an epic run similar to the one it traveled during the Great Recession.
Retirement savers will have a tremendous volume of coronavirus-related information to process in the days, weeks and months ahead. Much of it will be confusing – even contradictory. One option savers will have to regain clarity on behalf of their portfolios is gold. Gold could help bring stability as volatility and uncertainty continue to roil markets. What’s more, as the Fed continues to engage in massive asset purchases, the fertile ground that typically results for precious metals could actually help portfolios grow even as financial markets struggle.
By: Isaac Nuriani, CEO, Augusta Precious Metals
Image by Stefan Keller from Pixabay