A time of staggering proportions not seen since the market crash of 2008. Markets across the world have been seriously hit by the fears of the spread of coronavirus, driving economies into another recession. Here’s a look at other key driving factors and how all this has impacted gold prices.
The world seems to be increasingly fearful of the spread of the coronavirus. COVID-19 (the coronavirus) is a new illness, originating from China, that can affect your lungs and airways. There are no specific treatments for this yet, but symptoms can be treated in a hospital. In some small cases, the virus can be severe and lethal. The NHS is currently unaware of how it spreads from person-to-person but suggests washing your hands on a regular basis as a counter-measure to prevent it from spreading further.
Stock Market Plunge
Investors woke up on ‘Black Monday’ (9th March 2020) to absolute havoc in markets. The coronavirus had already made investors price-in an economic slowdown in its lead up, but nothing had prepared them for what was to come.
Panic on the trading floor, investors dump risky stocks, and a rare incident is witnessed, a ‘circuit breaker’ is triggered in Wallstreet. If markets drop below a certain amount (6-7%), markets close for 15 minutes to give investors time to restrategize. The last time this happened was in 1997.
The US stock market set a pattern felt across the world. The FTSE in London, the DAX in Germany and the Nikkei in Japan saw drops not seen since the 2008 financial crisis.
(Source: Channel 4 News)
1. Oil prices
Oil prices have contributed to stock market price drops. Prices saw a drop of 30% during that time, the biggest drop since the first Gulf War in 1991. It recovered a little, trading about 20% around mid-day. At their lowest, oil prices were down 34% during that time.
Compare this with prices just before the financial collapse in 2008. Oil was trading at £96.82 in July 2007, reached £165.06 before the collapse in June 2008 and then shot down to £50.93 by January 2009.
Russia vs. Saudi Arabia
The escalating spat between Russia and Saudi Arabia is adding to investor’s fears over oil prices. In the lead up to the price drop on Black Monday, the OPEC (Organization of the Petroleum Exporting Countries is an intergovernmental consisting of 14 oil-producing nations) recommended additional production cuts of 1.5 million barrels a day starting in April. This was in order to cut production and stabilise the markets.
But the coronavirus decreased demand for oil even more, so in response, Russia refused to participate and instead has ramped up production whilst slashing prices. Saudi Arabia quickly followed suit, which made oil prices tumble.
2. Gold prices
Gold proved once again what an incredible safe haven investment it is. On the 24th February prices went up to £1304.49, the highest it’s ever reached. Prices went from £1268.18 at the end of close on Friday, to £1288.78 the following Monday midmorning, topping off at £1304.49 in the afternoon and coming back down to £1279.11 by the end of Monday.
Gold prices dipped down a little the week after, giving investors the opportunity to enter the market. A week later, on Black Monday, the price rose sharply again to £1301.58.
3. Central bank interest rates
The US Federal Reserve slashed interest rates in an extraordinary attempt to contain the coronavirus economic fallout. In their first emergency move since the 2008 financial crisis, they dropped their interest rates by half a point.
The move came after a call between finance ministers and central bankers from Britain, Canada, France, Germany, Italy and Japan. These rate cuts and policy actions by central banks were clear indicators of close alignment at an international level.
Low-interest rates aim to stimulate growth but a global pandemic is unusual because it first hits supply and not demand. A closed factory and a quarantined workforce cannot make mobile phones or cars, no matter how much people want to buy them.
The dramatic cut in US interest rates failed to have the desired effect. Manufacturing and travel sectors underperformed, also adding to the stock market jolts. All current central bank interest-rates can be seen below:
There are so many variables that come into this stock crash. Aside from oil prices taking a massive dive, the coronavirus continues to spread, and gold is now on a bullish trend up. Pair this with an overinflated stock market, fear of economic shutdown and a stressed high-yield US bond market, it’s easy to see why traders fear a new global recession is inevitable. With so much uncertainty and with no end in sight, we still have a long way to go before we get through this.