Gold had ticked up to US$1,580 per ounce as at mid-morning on Thursday 30 January, significantly higher than the US$1,510 at which it started the year, but only marginally above the previous year-to-date US$1,570 high hit at the end of the first week of the year.
Two factors account for the rise, subsequent drift and then lacklustre recovery. The first is that Donald Trump assassinated an Iranian general. The second is that the US dollar has been strengthening.
But what of the coronavirus, I hear you cry?
Therein lies an interesting tale. Yes, the coronavirus has brought buyers into the market, and yes, it’s probably added between US$30 and US$40 to the price thus far. Could there be more? – you bet.
Thus far though, the big safe haven money has tended towards the US dollar rather than gold. A quick look at the DXY [https://www.bloomberg.com/quote/DXY:CUR], the index that measures the performance of the dollar against a basket of currencies including the euro and the pound, shows a consistent strengthening since the beginning of the year.
A slight jump in the DXY is discernible around the time that Mr Trump killed Mr Soleimani, but it’s nothing like the jump in gold – you wouldn’t necessarily pick out the move as significant against the broader trend unless you were looking for specific correlations.
The conclusions are simple enough to draw.
First, the gold price is more sensitive to conflict in the Middle East than it is to viruses spreading slowly and inexorably out of China. That’s because, although crises with Iran and Syria have tended to manifest as low-level proxy wars, there’s always the possibility that they will bubble up into something nuclear threatening the existence of Israel and the entire post-war order.
Coronavirus is serious, but the threat it poses is not of that magnitude, yet. Thus far, it seems, the market is looking at the likely ramifications more in economic terms than in terms of its wider destructive potential. Thus mining companies sold off because demand from the Chinese economy is likely to be lower now in the near term. Likewise, the Aussie dollar is weaker because Australia generates significant foreign currency earnings from China, not just from commodities, but also from tourism. And of course the Yuan itself is feeling the pressure, alongside local stock markets in places like Taiwan, where the index dropped nearly 6% when it opened after the New Year break.
In such circumstances, when investors are looking to pare losses rather than prepare for doom, the US currency is the obvious place to go: obvious because the US economy remains a standout performer in a sea of otherwise anaemic growth. And obvious too because of its instant liquidity and status as the global currency of choice.
As it stands, Chinese authorities reckon the coronavirus might trim as much as a whole percentage point off the 6% GDP growth that’s targeted for 2020. It’s a serious hit for miners, for Australia, and possibly for those looking to break into the Chinese market, like Tesla. But it’s not enough to throw the world as a whole off its stride.
If the virus spreads significantly, and deaths outside of China begin to rise, sentiment is likely to change, and rapidly too. Those who took an early position in gold will look prescient. But under those circumstances no-one will be laughing.