Global Shutdown And Gold

The comments below are an edited and abridged synopsis of an article by Arkadiusz Sieroń

COVID-19 has frozen the global economy. People want to protect themselves and others against a contagious pathogen, and the economy is collapsing.

Global Shutdown and Gold | BullionBuzz
Coronavirus text outbreak with red world map on dark gray background. Virus hazard, pandemic, health risk concept

We could avoid a recession, but only by letting billions get infected and millions die. Currently, the economic lockdown is our only weapon against COVID-19. But the costs of the shutdown are astronomical.

Nobody knows how deep the recession will be; it depends on how the epidemic evolves and how governments respond, and no one can determine this with certainty.

Projections for the US show that GDP will fall by 0.2% in 2020. Goldman Sachs says that US GDP will shrink 24% in Q2 (2.5 times more than any decline in history), and 3.8% for 2020 as a whole.

These forecasts may be too optimistic. After all, the initial figures from China for January and February were much worse than feared. Industrial production fell 13.5%, well below of expectations of a 3% decline. Retail sales plunged 20.5%, below expectations of a 4% decline. And fixed asset investment collapsed 24.5%, much more than expected.

China imposed more draconian measures than other countries, locking down cities and regions. But thanks to this, it has contained the epidemic and hopes for a fast recovery. But a massive negative shock in China in Q1, followed by economic shutdown in Europe, the US and other countries, will make this year’s performance the weakest since the Great Recession, or even the Great Depression.

Chances of a V-shaped recovery are slim. Instead, we should expect a U-shaped (L-shaped?) recovery, because we are still several weeks away from the epidemiological peak. Some companies will go bankrupt. Consumers may not resume spending, nor businesses hiring, as there may be a second wave of infections.

Another issue is that problems that were hidden during the economic expansion and bull market (excessive indebtedness and zombie companies) will emerge and further deepen the recession.

Unless a vaccine is developed quickly, the recession will be more severe than most people realize. The recovery will come later and will be weaker than expected, especially if the debt problem re-emerges. Switching off the economy and switching it on again is not easy; it’s like restarting a nuclear reactor. It’s easy to make a catastrophic mistake, and some countries will make errors along the way. In such a time, gold will shine.

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