Pandemic – Stocks, Gold, and Central Banks

Stocks didn’t act on Tuesday (2/4) like the Coronavirus outbreak was an extinction-level event.  

But as usual, there’s more to the story than immediately meets the eye.

UBS customers were told that China’s stock sell-off “is an opportunity to buy that country’s stocks.”   

One headline said, “Stock Market Rally Soars as Coronavirus Fears Fade.”   Another read, “Coronavirus?  What Coronavirus?”

The Dow Jones Industrial Average, which lost 600 points on Friday, gained back 144 on Monday and 400 more on Tuesday, while gold sold off both days, down almost $27 on Tuesday.

It seems like there are a lot of virologists, epidemiologists, and public health experts working as stock analysts and running investment portfolios, because these voices are acting like they know a lot more than the rest of us about the still spreading virus.

But did anybody who really knows blow the all-clear whistle?

No.  In fact, as we have gone to great lengths to explain in these discussions, the only thing that lifts stocks these days is the gushing of liquidity from central banks.  So, to understand the market action of the last couple of days, we need only look for the money spigots being turned on full force.  That’s what gets the algorithm traders excited.

And if fact the world’s central banks are opening the floodgates.  The People’s Bank of China mainlined $174 billion into the markets on Monday.  The Federal Reserve and the European Central Bank are onboard as well.

This is what the central banks do:  They print money.  That’s it.  It’s their only tool.  It’s the hammer in the hands of central bankers who see every problem as a nail.

You could call it counterfeiting, since it is all just made up money; but unfortunately, it’s legalized counterfeiting.   (And of course, it’s actually digital money, but we use the expression “printing money” as a short-hand.)  

A writer at CNBC on Monday described the syndrome we’re discussing about as well as anybody in the mainstream media ever.  He wrote, “Central banks like the PBOC and its counterparts around the world — notably the U.S. Federal Reserve and the European Central Bank – have been bailing out economies and financial markets since the 2008 financial crisis. Trillions in digital money printing along with bargain-basement interest rates have been the main weapons of choice to combat recurring episodes of slowness.”

Of course, doing the same thing over and over without solving the underlying problem could be clinically diagnosed as a derangement.  Meanwhile, the real problem, financial bubbles of gargantuan proportion that will eventually pop, go unaddressed by the central bank bureaucrats.  

In any case, Wall Street follows the central bankers’ lead.  If they are going to print a lot of money to offset the slowdown from the Coronavirus outbreak, then the stock markets will go up.  At least for a couple of day.  And even hedge funds guys that understand the long-term effects are nimble and will sell gold even if just a trade for a day or two, for the liquidity they need to leverage up in front of the new, aggressive money pumping.

That’s about as concisely as we can describe the action of the past couple of days.  If the Coronavirus has the deadly punch that many fear, its financial impact on the stock markets will be devastating and gold will rocket higher.  If Coronavirus proves to be less than a pandemic-level catastrophe, the central banks’ additional money printing will send gold higher as well.

The central banks are in a box of their own creation.  

The risk to stocks is extraordinarily high.  Gold is the only safe haven.  We recommend our friends and clients take advantage of this break in the gold price.  It isn’t likely to last for long.