Herd Insolvency or Herd Immunity What Will Affect Gold More?

Herd Insolvency or Herd Immunity What Will Affect Gold More?
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VACCINES ARE COMING. BUT SO IS THE DEBT CRISIS. WHAT DOES IT IMPLY FOR GOLD?

COVID-19 cases are still rising at an alarming rate within the U.S. As the chart below shows, the rolling 7-day average of latest daily infections stays above 160,000.

Daily new confirmed COVID-19 cases

Show is the rolling 7-day average. The numberr of confirmed cases is lower than the number of cases; the main reason for that is limited tesng.

It means that the immediate economic outlook is going to be dark. The short-term economic slowdown is sweet information for the gold market.

But there's also bad news for Gold, and by that,we mean the recent positive news on vaccine efficiency. It’s become clear that we'll probably have the primary doses of a vaccine – or maybe a couple of vaccines – by December 2020 or in early 2021, the tail-risk of no vaccines within the near future has been practically eliminated. This is why the stock exchange has increased despite rising Covid-19 cases. Simply put, some companies – like airlines – become investable again because of the breakthroughs in vaccine developments.

Does this mean that gold is doomed within the medium-term, or that the vaccines’ arrival will sink gold? Well, not necessarily. Although it’s true that the elimination of the risk weakens the safehaven demand for gold, one mustn’t forget that gold was actually during a bullish trend before the pandemic started because of the accommodative Fed’s monetary policy.

So, the question is: does one think that herd immunity will force the Fed to drop its dovish stance? Or will the eradication of the coronavirus make the entire new debt disappear? I don’t think so. In other words, the vaccines will solve the health crisis, but they're going to not solve all our economic woes. And the debt problem is poised to be one among the best global threats immediately. Indeed, the before week, the Institute of international Finance said that global debt is predicted to surge from $257 trillion in 2019 to a record $277 trillion by the top of 2020. On a relative basis, the worldwide debt is predicted to soar from 320 percent to 365 percent

of worldwide GDP. This means that the worldwide economy will struggle to urge out from indebtedness without triggering adepression.

And if you have any slightest doubt that the wave of debt insolvencies is coming; in the previous week, Chinese state-owned company Yongcheng Coal & Electricity Holding Group defaulted. What is important is that it wasn’t an isolated event but a neighbourhood of a series of defaults by top-rated state-owned enterprises. This bankruptcy highlights the danger of defaults within the bond market. Importantly, the pile of corporate debt is very large not only in China, but also within the U.S., because the chart below shows. As well, the Fed won't help if the debt crisis occurs. The central banks can affect the credit crunch, but not the solvency crisis. Oh boy, 2021 is setting itself up to be a stimulatting year!

Conclusion:

What does all of these mean for the gold market? With or without the coronavirus, the U.S. economy is becoming increasingly debt-dependent. The only problem being is that debt-driven economic process isn't sustainable within the long-run. Even a little increase in interest rates could lead on not only to higher borrowing costs, but also to a wave of debt defaults. What does this imply? One possible outcome is that the interest rates will need to be kept at ultra-low levels for years. It goes without saying that gold thrives in an environment of low real interest rates.

Moreover, some economists mean that the top of the pandemic could accelerate inflation which the Fed and therefore the state governments wouldn't oppose an excessive amount of. Actually, the U.S. central bank has already announced its new monetary regime during which it wouldn’t react to a rise in inflation rates above its target.

A􀅌er all, higher inflation would help Uncle Sam to scale back the important value of debt and gold should benefit in such a macroeconomic environment.

US Corporate Debt as % of GDP Source: ST.Louis Fed

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Author:Hima Varsha

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