Gold hit an 8 year high last night reaching US$1765. Our AUD surged over 69c to take all the shine of the rise off for local investors. Much of gold’s rise was likely off the back of a worsening global outlook for COVID-19. Whilst mainstream news seems to have largely moved on with more stories of car crashes and puppies, the global reality is getting worse, notably with Sunday seeing the single worst day globally for new cases since the pandemic began at 162,045. From WHO's director general Tedros Adhanom Ghebreyesus:
"The pandemic is still accelerating... We know that the pandemic is much more than a health crisis, it is an economic crisis, a social crisis and in many countries a political crisis... Its effects will be felt for decades to come."
And so whilst markets continue to flourish on hopes of the mythical V shape recovery, the second wave threatens a U shape at best or W shape more likely. From Bloomberg:
““The fight is nowhere close to being over,” said Tuuli McCully, the Singapore-based head of Asia Pacific economics at Scotiabank. “A second significant wave of infections in advanced economies is a huge risk for the global economy that is still in very early stages of recovery.””
One thing to consider when talking of the V (or U or W for that matter) is the critical piece of where the left hand side started and where the right hand side ends up. It is well documented that Australia was already languishing economically before COVID-19 broke out. We did not go into this in a strong position which might carry momentum into a strong recovery to get that right hand top of the V equal to the left. Rebounds in retail spending, whilst certainly strong, may well contain a large degree of pent up demand that may not see that replicated going forward. Some elements of retail, such as clothing and restaurants are still down 20-30% from last year. This all before the ‘economic cliff’ in September. The key thing to consider too is that the broader retail numbers that saw a 16.3% surge in May were after a 17.7% fall in April. That is just retail. Consumer services have been a lot harder hit and yet to see the recovery.
And so more broadly we need to consider that if we recover to what might broadly look like a full recovery of say 90%, we were not in an economy where many businesses could handle a 10% drop. We then looking at the insolvency phase to this crisis.
The chart below from AMP this week shows just how far we are away from that.
More and more commentators are talking about a Nike Swoosh recovery. The issue will be when the right hand side ends higher than the left and how many business become insolvent beforehand.
Victoria is demonstrating right now that we are far from out of the COVID woodwork and we are most certainly economically inextricably connected to the rest of the world which still has a long way to go. Since this all started to seep back into the subconscious of more grounded investors on Friday we have seen yet again how gold’s role plays out.