The Most Mispriced Event of the Century

Friday, 14 February 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • How safe is your gold?

I think this is the most mispriced event in our generation, but until that is obvious you have to participate in the rally.

James Whelan, Investment Manager, VFS Global Macro Fund

The opening quote above comes courtesy of this morning’s Sydney Morning Herald.

The event Whelan is referring to is the deadly coronavirus. Or COVID-19, as it’s been rebranded. And the mispricing refers to investors’ blasé attitude to the potential that things could get worse. Much worse…

US markets retreated a touch overnight. But they’re still hovering near record highs. And futures markets indicate they’ll be back in the green tomorrow (overnight our time).

Meanwhile the ASX 200 is posting another day of gains, up 0.42% at time of writing. This comes despite the Aussie government extending the travel ban on foreigners who’ve been in China for an additional week. The travel ban affects almost 100,000 Chinese students studying in Australian universities. It now runs through 22 February. But it could well get pushed out again.

Yet China’s CSI 300 index is up 0.80% in intraday trading…

Of course, these are just the index results. Some stocks are feeling the impact of the travel bans and factory closures more than others. While many continue to post gains. Hence Whelan’s advice to participate in the rally.

That’s advice most of our editors agree with.

Over at his premium trading service, Billion Dollar Breakout Trader, Ryan Dinse urges traders not to give in to emotion:

Markets are thinking beyond the immediate effects of potential supply chain disruption and slowdowns in economic growth.

Instead, they’re rubbing their hands with glee at how much money central banks will throw out to fix this problem.

Is that bad or good?

Probably bad in the long term.

But for now, it is what it is as far as us traders are concerned. We have to trade the situation as it is, not what we think it is or is not going to be.

With central banks fuelling the longest stock market bull run in history, investors have grown accustomed to the old ‘bad news is good news’ mantra. When things turn pear shaped…the central banks throw more cheap money around.

The European Central Bank (ECB) is even dipping its toe in combatting climate change. So it’s a safe bet central banks will pull out all the stops to support markets should the coronavirus continue to spread.

As John Porter, a fund manager at Mellon Investments Corp, told Bloomberg TV:

We are probably going to see central banks continue to step in to support the economy and that’s part of what investors are looking at to give them confidence that this is a situation they can look through.’

But even if COVID-19 is contained sooner than later, as we fervently hope, do central banks have enough fire-power to keep markets from tumbling?

Global strategist Jim Rickards has serious doubts.

Here’s what he writes in Strategic Intelligence (published by or friends at Fat Tail Media):

The best case is that the Chinese economy may drop from estimated 6% growth to 4% growth in the first half of 2020. The worst case is difficult to imagine, but could include a global recession and maybe even a global financial panic.’

The best-case scenario sees Chinese GDP growth slowing to 4%…and the CSI 300 is only down 4.7% over the past month? Investors in Chinese stocks are certainly putting a lot of their eggs into the People’s Bank of China’s basket.

And this as the worst-case scenario is beginning to look disturbingly likely.

From The Australian:

Leading scientists are still convinced the true number of cases is being vastly underreported.

The director of the MRC Centre for Global Infectious Disease Analysis, Neil Ferguson, said he believed only 5 per cent of cases were being detected in China.

“I think we’re in the early phases of a global pandemic at the moment,” Professor Ferguson told the BBC.

Officially, some 60,000 people are now infected with coronavirus. The real numbers are almost certainly higher. If Ferguson is right, that number could already be in the 1.2 million range.

Frighteningly, that figure could be dwarfed over the coming months.

From Bloomberg:

‘[A] top infectious-disease scientist warns that things could get far worse: Two-thirds of the world’s population could catch it.

So says Ira Longini, an adviser to the World Health Organization who tracked studies of the virus’s transmissibility in China. His estimate implies that there could eventually be billions more infections than the current official tally of about 60,000.

To date, most of those 60,000 confirmed victims are in mainland China. Though COVID-19 has already spread to 24 countries that we’re aware of.

Active traders may be able to squeeze some more profits from the markets before the wider impact of the virus becomes obvious. But what about long-term investors?

According to veteran wealth planner Vern Gowdie, you should head for the exits.

When is the best time to panic?

The simple answer is… “before everyone else does”.

Unfortunately, that’s not how it works.

The vast majority do the opposite of what’s required to build and (more importantly) retain long-term wealth.

Vern’s just finished a new special report detailing why he believes ‘everyone else’ will start to panic in 2020. And how you can prepare for that today.

You can read that here.

And on that upbeat note…to the markets!

Markets

Overnight, the Dow Jones Industrial Average closed down 128.11 points, or 0.43%.

The S&P 500 closed down 5.51 points, or 0.16%.

In Europe the Euro Stoxx 50 index closed down 7.69 points, or 0.20%. Meanwhile, the FTSE 100 lost 1.09%, and Germany’s DAX closed down 4.35 points, or 0.03%.

In Asian markets Japan’s Nikkei 225 is down 114.66 points, or 0.48%. China’s CSI 300 is up 0.80%.

The S&P/ASX 200 is up 29.57 points, or 0.42%.

West Texas Intermediate crude oil is US$51.43 per barrel. Brent crude is US$56.34 per barrel.

Turning to gold, the yellow metal is trading for US$1,577.23 (AU$2,348.47) per troy ounce. Silver is US$17.66 (AU$26.30) per troy ounce.

One bitcoin is worth US$10,242.89.

The Aussie dollar is worth 67.16 US cents.

How safe is your gold?

One commodity yet to be negatively impacted by the coronavirus is gold.

The yellow metal is up 3.8% year-to-date, and up 20.5% over the past 12 months.

But with gold at near record highs in Aussie dollar terms, and our debt-mired government facing a slowing economy, how safe are your physical gold holdings from potential confiscation?

This question comes from reader Paul:

Hi, I’m very much a gold fan but one thing concerns me and that is the Government’s ability to order gold to be surrendered. I understand legislation to enable this was passed years ago but is awaiting a signature to enact this.

What can a gold owner to do in such an eventuality without breaking any laws? I have written and posed this question before but have not read a response.

Paul is referring to Part IV in Australia’s Banking Act of 1959. And he’s not the only one wondering just how safe gold holdings are from the sticky fingers of our government.

For an answer, we turn to our good friend Shae Russell. Shae is the editor of Rock Stock Insider, published by our sister company Fat Tail media.

Are we living in a world where the RBA can confiscate our gold and return us fiat dollars? Technically yes, but the reality of that happening is very slim.

Shae refers to a recent interview she had with Bron Suchecki. Bron’s the senior precious metals analyst at Pallion, the parent company of ABC Bullion. And he was the first person in Australia to discover the loophole around gold ownership in Australia

Here’s more from Shae:

Part IV of the Banking Act of 1959 as Bron says, has “a mechanism in place to require delivery of gold to the Reserve Bank of Australia (RBA)”. However, while the provision to hand over your gold is in the Banking Act, Bron believes it’s more that it’s a forgotten piece of legislation than a real threat to private gold ownership. Remember, the Banking Act was written at a time when Australia was on a gold standard.

Yet decades later, we still have this provision that clearly states if the RBA commands it, we need to hand over our gold to the central bank. As Bron points out, it possibly has more to do with ensuring the mines delivered the gold to the RBA than individuals.

Funny how governments have a far easier time writing new legislations than repealing old ones?

But the word from our experts is this is one loophole the government is highly unlikely ever to utilise.

That’s all the time we have for today…and this week.

Have a great weekend.

And if you’d like to know more about Shae’s investment advisory service Rock Stock Insider — and her top gold stock picks for 2020 — you can find that here.

Cheers,
Bernd