This Is Not a Drill!

Friday, 6 March 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • The other clear winner

This is not a drill. This is not the time for giving up. This is not a time for excuses. This is a time for pulling out all the stops.’

WHO Director-General Tedros Adhanom Ghebreyesus

Apologies.

I intended to steer clear of all things virus today.

But if you read the opening quote above…you’ll know I failed right out of the gate.

I’ll spare you from rehashing the latest alarming COVID-19 headlines, though. It’s the least I can do. Besides, the mainstream media has that well covered.

Instead, we’ll stick to the latest market ructions. And how you may wish to navigate them.

With another heavy round of selling in the US overnight, Wall Street volatility is at eight-year highs. And with falling interest rates and government stimulus packages battling virus-driven global recession fears, you should be prepared for a lot more volatility to come.

As a reminder, last week the Down Jones shed 9.1%. Then on Monday the Dow closed up 5.1%. On Tuesday it flipped to close down 2.9%. On Wednesday it was well back into the green, closing up 4.5%. And yesterday (overnight our time) it dropped 3.6%.

Dizzy yet?

The swings on the ASX haven’t been quite as extreme. But as you can see in the five-day chart below, it’s been anything but smooth sailing:


Port Phillip Insider

Source: Google Finance

[Click to open in a new window]

At time of writing the ASX 200 is down 2.4%. It’s now down 12.6% since the sell-off began in earnest two weeks ago, on Friday, 21 February.

But there are a few noteworthy standouts in this falling market.

Gold was on an upward track even before the coronavirus fears sent investors scrambling for haven assets. And it’s done particularly well in Aussie dollar terms.

Have a look at the chart below. It shows the gold price in Australian dollars per ounce on the right hand scale. And it dates back all the way to 1975.


Port Phillip Insider

Source: Goldprice.org

[Click to open in a new window]

Have a look at the far left side of the chart.

In 1975 — when your editor was a year two student in Tokyo — you could have picked up an ounce of gold for $51. Today that same ounce is worth $2,536. That’s a gain of 4,873%.

Now granted that’s over a 35-year period.

So let’s bring up the one-year chart:


Port Phillip Insider

Source: Goldprice.org

[Click to open in a new window]

One year ago an ounce of gold was worth $1,812 Aussie dollars. Meaning the yellow metal has gained 40.0% over 12 short months.

It’s hard to tell on the chart. But gold — at seven-year highs in US dollar terms — just notched up a new record high in Aussie dollars, unseating the previous peak from 24 February.

As I said, even before the coronavirus launched a new rush for haven assets, gold was doing well. But since fear really began to trickle into markets in early February, gold’s run higher accelerated. It’s now up 10.0% since 4 February.

Little surprise then that we stumbled across this headline in Wednesday’s The Australian, ‘ETFs funnel gold rush as Australians look for safe-havens as coronavirus escalates’.

The article notes:

The nation’s biggest listed gold fund saw inflows more than triple over the month of February. The ETF Securities GOLD ETF took in $109m over the month of February up from $35m a month earlier…

A typical month for the GOLD ETF a year ago would have seen inflows of just $10m or so…

The strong recent inflows also suggest that even if sharemarkets bounce back, the move to gold is a deep trend that will not reverse with a short-term sharemarket recovery.’

As you’d expect, with demand for gold sending the price rocketing, the well-positioned gold miners are making hay.

Newcrest Mining Ltd [ASX:NCM] is up 1.8% in intraday trading. Newcrest is now up 15.5% since Monday’s opening bell.

That performance pales next to Saracen Mineral Holdings Ltd [ASX:SAR]. Saracen’s share price is up 5.8% in intraday trading. And up 20.9% since Monday.

As a final example (there are more…) Northern Star Resources Ltd’s [ASX:NST] share price is up 3.6% at time of writing. That brings its gains to 15.1% for the week.

Remember, the ASX 200 is down 3.0% for the week.

Now, as always, a word of caution. Even with rising gold prices, not all gold stocks will go up. Some can and will fall. Hunting up gold is a notoriously risky business. Especially on the smaller end of the spectrum. Though it’s precisely that smaller end where the really big potential gains can be found as well.

That’s why doing your homework is crucial before you invest a single hard-earned dollar.

Over at Rock Stock Insider, published by our sister company Fat Tail Media, Aussie gold analyst Shae Russell spent much of the past year doing just that. Travelling the globe. Interviewing leading gold experts. And digging beneath the fluff you’ll generally find in the financial news.

You can find out what she’s uncovered — along with her top gold stock picks and gold ETF recommendation — by clicking here.

Now a look to the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 969.58 points, or 3.58%.

The S&P 500 closed down 106.18 points, or 3.39%.

In Europe the Euro Stoxx 50 index closed down 56.98 points, or 1.67%. Meanwhile, the FTSE 100 dropped 1.62%, and Germany’s DAX closed down 182.97 points, or 1.51%.

In Asian markets Japan’s Nikkei 225 is down 690.97. points, or 3.24%. China’s CSI 300 is down 1.28%.

The S&P/ASX 200 is down 154.63 points, or 2.42%.

West Texas Intermediate crude oil is US$46.36 per barrel. Brent crude is US$49.99 per barrel.

Turning to gold, the yellow metal is trading for US$1,673.49 (AU$2,527.17) per troy ounce. Silver is US$17.47 (AU$26.38) per troy ounce.

One bitcoin is worth US$9,104.90. That’s up 3.9% overnight, lending credence to proponents spruiking bitcoin as a safe haven asset.

With bitcoin’s next halving on the horizon, crypto expert Sam Volkering thinks bitcoin has a lot further to run, virus or not. You can watch Sam’s detailed analysis of the crypto market in this video interview with publisher James Woodburn.

The Aussie dollar is worth 66.22 US cents.

The other clear winner

Aside from gold, bonds are another clear winner from the mounting fear gripping markets.

Overnight, the 10-year US Treasury yield fell to 0.90%. That’s a new record low. Meaning a new record high price for the bond. (Remember, bond prices move inversely to the yield.)

Here at home, the 10­-year Australian government bond yield stood at 0.77% yesterday. That’s not quite a record. That record, The Australian Financial Review tells us, was hit on Monday when yields dipped to 0.68% ‘at the height of Covid-19 alarm’.

The article notes that, ‘This year, there’s already been a sharp fall in bond yields, with the 10-year plunging 47 per cent to where it sits today.’

That’s a 47% fall in yields. Meaning a 47% gain in the bond’s value.

Now it’s not easy investing in bonds in Australia.

But one way to gain exposure to the bond market is via ETFs.

With that in mind I turned to our income and options specialist, Matt Hibbard. Here’s a snippet from the email he just sent back:

In terms of bond ETFs, you could consider Vanguard’s Government Bond ETFs: VGB and VAF. Both invest in AAA or AA rated Aussie government bonds, the only difference being that VAF also invests in high-grade corporate bonds (around 10% or less).

They average a yield of around 2% or thereabouts, pay distributions quarterly, and unlike term deposits, you’re not locked in. I don’t understand exactly how they manage their duration risk. But they can be a good place to park your money knowing that you can be out in T+2 if you find something else you want to buy.

Of course bonds carry their own risks. This is just a suggestion for readers to research further on their own.

We’ll leave it here for today.

Enjoy the long weekend. I’ll be back with you on Tuesday. But be sure to check your inbox on Monday for a special presentation on risk management from trading pro Murray Dawes.

Cheers,
Bernd