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Coronavirus: we're buying toilet paper but what about gold?

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The coronavirus is hurting global growth prospects and equity values as investors flee to safer assets to minimise capital losses on their portfolios, including gold.

Gold last week soared to seven-year highs before retreating. With US Treasury yields falling to record low levels, the precious metal could reach US$1700 per ounce in the near term if the coronavirus remains uncontained.

Gold recently hit a seven-year high of US$1665 before dipping back below US$1600. But further gains could be expected over the first half of the year if COVID-19's rapid spread brings on economic uncertainty and greater equity market volatility.

gold safe haven coronavirus

On the local exchange, gold miners have rallied over the past year. The S&P/ASX All Ordinaries Gold Index was up 17.5% over the year to February 28, compared to a gain of 8.6% for the broader share market, as measured by the S&P/ASX 200.

Northern Star, Saracen Mineral Holdings and AngloGold Ashanti have stood out among the gold miners, with gains of around 48.5%, 48.4% and 47.9% respectively over the year. These Australian miners are all held by the VanEck Vectors Gold Miners ETF, which has gained 39.7% over the same period.

In 2020, global investors will likely favour gold and gold miners as safe-haven assets to hedge against the market volatility brought about the coronavirus's quick spread and the jump in economic uncertainty.

Even before the current share market rout, gold was rallying with stocks at record highs in the US, an indication that investors were hedging their bets. Now, the longer the virus remains uncontained, the more global economic growth will be compromised, and the greater the prospects for gold's gains. This week's rate cut by the US Federal Reserve - its first emergency rate cut since 2008 - will only add to the momentum.

Another factor supporting the gold price is increased central bank purchases. Strong buying for gold as a financial and currency hedge from bullion exchange traded products and central banks has driven up the yellow metal's price, and this buying will likely continue this year given the security gold represents.

Another source of risk is huge levels of private corporate debt in the US, the world's biggest economy. While economic downturns aren't necessarily gold drivers, the financial stress that accompanies recessions could trigger a sustained bull market for gold and gold stocks. Overleverage is usually the culprit, as we saw with subprime mortgages in 2008, which triggered the global financial crisis.

If the coronavirus becomes a pandemic, then recession could hit the US, with the economy barely growing even before the virus struck. That could push many companies into debt default as their cash flows freeze up. Currently, around 80% of corporate leveraged loans in the US have weak debt covenants, up from 6% in 2006.

While banks are in better financial shape since the crisis, 85% of leveraged debt in the US is held by non-banks and this represents a significant systemic risk. So, along with the coronavirus, and falling interest rates, the fundamentals are in place for a sustained gold rally this year.

We're cutting through the confusion to help you manage your money during the coronavirus outbreak. Click here for more on how COVID-19 could affect your job, budget, super and investments.

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Arian Neiron is managing director and head of Asia Pacific at VanEck.
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