Why The Coronavirus Could Boost The Gold Price Even More

Gold prices hit new record highs against the euro and yen last week, even as the U.S. dollar continues to hold up well against the other currencies. Meanwhile, the coronavirus continues to support the gold price, although stock investors are still downplaying its effect. The S&P 500 and other major indices are holding up well.

Quantifying the coronavirus risk

In a note this week, Goldman Sachs economist Daan Struyven put the economic impact of the coronavirus into perspective. He warned equity investors that although the long-term impact will be minimal, things could get difficult in the short term. He emphasized that the impact of the coronavirus will be temporary but quite large.

Additionally, he noted that many people have been comparing the number of coronavirus cases to the number of influenza cases. For example, the number of deaths from the coronavirus is approaching 1,400 worldwide. However, the number of people who die of the flu in the U.S. alone is about 290,000, while about 650,000 people die from the flu globally every year.

Even though far fewer people die of the coronavirus than the flu, Struyven expects the former to have a much greater economic impact. He estimates that the outbreak will subtract approximately 2 percentage points from annualized global GDP growth in the first quarter. For comparison, large hurricanes in the U.S. subtract only about 0.2 percentage points from global GDP growth. Thus, he estimates that the impact of the coronavirus outbreak will be about 10 times bigger than the disruption caused by a major hurricane hitting the U.S.

Coronavirus impact on gold prices and beyond: China’s huge size taken into account

The reason for the massive impact to global GDP is China’s massive size. Wuhan, the city where the outbreak started, is home to about 11 million people, making it about the same size as Paris. Hubei province is home to nearly 60 million people, which is about the same as the entire Iberian Peninsula. Hubei’s economic output is about the same as the entire states of Massachusetts or Washington.

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