Act Accordingly

Written by Gerardo Del Real
Posted March 2, 2020

Last month I provided a brief overview of the initial coronavirus reports out of China.

I told you that “for the first time in a long time I see the potential for a pullback in the major U.S. indices.”

And that “...outside of the very real human costs the virus has already inflicted, there is the potential for a significant economic impact.”

Unfortunately that’s exactly what’s playing out.

On the human front, more than 89,000 cases — and over 3,000 deaths — of COVID-19 (coronavirus) have been confirmed and worries about the virus becoming a global pandemic have governments around the world scrambling to come up with solutions to mitigate the human and economic impact of the virus.

While it appears that efforts in China are starting to bear fruit, new outbreaks in over 30 countries including Italy, the Middle East, and South Korea have spooked markets around the world.

New cases in Washington State and New York here in the U.S. have many taking precautions as the possibility of quarantines or prolonged school closures continues to increase.

Financially, the Dow, S&P 500, and Nasdaq Composite all fell more than 10% last week, their biggest weekly declines since the financial crisis back in October 2008.

The 10-year Treasury yield is at its lowest ever, recording a 1.04% reading over the weekend.

In China, a survey on Chinese manufacturing activity released on Monday came in at its weakest level ever. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 40.3 for February vs. an expected 45.7.

Anything below a 50 signals a contraction. Keep in mind these are the official numbers, which are typically optimistic.

Gold is once again in the spotlight, having flirted with the $1,700 level — a seven-year high — before pulling back to the $1,600 level.

The pullback is healthy.

The base metals and energy sectors continue to get clobbered and hopes for a rebound in the first half now appear to be deferred until the second half.

The better juniors in the copper market, assuming coronavirus is brought under control, are presenting an extremely compelling opportunity but one that will require a bit more patience before it bears fruit.

With good reason, for now. The world’s second-best economy — China — is nearly shut down.

The White House is planning to ask Congress to approve an emergency spending package to help the Trump administration battle the spread of the coronavirus.

It’s important to take a step back and look at what all this means and how it’ll likely play out.

I’ve repeated over and over that the U.S. is the cleanest dirty shirt in the financial markets laundry basket. That includes the bond market and the major U.S. indices.

I’ve explained that politicians from both sides of the aisle refuse to address the deficit but relative to the Eurozone and Japan, the U.S. is where capital would go in a black swan event.

The reaction in the U.S. bond market is all you need to look at if you are in the dark about where capital will go as volatility becomes a normalized part of the trading, investing, and speculative environment.

Expect coordinated and repeated global rate cuts in 2020. Not typical during election years but these are not typical times.

I’ve also explained that in a real gold bull market, gold would rise alongside the dollar. That’s played out beautifully as gold hit a seven-year high in February while the dollar also hit a three-year high.

The recent pullback in the gold price is in part due to profit taking and a rush for liquidity while the stock market attempts to force a significant rate cut from the Fed in March.

Rate cuts won’t help savers, rate cuts won’t provide the health care infrastructure necessary if coronavirus cases continue to escalate, but rate cuts are exactly what’s coming.

The last few years haven’t been a fun ride if you speculate in the junior resource space but, if you’re going to speculate in this space, you have to be willing to ride out the cycle, use pullbacks to average down, and add to quality names.

The recent sell-off is a pullback. Act accordingly.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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