Gold News

Not So Happy Year of the Rat

Gold price up, Chinese demand down...

The NORMALLY RELIABLE 'Love Trade' during China's Lunar New Year has been impacted by the deadly coronavirus, which was first reported in the central Chinese city of Wuhan – population 11 million – but has since spread to other areas of the country, writes Frank Holmes at US Global Investors.

Travel and spending in general have largely been restricted, with the Chinese government's recent travel ban affecting as many as 35 million people. Last Friday we even learned that Shanghai Disneyland has temporarily closed its doors in an effort to curb the outbreak.

Gold consumption in China, the world's largest consumer of the yellow metal, fell 13% year-over-year in 2019, the China Gold Association announced mid-month, with sales of jewelry, gold bars and coins falling sharply on higher prices.

What's also missing in the gold market today is the generalist investor. Holdings in gold-backed ETFs hit a new record high at the end of last year, but according to a Murenbeeld presentation, generalists are increasingly not participating – a reverse scenario of what we're seeing in cryptocurrencies.

Last Saturday marked the Chinese Lunar New Year, a time when as many as 400 million people ordinarily travel to visit family and go on vacation.

Before the coronavirus struck, 3 billion trips were estimated to take place during the 16-day celebration, while some 79 million passengers were expected to take flights, up more than 8% from 73 million a year earlier. The new Daxing International Airport in Beijing was to handle nearly 2 million flights.

When I flew through Zurich to attend a crypto conference this month, I happened to see multiple kiosks and signs proclaiming "Happy Year of the Rat," an indication of just how broad and far-reaching China's influence is – as well as how quickly viruses can spread in today's uber-connected world.

If investors are seeking a precedent to compare to the recent coronavirus, they need only look back 10 years, when the H1N1 Swine flu made it the US via Mexico.

An estimated half a million people died as a result of the virus, 12,000 in the US alone. Major US carriers were impacted, with Delta Air Lines reporting between $125 million and $150 million in lost revenue, according to a note last week from Credit Suisse. But the virus was relatively short-lived, and the industry promptly recovered.

Before that, in 2003, was the SARS epidemic. Air traffic to China fell by nearly half year-over-year in the second quarter of that year, which may have had a negative impact on airline earnings.

Credit Suisse points out it's hard to estimate SARS' impact on airlines since there was also the Iraq War, not mention a weak macro environment at the time. Again, airlines were quick to recover once the threat of the virus dissipated, and carriers were citing normalization of trends, including capacity growth, in the second half of 2003.

Our own airlines ETF has very little exposure to Asia. The only Asian carrier in the ETF, in fact, is Japan Airlines. It does not own Airports of Thailand, down 4% year-to-date through January 24, or Beijing Capital International Airport, down more than 15%.

Again, it's the Year of the Rat, the first sign of the Chinese Zodiac, following 2019's pig. Speaking of which, pork price inflation in China fell in December, to 97% from November's 110% year-over-year, as the African swine fever has wiped out some 40 million pigs. But according to Chinese officials, the fever has come into control, and the number of new pigs jumped the most in a decade last month.

Because it's the first of the 12 zodiacs, the Year of the Rat is seen as a time of beginnings and renewals. That brings me hope, especially paired with the recent positive development in the US-China trade war. To all of my friends and family, readers and shareholders, I want to wish you a Happy New Year!

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

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