Wednesday Briefs – 29 July 2020

A weekly commentary on current events. Follow populyst to receive notification.

This week: Southern surge fading; Gold price; S&P 495.

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Southern surge fading

The number of reported cases appears to have peaked in Arizona, Florida and Texas. Each surge lasted five to seven weeks before it started to fade. The arrows in the chart show six-week time spans.

This is longer than the New York State surge of March-April which lasted less than four weeks from onset to peak. But the availability of tests in New York at the time was not as broad as it is now in these Southern states. It is very likely therefore that the New York surge started earlier than the numbers showed, perhaps as early as February.

Screen Shot 2020-07-28 at 6.51.33 PM

As noted in previous briefs, deaths lag reported cases by approximately three weeks. And we should therefore expect deaths to peak (or have peaked) in Arizona, Florida and Texas on or around July 27th, August 7th and August 12th respectively. The Arizona number is already declining as expected.

The peaks for the seven-day average for deaths would end up at 77 for Arizona (it is already past that peak and down to 70), 166 for Florida (now 132 and still rising) and 208 for Texas (now 156 and still rising). These estimates are based on the current ratio of deaths to three-week-ago reported cases in these states, 2% for AZ, 1.4% for Florida and 2.1% for Texas.

Edited 1 August 2020: the ratio has been rising in Florida and we have revised the peak 7-day average deaths to 210, still on or around August 7th.

Gold price

The dollar price of gold made new highs this week to top its former peak of $1,900 per ounce seen in September 2011. It is difficult to predict its course going forward, in particular in the near-term. Gold is correlated to several factors but not consistently so over long periods. The weak dollar, low interest rates, a soaring budget deficit and geopolitical tensions all have played an important role in previous bullish periods. Today we have all four of these vectors and more.

Generally speaking, it is best to see the price of gold as a barometer of trust in institutions, even if this approach is not precise enough to assist traders in their near-term decisions. At the end of this 2016 article, we listed some questions that may help determine the direction of gold. Here they are, supplemented by two more:

  • What actions will the next US President and Congress take to restore trust?
  • Will GDP growth improve in the US and other developed countries?
  • Will cronyism be beaten back in the US and Europe?
  • Will there be more terror attacks in the West?
  • Will US tensions with Russia and China subside?
  • Will the war in Syria reach a settlement? Will ISIS be defeated?
  • Will the wave of migrants into Europe continue and how will it be handled?
  • Will China continue to deliver 6-7% GDP growth?
  • Will the pandemic subside within the next six to nine months?
  • After the pandemic, will the federal budget deficit be brought back under control?

Considering the likely answer to each, current conditions seem supportive of more increases for gold.

From an investor demand perspective, the entire value of gold in the world as a percentage of total investable assets must be well below what it was at the last peak of 2011, considering the large inflation seen in other asset classes during the past nine years. Because of its recent acceleration, gold may be due for a near-term pause. Beyond that, it could enter an explosive upward phase if its main drivers intensify. As volatility increases, a spike to $3,000 or higher is not impossible.

S&P 495

The stock market is holding on to its recovery gains with the S&P 500 now flat and the Nasdaq up 16% in the year to date. As noted previously, the bulk of this gain was effected by the top five market caps, Apple, Amazon, Alphabet/Google, Facebook and Microsoft.

A chart from Goldman Sachs last week shows that the “S&P 495”, which is the S&P 500 minus the five leaders, is still down 5% in the year to date.

This suggests that there would be significant upside for several sectors within the next year if the economy gets past the pandemic and recovers some degree of normality. Among severe laggards are travel and hospitality, restaurants, energy and many others.

Access all Wednesday Briefs here.

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