By Giles Coghlan, Chief Currency Analyst at HYCM
UAE opens for business
The UAE is now opening its doors for business internally and externally as Emirates and Etihad Airways have plans to resume long-haul flights to 29 destinations across Europe, Asia and North America by June 15th. The UAE is not alone in opening its doors for business as countries around the world lift COVID-19 restrictions. In Europe, countries are undergoing a staged re-opening with many businesses changing their operations in order to prioritise customer and staff safety. However, the message that the markets are sending is that business will shortly be back to normal.
The market is increasingly pricing in that the worst of the COVID-19 outbreak is behind us now. There are a number of very promising vaccine trials in the pipeline and the US administration selected Moderna (MRNA), AstraZeneca (AZN), Johnson & Johnson (JNJ), MERCK (MRK) and Pfizer as COVID-19 vaccine candidate finalists. The chances of one of these trials being successful is what the market is pricing in. In fact, the Nasdaq is approaching its all-time high at the time of writing, such has been the optimism.
Furthermore, the US job market has shown an incredible result for May. Wall Street had estimated that US jobs would fall by 8.3 million. However, instead of falling, jobs actually rose by 2.5 million in the biggest jobs increase ever. This report indicates that the US may have turned a corner and that the worst of the COVID-19 impact is now behind us. The hopes for the so-called ‘V-shaped’ recovery are alive and well. However, these hopes could easily turn out to be premature.
Risk of COVID-19 returning
According to researchers at Karolinska Institute in Sweden and the University of Basel in Switzerland, their mathematical model shows that the spread of COVID-19 can decline in the summer, but then return in the autumn and winter. The Professor of infectious disease control at the Department of Microbiology, Tumor and Cell Biology, Karolinska Institute says, ‘Even if the spread should decrease in the summer we cannot conclude that the pandemic is contained because such a decline can be temporary and due to a combination of infection control efforts and seasonal variation in how the virus spreads.
This note of caution chimes with history as the 1918 influenza pandemic, known as the ‘Spanish flu’, took place in three distinct waves. It was actually the second wave which proved to be the most deadly.
So, what would be a good hedge against the return of COVID-19? Well, there is one commodity that shines in the midst of a recession.
In recessions, gold tends to shine very brightly. In each of the three last major recessions during 1990-91, 2001, and 2007-2009 gold increased in value. Gold is historically good to hedge into recessions and many investors are already adding to their gold holdings. In fact, gold ETF inflows through the month of May have beaten yearly records in only 5 months. Gold-backed ETFs added $8.5bn across all regions in May, boosting gold holdings to a new all-time high of 3,510t.
Look at the chart below for gold’s increase over the last few recessions and you can see why it is regarded as a good hedge during recessions:
Demand for gold is likely to help the UAE as it is a regional centre for gold trading in the Middle-East. Gold in raw, semi-worked and jewellery form is highly important to both the U.A.E’s import and export figures. In 2018, unwrought gold made up the U.A.E’s largest imported item. In 2017 the UAE exported $142 billion and, of these exports, $20.2 billion were gold. Around 14% of the UAE’s export market will be encouraged by rising gold prices. The country’s large gold market is likely to benefit from investors across the entire region flocking to the precious metal as a safe haven hedge against a second outbreak of COVID-19.
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