February 28, 2020

Why Investors should treat the Sell-off as an Opportunity

Why Investors should treat the Sell-off as an Opportunity

What Pandemic? Safe Haven to Close the Week in Negative Territory

What’s been interesting to observe this week is that while equity markets have been battered badly, and all the major global indices such as the Down Jones, the FTSE 100, the DAX, the Nikkei, the Hang Seng have experienced a drop more than 10% from their all-time high—the gold price is set to close the week in negative territory.

This confirms our earlier view; the markets are overreacting to Coronavirus. Coronavirus is not going to send the world into a major recession. Yes, the global supply chain has been disrupted, resulting in a slower growth period. True, it will impact the demand as well—the spillover effect. However, the world is not coming to an end, despite what the media would have you believe.

The Sell-off is Healthy

In my opinion, the sell-off in the equity markets is healthy. We have seen unprecedented bull rally, and bears have been waiting for any kind of excuse to push markets towards correction territory. In our opinion, investors should consider the sell-off as an opportunity to bag top stocks at a much deeper discount. Having said this, there is no need to rush, because we are still nowhere near the bottom, the equity markets are likely to remain jittery for a prolonged time. In simple words, this market will be driven by economic data which is bound to show weakness due to Coronavirus.

The Big Question

So, the bigger questions for investors are, why is the gold price set to close at a lower price this week despite the epidemic? Second, why hasn’t Bitcoin’s price moved even though it is considered a safe haven?

Default Rate and Gold Price

The reason the price of gold hasn’t increased is that corporates are still somewhat in good shape. What I mean to say is that Coronavirus hasn’t influenced the corporate default rate yet. It is imperative to remember that cheap money has increased the debt levels across the world among corporates. If the disruption in the supply chain really inserts heavy pressure on corporates, then we could see the default rate ticking higher. The domino effect at that stage could raise some serious alarms, and only then could we see the central bankers provide support. Once that has triggered, we could see the gold price roaring and start talking to the moon.

For now, I think this upside trend will remain because the price of gold is still set to close the month with substantial gains. The uptrend is still intact because the price is trading above important moving averages: the 50, 100 and 200 SMA on a daily time frame. After the recent retracement, the price of gold may find support and begin to rise again, especially because we will see mines of the economic number next week.

No Reaction for Bitcoin, AKA Safe Haven

As for Bitcoin trading, the price is struggling to win its battle with important price levels—the 50, 100 and 200-day SMA. Speaking from a fundamental perspective, we have not seen any evidence of Bitcoin’s price having any sort of connection with the ongoing pandemic situation. Bitcoin’s price is likely to react more if the monetary policies go off the rails. After all, the major fundamental of Bitcoin’s price questions the traditional monetary policy. Bitcoin believers do not believe in central monetary policy, and they have reservations regarding currency manipulation by central banks.

So, unless we witness chaos created by the central banks and the dollar threatened, we aren’t likely to see the price of bitcoin explode above the all-time high. One possible scenario is that the central banks provide support by lowering the interest rates again, then we could see some serious potential for the bitcoin price. Another reason Bitcoin price has been unaffected by Coronavirus is that as of yet, there has been no cause for sanctions. Whenever we see restrictions on one country imposed by a stronger country, there is a surge in Bitcoin’s price. After all, the crypto king, Bitcoin, has a reputation for bypassing all sanctions and producing the same results as the national currencies.