Central banks buy gold for fear of the economic damage that the pandemic can cause. The pioneering cryptocurrency is breaking with the trend of traditional markets and is becoming stronger.
When the World Health Organization (WHO) decreed a global pandemic on March 11th, there was immediately a direct impact in all markets. COVID-19 affected all sectors, including cryptocurrencies, securities, banks, and even futures markets. One day after the announcement, Bitcoin fell by more than 40%, breaking the USD 4,000 barrier.
As the pandemic continues, it has caused fear of an imminent global recession. The International Monetary Fund predicted that the health crisis will lead to a historic crisis, not seen since the Great Depression of 1929 to 1939. Along with this, central banks are adopting measures that help understand that they are preparing to face a deep crisis, such as a wave of gold purchases.
Purchasing Gold
The World Gold Council said that central banks worldwide added about 36 tons of gold to their reserves in February. The figure was 33% higher than the purchases that banks made in January. Turkey was the largest gold buyer since it added around 24.8 tons to its deposits in February.
Russia also increased its funds in the precious metal, adding 10.9 tons of gold to its treasury. In September 2019, the amount of gold that it had already stored in its vaults exceeded USD 100 billion. Other major gold buyers during February were Bulgaria (3 tons), Greece (1 ton), Kazakhstan (1.8 tons), and Qatar (1.6 tons).
The past two months suggest that gold is still an important component of foreign reserves, despite the high demand in recent years. However, the World Gold Council noted that the recent instability and uncertainty in the market will be at the forefront of the minds of central banks.
Banks Increase Reserves
In recent days, US banks released their 2020 first-quarter results, showing that their profits have plummeted. Wells Fargo’s first-half dividends sharply fell by 90%, while JPMorgan Chase’s losses reached 70%. Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley also suffered drops in their profits.
Businesses across the USA have closed due to the coronavirus outbreak, which has led millions of US citizens to lose their jobs. Borrowers who were in good shape just a few weeks ago now have financial difficulties and risk not paying their loans. The FED and the US government are taking unprecedented measures to ensure that credit markets can function and to secure funds for households and small businesses.
Several of the largest banks in the USA have set aside billions of US dollars as they expect massive loan default losses. For example, Wells Fargo set aside about USD 3.1 billion to cover expected credit losses during this unprecedented economic crisis.
JPMorgan, one of the country’s largest credit card issuers, increased its reserves as a preventive measure in the face of a wave of possible bad loans. The banking institution reserved around USD 6.8 billion in the first quarter of 2020, with the possibility of increasing the figure in the second quarter.
Bank of America, the second-largest bank in the USA by total assets, recorded a 45% drop in profits of about USD 4 billion in the first quarter of 2020. The loss includes an accumulation of reserves of USD 3.6 billion, mainly due to the deterioration of the economic prospects related to covid-19.
Bitcoin Becomes Stronger
Despite the grim picture that traditional banks show, Bitcoin may represent an alternative to face the imminent world recession caused by the COVID-19 pandemic. A recent study found signs that Bitcoin, besides breaking the trend observed in traditional markets, is also becoming stronger.
The Standard & Poor’s 500 (S&P 500) investment index places Bitcoin among the assets that generate great profits at a high-risk cost, even five times higher. However, the cryptocurrency market only contracted by 5% in 2020 against the collapse of almost 22% of stock indices.
Furthermore, Bitcoin is becoming a less risky asset. The first cryptocurrency is still susceptible to the receding stock market tide, but it is more of a bullish divergent condition. Bitcoin remains close to 9% in 2020 and is nearing its support level of USD 8,000, despite a 20% correlation to the S&P 500.
By Alexander Salazar
