Money Creation Inflates Gold

On the surface it may sound encouraging to cash-strapped Americans that more currency is being created on their behalf. The thought being, that if more money is created, perhaps more of it will come their way. The Treasury Secretary, Steve Mnuchin is currently working on a plan with the Senate, to get additional stimulus payments authorized by the end of July. These funds would be distributed to Americans, in addition to those already distributed, to help relieve financial stresses related to the COVID-19 pandemic. All too often however, money created to help has the opposite effect because of the inflation often created with the additional currency.

In our “Precious Metals Outlook  2020” presented in October 2019, we told you about the recession likely to arrive in 2020, before COVID-19 had even materialized.  We also recommended holding onto Gold and Silver, but to consider selling Platinum and Palladium by year end, and look for opportunities to repurchase them during the 2020 recession.  The tables turned markedly, once the recession started in February.  Those who took our recommendations to heart, have done well.  Platinum ended the year around $1000, but was below $600 by the middle of March 2020.  Palladium ended the year around $2000, but was below $1420 by the middle of March 2020.  These were good reentry points to get back in, for those watching.   Meanwhile, spot Gold has climbed from $1500 to over $1800, with spot Silver moving from $17 to nearly $20 today.  While there may be some temporary pullbacks in Gold and Silver, they both appear poised to end the year higher than they currently are.

The question we have to ask ourselves, is what are the likely effects of currency creation for Gold and Silver going forward?  This is a question for which there is already an answer, if we look at what has occurred previously.  When we create more of something, the supply is increased, while demand for that item tends to decrease.  In the case of $Dollars, when more are created, demand actually increases - because it often takes more of them to purchase the same amount of items.  That is, when the value of Dollars decreases, the quantity needed increases.  This is the current situation both here in the US, and abroad.  During the Great Financial Crisis of 2007-2009, the budget deficit reached nearly 10% of GDP.  GDP is a measure of the economic output of a nation; sort of like our national income level.  This year, our budget deficit is over 14% of GDP, and the highest it’s been since WWII.

For the individual consumer, the effects can be seen by looking at the rate of inflation for common purchases such as food and medical care.  As seen in the graph below, it has jumped to a rate more than double the target rate of overall inflation stated by the Federal Reserve.  To maintain purchasing power for the years ahead, we have to store some savings in something that can keep up long term, like precious metals (referred to here as “forever money”).

The Federal Reserve has also jumped into action, introducing nearly as many new stimulus measures in the last 2 months, as they did in a year during the Great Financial Crisis.  These measures are connected to stimulus payments made to the public, related to the pandemic and follow-on economic crises.  Remember that we were already heading into a recession, even without the pandemic.  But the economic effects of the pandemic seemed to magnify the severity of what was already quite a shock all by itself.  Some of the new stimulus measures introduced this year include the direct purchase of corporate bonds, and ETFs.  One question no one is asking which needs to be answered is -  who are they buying them from?  Someone on Wall Street just received another bailout, while you and I (taxpayers) are now holding the bag for junk bonds that are nearly ready to implode.

With some states going back into lockdown, many businesses being shuttered, and major corporations declaring bankruptcy, where can we turn for further asset growth and protection?  It is doubtful that stocks and bonds can offer much in terms of peace of mind or stability, at this point.  With 30-yr Treasury Bonds paying less than 1.5%, and 10-yr paying less than 1%, not much solace can be found there.  Short-term pullbacks notwithstanding, Gold looks to be a good store of value with room to grow.   Silver offers growth opportunities and something tangible that cannot be printed or inflated away.  As we pointed out in April, there is also a premium over spot for the actual metal, regardless as to whether you are buying or selling.  A Gold or Silver Eagle coin will cost $1,950 or $26.50 respectively, to purchase today.  In other words, the currency creation ramped up for COVID-19 has advanced Gold and Silver prices more quickly than expected otherwise.

Since deficit spending is prepared to continue and increase between now and year end, we can logically deduct that the advancement of Gold and Silver prices will continue as well.  We are due for a pullback or two between now and then, but the trend is set to continue.  It is also noteworthy that stock and bond markets appear to be elevated beyond sustainable levels, which means there are few attractive places for capital to go, besides Gold and Silver.  Watch for the pullback days mentioned above, and use them to make additional purchases.  As explained last month, this environment also provides support for those needing to cash out of previous Gold and Silver purchases to replace income from lost jobs, etc.  Precious metals can truly be a “friend indeed, for a friend in need”, in troubled times like today.  

The journey of 1000 miles begins with the first step.  For those new to the world of precious metals, you are not alone.  More and more Americans are learning what other societies have known for centuries about currency debasement, inflation, and the purchasing power protection offered by physical Gold and Silver.  For those familiar with these concepts looking for an equitable partner with whom to buy and sell precious metals, you have come to the right place.  The United States Gold Bureau stands ready to offer recommendations and fair pricing, whether you are looking to buy or sell precious metals.  Beyond that, they are committed to investor education, and providing insightful information needed to make informed decisions.  While no analyst can predict exact prices in the future or know precise timing when things may occur, we do our best to inform you of trends on the horizon, and provide projections of the general direction things are headed.