Is the Fed About to Become a Major Gold Buyer?

Due to a new round of fiscal stimulus and waning global confidence in the dollar, Guggenheim’s Scott Minerd argues the Fed may resume buying gold in a big way.

In a recent note, Scott Minerd, chief investment officer of Guggenheim Investments, outlined a possible scenario that could manifest as a result of the Federal Reserve’s massive pandemic-related stimulus. The U.S. dollar has held a tight grip on its status as a global reserve currency over the past few decades, yet recent years have seen talks of that status potentially being usurped by another sovereign in the not too distant future, with the Chinese yuan as perhaps the most aggressive candidate.

Minerd doesn’t believe that the greenback’s place as the reserve currency has been placed into question so far, but he already sees concerning signals in the form of the dollar losing its market share. These are a clear result of the Fed’s attempts to deal with a massive government deficit while also staving off a recession.

In his note, Minerd expanded upon a sort of vicious cycle that the Fed could soon find itself in. As the CIO explained, the Fed’s current rate of asset purchases is outpacing the rate of bond issuance, and the central bank is likely to try and solve this problem by upping its asset purchases to a massive $2 trillion annually.

Although the Fed’s recent pumping of trillions of dollars into the economy represented the biggest stimulus to date, Minerd thinks that an official (and even greater) quantitative easing (QE) program is on the way. With a budget deficit exceeding $3 trillion and the Fed’s commitment to boost the economy at any cost, Minerd expects the central bank to keep interest rates zero-bound for a minimum of five years, if not longer.

Needless to say, any environment of low or negative interest rates greatly benefits gold, and the yellow metal has been reaching all-time highs in numerous countries whose central banks have adopted similar policies. But there are more reasons why gold could be the refuge investors need moving forward. A commitment to zero rates, especially over a protracted period of time, would likely raise inflationary expectations and potentially pave the way for a sudden spike in inflation.

Along with weakening the greenback on their own, intrusive measures such as these could reduce confidence in the dollar and intensify speculation in regards to its place as the reserve currency. In return, the Fed could attempt to offset its risky policies by accumulating even more gold, despite its reserves already far exceeding those of any other central bank. As Minerd notes, the historic tendency of sovereign nations to hoard gold in order to maintain economic leverage is well-documented, and Minerd would not at all be surprised to see the Fed becoming a major gold buyer in the near future to avoid losing dominance on the global stage.

Gold Stands to Soar in Midst of “The Great Lockdown”

Photo by Wikimedia.orgCC BY | Photoshopped

Global economic growth is projected to fall below -3% this year, and it’s exactly why Frank Holmes argues that more people must own gold. See his argument here.

As Forbes contributor Frank Holmes points out, “The Great Lockdown” isn’t just a colloquialism used to describe the current state of affairs. It is a term that the International Monetary Fund (IMF) itself has come up with to describe the economic picture, along with such dismal outlooks as predicting that the world is headed towards the worst recession since the Great Depression. And, with global economic growth projected to fall below negative 3% this year, they have no shortage of data to back up their forecast.

To Holmes, this is a wake-up call that signals it’s time for every individual to focus on preserving their savings. As evidenced by the action in the gold market so far, plenty of people around the world have indeed recognized this ominous signal. Gold has climbed roughly 13% so far this year and quickly made precious metals one of the best-performing asset classes. A look into this month’s top searches on search engine also shows that gold has piqued more interest than it has at any point over the past decade, including when the metal reached its all-time high of $1,900 in 2011.

With its exceptional performance thus far, many experts and analysts have been calling for prices that even the bullish forecasters wouldn’t have dreamt of a year or two ago. Bloomberg commodity strategist Mike McGlone recently noted that gold seems to be aiming for a reversion of its long-term mean versus the S&P 500 Index, a move driven largely due to the unprecedented amount of monetary stimulus currently taking place. If true, gold would undoubtedly move on to new highs, with Holmes highlighting a range of $2,800 to $3,000 based on the S&P 500’s current mean.

Perhaps the most notable part of this analysis, however, is that a mean reversion of this kind is far from a hypothetical scenario. In May 1990, gold and the S&P 500 were both trading inside a range of 330 to 360. For a more recent example, March 2013 also saw gold and the S&P 500 trade within a 1,500 to 1,600 range, a roughly one-to-one ratio. This makes the scenario of gold climbing to $2,800 and above in the short-term a very realistic possibility backed by historical precedent.

Yet despite the clear flock to gold and extremely bullish indicators such as this, Holmes thinks far too many people remain severely underweight on the metal. A study done by the World Gold Council (WGC) last year showed that commodity indices have a minimal gold weighting, meaning that investors whose exposure through gold comes by way of funds only receive a meager amount of benefits from an outperforming asset.

Instead, Holmes recommends a much more direct approach to owning the metal, one that involves at least a 10% allocation within a portfolio with a sizeable emphasis on physical gold. While some people might feel as if they already missed their entry point due to the strength of gold’s gains so far, Holmes notes that both price forecasts and economic predictions suggest that this is far from the case.

Is China Headed For A Serious Socio-Economic Crash?

NOW THAT THE IMF WILL INCLUDE CHINA’S YUAN IN ITS BASKET OF CURRENCIES, WHAT ARE THE REPERCUSSIONS FOR THE WORLD ECONOMY AND YOU?

Chinas collapsing Is China Headed for a Serious Socio Economic Crash?

From L Todd Wood, for Birch Gold Group

The Communist Party of China still is a totalitarian government. Many people around the world forget this fact. The world’s second largest economy is run by a committee of dictators, where the people aren’t free and neither are the securities markets.

It is for this reason that the inclusion of the offshore version of the renminbi, the yuan, into the International Monetary Fund’s Special Drawing Rights, or SDR, may not be the panacea for China that their leaders think it will be.

You have to think about the marriage of the yuan’s rise to a convertible, global reserve currency, with the dramatic slowdown, or crash, of the manufactured, Chinese economic miracle. Although China has allowed some capitalistic thought and practice into its economic fiber, the economy is still “managed” — hence the term, managed capitalism.

This means that the markets are not truly allocating capital; on the contrary, China is still issuing five-year economic plans. In short, all China has done over the last several decades — in addition to making things cheaply and exporting them — is misallocate capital to keep its billions of people working, and to prevent social unrest.

Now, the decades of building ‘ghost cities’ are coming home to roost.

The Economic Times reports, “Now, with increased convertibility the yuan may be used for two purposes; one to attract more investment and two to enhance flight of capital to safer and more stable economies. It can also trigger off conversion of hoards of black money to safer havens…Therefore, inclusion of the yuan in the IMF’s basket of currencies may not be a good thing if things turn bad for China.”

In other words, with the yuan becoming a convertible, international currency, money can flow into China as well as go out. Only a small portion of the Chinese population is benefiting from the Chinese “economic miracle.” It is not sustainable.

The wealthy in China are hauling boat loads of cash out of the country as fast as possible. They know it is a ponzi scheme and they don’t want to be the last ones holding the empty bag. The convertibility of the yuan will allow this massive capital drain to increase.

Investors are going to be wary of a system where the sellers of securities in a market downturn are arrested and put in jail, where company intellectual information is stolen and there is not a level playing field in regard to competition with local firms. But that’s not all China has to worry about.

China could be headed for serious social unrest as well. There are millions of people, effectively serfs, who are disenfranchised from the wealth that has been created. They are angry. Their land is being taken for a factory, a city, a wealthy person’s palace. The ghost cities in China are surrounded by ghettos filled with people whose land was stolen to build the empty metropolis.

To summarize, China is headed for a serious socio-economic crash with all of the negative effects that will entail.

The problem to you and me is that this will damage the global economy as well. You can’t have a collapse of the world’s second largest economy and not have outsized, collateral damage.

The fact that wealthy Chinese people will be able to remove billions of dollars in stolen wealth from the system, while a collapse happens, will only add gasoline to the proverbial fire.

The bigger the economic bubble, the bigger the consequences when it pops. China is history’s biggest. The world’s financial system is teetering on many levels. All the more reason to make sure you have a properly diversified portfolio, one that includes more than just the paper assets that could be worth no more than the paper they’re printed on.


China has also been drastically hoarding gold. Read about it here.

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