Fed Chair Just Made this Case for Gold

Photo by Wikimedia.orgCC BY | Photoshopped

In addressing the distressed economy, Jerome Powell made the case for more government stimulus. Here’s why one author argues it will be great for gold.

On Wednesday, Federal Reserve Chair Jerome Powell gave a speech addressing the difficulties that surround both the domestic and global economy. As expected, the speech had little optimism to it and immediately pushed the stock market down. In the meantime, gold continued to test new highs, having most recently climbed above $1,750 during Friday’s trading session.

As FXEmpire’s Arkadiusz Sieron notes, the closest to optimism one could glean from the speech was Powell’s reveal that the Fed would keep interest rates in positive territory. Although the chair dismissed the negative interest rates of the European Central Bank and the Bank of Japan as dubious experiments, the fact remains that Treasuries have posted some of their all-time low showings even before the coronavirus.

From there, Powell went to some lengths to detail just how bad the situation has gotten from a purely economic standpoint. The chair noted that lawmakers were not only struck by the magnitude, but also the speed at which the pandemic had engulfed all layers of the economy, likening the crisis to the worst of its kind since World War 2.

What was already a decline in economic activity was greatly aggravated by the coronavirus, with Powell noting that any job gains made over the past decade have been erased. Furthermore, the chair revealed that the pandemic caused a loss of 20 million American jobs in the span of just two months.

The rest of Powell’s speech struck a familiar chord, as the chair warned people not too get overly anxious with expectations of a recovery and warned that a V-shaped recovery, or a quick turnaround, is unlikely. Instead, Powell and his team expect the coming rebound to not only be slow, but riddled with uncertainties.

Addressing government spending, Powell seemed satisfied with the Fed’s lack of hesitation when it came to issuing their trillion-dollar stimulus check. The chair said that the trillions of dollars printed thus far might not be the Fed’s final response on the matter, and that the central bank is open to more stimulus if the need arises.

Likewise, during the speech, Powell appeared to urge Congress to open the door for more fiscal spending. The federal government has already created a massive deficit, moving the budget from a $160 billion surplus in April 2019 to a deficit of $737.9 billion during the same month this year.

Pointing out that the Fed deals more with lending than it does with spending, Powell seemingly wasn’t content with the $2.9 trillion spent on mitigating the effects of the pandemic, believing more support could be in order. In short, the speech at the Peterson Institute for International Economics was one of a contracting economy, uncertain recovery, currency debasement and piled-up debt, all major tailwinds that have kept gold breaching one high after another over the few past weeks.

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?


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.

[Read more…]