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You Can’t Just Print More Gold

Summary:
“I think there is a strong likelihood we will need another bill.” That’s according to Treasury Secretary Steven Mnuchin, who supports additional fiscal stimulus to combat the economic impact of the novel coronavirus—within reason. The secretary’s statement comes after the House passed a record-shattering trillion relief package, though leaders in the Senate have said they will not put it up for a vote. Senate Majority Leader Mitch McConnell has made it clear that the next coronavirus bill “cannot exceed trillion,” according to reporting by Axios. Even so, the U.S. government’s response is already massive, dwarfing anything that’s come before it. Across the pond, Britain’s government is likewise spending like crazy. The U.K. budget deficit widened to a record 62.1 billion pounds

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You Can’t Just Print More Gold

“I think there is a strong likelihood we will need another bill.”

That’s according to Treasury Secretary Steven Mnuchin, who supports additional fiscal stimulus to combat the economic impact of the novel coronavirus—within reason.

The secretary’s statement comes after the House passed a record-shattering $3 trillion relief package, though leaders in the Senate have said they will not put it up for a vote. Senate Majority Leader Mitch McConnell has made it clear that the next coronavirus bill “cannot exceed $1 trillion,” according to reporting by Axios.

Even so, the U.S. government’s response is already massive, dwarfing anything that’s come before it.

Across the pond, Britain’s government is likewise spending like crazy. The U.K. budget deficit widened to a record 62.1 billion pounds ($76 billion) in the month of April, equal to the government’s total borrowing in 2019, according to Bloomberg.

Against this backdrop of anything-goes spending, the idea of having a national currency backed by a real asset like gold seems less and less crazy to some. Doing so, it’s believed, would force lawmakers to practice fiscal discipline, reign in inflation and normalize international trade.  

Judy Shelton, President Donald Trump’s nominee to the Federal Reserve Board of Governors, has long favored a return to a gold standard, which officially ended in 1971. In an interview with Investment News Network (INN) this week, Shelton said she liked “the idea of a gold-backed currency,” adding that “it could even be done in a cryptocurrency sort of way.”

Although the chances of the U.S. returning to a gold standard are slim to none, I think it’s incredibly important in this time of economic uncertainty to ensure you have a 10 percent weighting in gold and gold mining stocks. I call this the 10 Percent Golden Rule.

The 10 Percent Golden Rule is rational and prudent. The U.S. government and Federal Reserve can’t pump this much money into the financial system and not trigger rapid inflation—and potentially even hyperinflation.  

There’s one thing that can’t be printed, and that’s gold. In fact, we may be looking at peak gold supply right now, which should only help the precious metal retain its value as cash deteriorates.

Unprecedented Money-Printing

Group of Seven central banks made net asset purchases of $2.5 trillion in March and April together. In April alone, these purchases were an unbelievable $1.3 trillion, nearly five times more than the previous peak of $270 billion in April 2009, according to Bloomberg data.

As of this week, the Federal Reserve’s total assets stood at a record $7.04 trillion. That’s a third of the entire U.S. economy.

You Can’t Just Print More Gold

You may have heard that the Fed has been buying ETFs that invest in corporate debt, as part of its emergency lending program intended to support corporate debt markets. In the first six days of the program, as much as $1.8 billion worth of such ETFs were purchased.

These are all incredibly large numbers. Fed Chairman Jerome Powell himself acknowledged this during a 60 Minutes interview this week, stating that the bank’s recent actions are “substantially larger” than they were during the last crisis.

And just check out this remarkable exchange:

SCOTT PELLEY: Fair to say you simply flooded the system with money?

POWELL: Yes. We did. That’s another way to think about it. We did.

PELLEY: Where does it come from? Do you just print it?

POWELL: We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury bills or bonds for other government guaranteed securities. And that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.

Again, we can’t just print more gold, digitally or otherwise.

I’ve written before how growth in M2 money supply—which includes not just cash but also savings deposits, money market funds and other “near” money—has historically been like Miracle-Gro for gold prices. As of May 11, the percent change in money supply from a year earlier was greater than 23 percent. That’s the highest rate since at least 1981, the furthest I could go back on the Federal Reserve Bank of St. Louis’ website.

You Can’t Just Print More Gold

U.K. Bonds Now Have a Negative Yield. Is the U.S. Next?

Gold has also benefited from low to negative rates, which are likely here to stay for some time.

This week the U.K. sold bonds with an average yield below 0 percent for the first time ever. The yield on the two-year gilt dropped as low as negative 0.080 percent. The five-year yield traded at negative 0.043 percent.

You Can’t Just Print More Gold

Meanwhile, Bank of England (BoE) governor Andrew Bailey admitted on Wednesday that a negative interest rate policy (NIRP) was in “active review,” despite saying in March that negative rates were “not an area I would want to go to.”

That’s why I don’t have a whole lot of faith when New York Fed president John Williams says that “negative rates are not the right tool to be used right now.”

It may only be a matter of time before subzero rates make landfall in the U.S., something President Trump is in favor of. “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT,’” he tweeted on May 12.

Big-Name Money Managers Back Gold

Other financial experts and money managers are similarly making the case for gold and other hard assets as helicopter money floods the economy.

“This is a perfect environment for gold to take center stage,” wrote Paul Singer, billionaire hedge fund manager, in a memo to Elliott Management clients. “Gold today, despite its modest run up in recent months, is the answer to the question: Is there an asset or asset class which is undervalued, underowned, would preserve its value in severe inflation, and is not adversely affected by COVID-19 or the destruction of business value that is being caused by the virus?”

Macro investor Paul Tudor Jones sees gold rallying to $2,400 an ounce and possibly to $6,700 on extreme inflation reminiscent of 1980. (And he also likes bitcoin, for the same reason.)

London-based hedge fund manager Crispin Odey says he increased the gold position in his flagship Odey European Inc. fund in April. What’s more, Barrick Gold is now his largest single long equity position.

Finally, in a viral tweet, Robert Kiyosaki of Rich Dad Poor Dad fame sounded off on the “incompetent” Fed before predicting $3,000 gold within a year and $75,000 bitcoin within three years.

“ECONOMY dying. FED incompetent,” Kiyosaki said. “Next BAILOUT trillions in pensions. HOPE fading. Bought more gold silver Bitcoin. GOLD @$1,700. Predict $3000 in 1 year. Silver @ $17. Predict $40 in 5 years. Bitcoin @$9800. Predict $75000 in 3 years. PRAY for the BEST-PREPARE for the WORST.”  

Airlines Webcast

On a final note, some of you may be aware that I participated in a webcast this week on the airline industry. I want to thank ETF Trends for hosting it, Dave Nadig for moderating it, and the hundreds of registered investment advisors (RIAs) who joined us as we discussed investing in airlines in the age of COVID-19.

We received dozens of thoughtful questions during the webcast, and because there were so many, I wasn’t able to respond to every single person. Instead, I compiled the most frequently asked questions and posted my answers as a special Frank Talk. I invite you to check it out by clicking here. 

 

Gold Market

This week spot gold closed at $1,754.40, down $13.60 per ounce, or 0.77 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 2.46 percent. The S&P/TSX Venture Index came in up 5.49 percent. The U.S. Trade-Weighted Dollar fell 0.63 percent.

Date Event Survey Actual Prior
May-19 Germany ZEW Survey Expectations 30 51 28.2
May-19 Germany ZEW Survey Current Situation -86.6 -93.5 -91.5
May-19 Housing Starts 900k 891k 1276k
May-20 Eurozone CPI Core YoY 0.90% 0.90% 0.90%
May-21 Initial Jobless Claims 2400k 2438k 2687k
May-25 Hong Kong Exports YoY -4.20% -5.80%
May-26 Conference Board Consumer Confidence 87.3 86.9
May-26 New Home Sales 493k 627k
May-28 Germany CPI YoY 0.70% 0.90%
May-28 GDP Annualized QoQ -4.80% -4.80%

Strengths

  • The best performing metal this week was platinum, up 5.65 percent, due to stronger retail buying. Gold and silver rose on Friday morning on safe haven buying. U.S.-China relations remain tense and China announced that it will impose new security laws on Hong Kong. Palladium rose the most since March, holding above $2,000 an ounce on Monday, due to renewed optimism about China’s economy and stimulus for automakers. The metal finished the week up 4.04 percent. Bloomberg notes that palladium had fallen by a third since hitting a record in late February.
  • ETFs backed by gold have seen 20 straight days of inflows, adding 154,000 ounces on Thursday, and bringing year-to-date gains of 20 percent, according to BMO Capital Markets, citing Bloomberg data.
  • Purchases of physical platinum by retail investors almost tripled to 312,000 ounces in the first quarter of this year – the most on record – according to the World Platinum Investment Council (WPIC). Prestige Bullion said that over 2,000 platinum coins featuring an elephant sold out to U.S. and Asian investors after being minted in March. The company says that more coins will be produced once South Africa’s virus lockdown is lifted and will feature other animals including the lion, rhinoceros, leopard and buffalo, reports Bloomberg. “The low platinum price in March was a buying opportunity, but the concerns regarding global risk and the huge negative fiscal impact of the COVID-19 pandemic are likely to continue the demand for precious metals, including platinum,” said Trevor Raymond, director of research at WPIC.

You Can’t Just Print More Gold

Weaknesses

  • The worst performing metal this week was gold, down slightly by 0.77 percent. Russian President Vladimir Putin ordered the army to help Polyus PJSC, Russia’s largest gold miner, treat an outbreak of COVID-19 at its Siberian unit, reports Bloomberg. 77 doctors and nurses set up a field camp and mobile hospital near the Olimpiada mine, the nation’s largest mine. There are approximately 866 virus infections in the area.
  • According to Johnson Matthey Plc, the coronavirus pandemic will cut the use of platinum-group metals in autocatalysts by at least 15 percent to 20 percent in 2020. The autocatalyst manufacturer said in a report on Monday that automakers are “expected to look closely at potential opportunities to reduce the PGM content of their systems, or to substitute some palladium with platinum, if they can do so without compromising their ability to meet current or future emissions limits.”
  • Venezuela’s central bank sued the Bank of England (BOE) for access to $1 billion in gold reserves, reports Bloomberg. The troubled South American nation asked the BOE to liquidate its gold and send the funds to the United Nations Development Programme, which is working with Venezuela to prepare for an increase in COVID-19 infections. This new lawsuit is another twist to the long dispute of cutting off President Nicolas Maduro’s regime from its overseas assets.

Opportunities

  • Joe Foster, portfolio manager and gold strategist at Van Eck Absolute Return Advisers Corp, says the yellow metal is expected to hit $2,000 an ounce in the next 12 months. Foster said in a webcast this week that “gold has had a V-shaped recovery as a response to the pandemic shock.” Bullion could trade even higher over the next several years if there is an inflationary cycle or unforeseen worst-case scenario, added Foster and as reported by Bloomberg.
  • The falling gold-silver ratio could be an indication that silver is on its way to outperforming the yellow metal. In March, the ratio rose as high as 127 and this week it is down to below 102, reports Kitco News. George Gero, managing director with RBC Wealth Management, says the ratio could fall back down to the 90s and that “silver was held back because of its industrial component. Now with the reopening of many of the economies, the industrial component is a tailwind instead of a headwind.”
  • Bloomberg’s Vincent Cignarella thinks the gold rally is real and not a bear trap due to the gold-copper ratio. The ratio of gold, the most widely recognized haven asset, and copper, a key industrial metal used globally, is often used as an indicator of the economy’s strength. “Since March 23, the 2020 low in equities and the ratio of copper to gold has stabilized and trended sideways – a potential indication stocks and yields have put in a bottom.”

Threats

  • Crispin Odey, one of Europe’s highest-profile hedge fund managers, said governments may ban private gold ownership if they lose control of inflation, reports Bloomberg. Odey wrote in a letter that “it is no surprise that people are buying gold. But authorities may attempt at some point to de-monetize gold, making it illegal to own as a private individual.” In 1933 the U.S. government forced purchases of private gold holdings as a part of a devaluation of the dollar. Odey has compared the coronavirus pandemic to the Great Depression of the 1930s and argues that governments before having resorted to debasing coinage.
  • Bloomberg’s Mark Cudmore has a bearish outlook for gold: “Like a teenager rebelling against the smothering love of over-protective parents, gold may upset a lot of people in the weeks ahead.” Cudmore notes that the yellow metal’s big drivers – global stimulus amid the pandemic and the U.S.-China trade war – are both stale now. Gold was supported by “shock-and-awe” policy support in March and April, and if there isn’t “something fresh soon” there could be a correction ahead.
  • COVID-19 remains a major threat globally as the virus continues to spread and lockdown measures ease in only in some countries. Brazil, a top miner and exporter, has seen a surge in infections. Reports out of China this week show that the virus is manifesting differently than doctors have seen before, raising concerns of a second wave of infections.

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 3.29 percent. The S&P 500 Stock Index rose 3.20 percent, while the Nasdaq Composite climbed 3.44 percent. The Russell 2000 small capitalization index gained 7.84 percent this week.
  • The Hang Seng Composite lost 3.39 percent this week; while Taiwan was down 0.03 percent and the KOSPI rose 2.22 percent.
  • The 10-year Treasury bond yield rose 1 basis points to 0.66 percent.

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You can read the remainder of the article at http://www.usfunds.com/investor-library/investor-alert/you-cant-just-print-more-gold/

May 22, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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