From Birch Gold Group
This week, Your News to Know rounds up the latest stories involving gold and the overall economy. Stories include: The right election bet, Goldman bearish on dollar and bullish on silver, and a return to the gold standard could be the only way out of the crisis.
Making the right bet ahead of the election
As we near the election, gold is showing signs of coming to life. On the back of an announcement last week that the White House is working on a new $1.8 trillion stimulus, gold jumped 1.8%. In the context of an extraordinarily loose monetary policy from the Federal Reserve, the engines appear ready once again.
As Forbes’ Frank Holmes notes, the previous bout of monetary printing aided in gold soaring to an all-time high and greatly expanded its scope of investors. He believes that another stimulus is likely to have a similar effect, as even the average citizen with little exposure to the financial sector becomes aware that their purchasing power is eroding. The threat of inflation, long established as one of gold’s primary drivers, might as well be here to stay.
Holmes also asserts that gold shines the light on some deep-rooted issues that might soon be unearthed. The $27 trillion national debt pile has accumulated at a swift and steady pace, and will soon be further expanded, raising the questions of how far it can go.
As numerous experts have pointed out, since there is no palatable solution to the debt issue, many officials try to ignore it. Yet while they might be turning a blind eye, a rising number of investors are noticing that something is awry. These investors are finding their way towards gold, be they an individual, an institution or an occasional celebrity, like billionaire investor Leon Cooperman, who compared the debt issue to those experienced by banana republics.
Goldman Sachs: Sell dollars and buy silver
While warnings of a dollar collapse may have once occupied a fringe position, some exposure to the mainstream shows that they are coming closer to home. A recent article by Reuters, which showed a number of analysts concerned about the dollar, only drew attention to the very real fundamentals behind the concern. Along with plans to issue another historic stimulus, the Federal Reserve also stated that it would allow inflation to run higher for an indefinite amount of time, seemingly all but signaling a dollar debasement.
Goldman Sachs isn’t among those waiting for the numbers to turn red. After multiple price forecast upgrades for gold, Goldman’s team have now turned their attention to silver. Among the factors pointing towards dollar weakness, the analysts highlighted the rising likelihood of a Biden win, which could push the greenback to its 2018 lows.
Peter Schiff, who is often cited as one of the loudest voices of warning ahead of the 2008 financial crisis, has recently returned to familiar tone. In a speech, Schiff revealed that he is unabashedly bullish on gold and expects it to take the dollar’s place as a reserve currency after the greenback collapses.
In a different analysis, Goldman’s Mikhail Sprogis pointed to silver’s industrial component, which might come into special prominence as the world turns towards green energy. Besides a favorable investment and industrial outlook, silver holders have more to look forward to. The gold-to-silver ratio has recently move to near 80, suggesting that silver is still significantly underpriced even after posting its best quarter since 2010. An ongoingly troublesome supply picture, one made worse by pandemic closures, stands as another strong tailwind to watch out for.
A return to the gold standard is looking increasingly plausible
As concerning as soaring sovereign debt is, it has largely been staved off from collapsing the global economy with the assistance of four decades of gradually lower interest rates. But now, as Seeking Alpha’s Zoltan Ban notes, rates have dipped into negative territory, marking a turning point where issuers of fiat must ask themselves some serious questions. The key among them is how to find a way to assure others of the currency’s value.
With a deficit of over $3 trillion this year and projections for at least $2 trillion next year, the U.S. could be on the fast track towards inflation if steps aren’t taken. While other countries might not notice it just yet as they are stuck in their own money-printing cycles, questions will eventually get asked and a return to a commodity-based system is perhaps the only scenario Ban finds likely. Whereas nations with strong exports like Russia might fall back on an oil standard for their currency, Ban believes the gold standard will be the preferred choice for many, U.S. included.
Although gold has, in modern times, only been used as currency in times of severe crisis such as the one Iran experienced, the world is now being given the option to trade with the yellow metal as tether. China’s newly-opened gold-backed oil exchange will not only expose users from around the world to the yuan, but will also make it easier for many oil exporting countries to lessen their dependence on the U.S. dollar.
The somewhat favorable outcome of the 2008 crisis has lulled many into a false sense of security and given them expectations that the next crisis can be resolved just as easily. Corporate bond yields are a major red flag, and various retail disruptions are perhaps warning that the next crisis could be triggered by firms, who are themselves holders of debt. Whether it’s corporate debt or any of the other factors putting downwards pressure, Ban is bracing for an inflation trigger and a subsequent re-evaluation of fiat currencies no more than a few years down the line.