As July comes to a close, gold is up better than 9% for the month and has advanced nearly 30% for the year.
Gold’s record-setting rise has been driven by Federal Reserve stimulus, dollar weakness, and strong safe-haven investment demand. Even the Wall Street-centric financial media is taking note:
Financial News Anchor #1: Gold is shining once again, this morning. The spot price is touching all-time highs, as the dollar index sits around a two-year low.
Financial News Anchor #2: Those gold prices have hit an all-time high. The spot price of gold reaching a record.
Gold traditionally surges in times of turmoil. In this case, the economic impact of the pandemic, and those US/China tensions. They are sending investors to this safe haven. But the Federal Reserve's monetary easing measures, they also have a part to play in the price of gold.
The Federal Reserve on Wednesday left its benchmark interest rate unchanged near zero. But rates are actually going down in real terms as inflation threatens to come roaring back. That’s a hugely bullish factor for precious metals.
On the other hand, deflationary pressures could quickly return if the Fed lets up on the monetary gas. The GDP report on Thursday showed the nation’s gross domestic product contracted in the second quarter at an unprecedented annual rate of 32.9%. The collapse in economic output was offset by a surge in fiscal stimulus that caused personal incomes to actually grow overall.
Additional stimulus checks from Uncle Sam are likely coming soon. At least another $1 trillion will be added to the budget deficit, which is already the largest in history. But during a pandemic and in an election year, deficits don’t matter – at least not to members of Congress.
But deficits do ultimately matter to taxpayers and holders of U.S. dollars. The currency is being rapidly inflated to cover ever-widening gaps between what the government spends and what it collects in revenue.
Goldman Sachs analysts this week wrote that "Combined with a record level of debt accumulation by the US government, real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge."
That’s right, the investment bank dubbed “Government Sachs” for its pipeline to the U.S. Treasury Department is worried about the long-term viability of the Federal Reserve Note. That certainly says something.
Rising risks to America’s fiat currency are being reflected in surging precious metals markets.
Silver spiked up to as high as $26 an ounce in wild intraday trading Tuesday before backing off. We had been eying the $26 level as a potential intermediate-term upside target and resistance level. Meanwhile, the other white metals are diverging to the downside.
Concerns about automotive demand amid gloomy GDP numbers may be weighing on the platinum group metals. Fears of weakness in industrial demand more broadly could deliver a hit to the silver market as well – perhaps forcing a retest of the big breakout at the $20 level.
But the poor man’s gold has been boosted in recent weeks by investors in both exchange-traded products and physical bullion. Bullion buying from newcomers has been furious.
As a consequence, the price action in the market for silver coins, bars, and rounds has been extreme to say the least. Premiums on popular products, especially Silver Eagles, have surged as demand overwhelms supply.
Another issue is that the U.S. Mint is now chronically failing to meet its own minting obligations. The West Point Mint has announced that in order to protect workers from the China virus, it will scale back production of gold and silver coins over the next 12-18 months.
Clearly this problem won’t be solved anytime soon. The scarcity of American Eagle products means premiums on these coins will likely stay elevated.
The good news for holders of them is that national dealers like Money Metals Exchange are also paying elevated buy back prices in order to acquire inventory from customers who are actually willing to sell.
There may come a time when you want to or need to sell your precious metals. Dealers are certainly happy – in fact, eager -- to help.
But given the unprecedented and growing risks right now to the U.S. dollar – and frankly most other fiat currencies – we also urge everybody to retain at least some emergency stash of sound money regardless of market conditions.
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