July 2020 - Week 5 Edition
One Reason Gold is Soaring: The Fed is Recklessly Fueling Future Inflation
Gold has shot up to a record high. Silver has also gone parabolic in price, rising to $24.85 (a 7-year high), doubling since March 18 (at $12.42) and thereby falling under an 80-to-1 gold/silver ratio, which we had predicted a few months ago. Part of the rise of both metals is due to a falling U.S. dollar. The Dollar Index is down 4% in July alone and down nearly 9% in the last four months, due in large part to the massive printing of fiat paper money.
The Federal Reserve and the U.S. Treasury – with the aid of the spendthrift U.S. Congress – are throwing unprecedented amounts of fiat money (unbacked paper currency) at the coronavirus problem, in a series of four (going on five) multi-trillion dollar stimulus packages to keep the American economy afloat. The Federal Reserve is fighting recession and deflation by fueling the economy with excess liquidity and is thereby sowing the seeds of future inflation – which came about prematurely, as the Labor Department recently said the Consumer Price Index soared 0.6% in June (a 7.2% annual rate).
A new book, “The Deficit Myth” by economist Stephanie Kelton, uses Modern Monetary Theory (MMT) to say that the most fiscally responsible way to fight the current COVID crisis is with “higher deficit spending.” At the current spending pace, multi-trillion-dollar deficits will likely be common in the 2020s.
In an amazing surrender to Modern Monetary Theory, the two most recent Federal Reserve Chairs, Janet Yellen and Ben Bernanke, said in testimony to Congress on July 17 that they favored turning loose the monetary spigots without limit, saying that they “would further increase the already record-level federal budget deficit.” In their testimony, they did admit that “at some point, we will have to think through how to ensure the long-run sustainability of federal finances,” but not now, since the crisis is too severe.
In addition, budget deficits are soaring. The U.S. federal deficit ballooned by $864 billion in June alone – more than the entire ANNUAL fiscal 2019 budget deficit, bringing the nine-month total to $2.74 trillion, and the full year (ending September 30) estimate to $4 trillion, or three times the previous worst, in 2009.
MMT says that we don’t even need taxes from Americans, we just print more money UNLESS inflation returns. But what then? Then, we raise taxes. But inflation has risen after every massive infusion of new fiat money in history. When inflation returns, gold could take off even higher, as it did in the 1979-1980 inflationary peak when many new gold and silver buyers entered the market. That was also the time when rare coins had their most historically powerful surge rising 1,195%, according to the CU3000 Index.
Gold is Always Gold, but Stock Indexes Frequently Change Names
At times like this, beware of articles that say gold has not done very well, using 1980 as a starting point. As soon as gold retreats below its new high, you will see articles in many major publications saying that gold has not even reached a new “real” after-inflation high. They will say the $850 peak in 1980 is really around $2,500 to $3,000 in today’s dollars but taking any investment’s peak as a starting point is unfair.
There are three problems in comparing gold to stocks. #1: The first is that gold competes more fairly with cash and bonds than stocks. Most investors should own some stocks, but gold has clearly beaten all forms of cash and bonds over time. Most currencies in history have been inflated out of existence, but those that survive have been badly beaten by gold. The U.S. dollar has only retained about 1.5% of its value to gold since the Federal Reserve was launched in 1913. But even comparing gold to stocks, consider these flaws:
#2: The stocks within the stock indexes keep changing. The Dow Jones Industrial Index began with only 12 stocks in 1896. After the index reached 30 stocks in 1928, nearly half (14) of them were replaced during The Great Depression years from 1934. Not one lasted the next 90 years. Most died a natural death as their products went out of style or their businesses failed. The stock that lasted the longest was General Electric, but it was taken out of the Dow index in 2018 when its fortunes started to fail. Recent replacements were rising powerhouses which replaced the old-line industrials, like Apple replacing AT&T, Cisco Systems replacing General Motors, Intel replacing Goodyear, Microsoft replacing Union Carbide and Nike replacing Alcoa. By that token, it looks like the real “industrials” were cast aside in favor of the glamour stocks, so why don’t we change the name to the Dow Jones Darlings?
#3: Most major stock indexes are dominated by a very few mega-stocks, which bloat their returns. Bespoke Investment Group published a study which showed that through Monday July 13th, the seven largest companies in the S&P 500 – namely, Alphabet (Google), Apple, Amazon.com, Facebook, Microsoft, Netflix and NVIDIA – as a group were up 45% year-to-date, while the rest of the S&P 500 had declined 11%. The major indexes are warped because the biggest stocks weigh them down by their size (“capitalization,” which is price times number of shares).
Gold is always gold. Silver is always silver. But the contents of stock indexes are often warped and ever-changing.
Make This Our Customers’ “One Shining Moment”
Remember those college basketball championship moments when the victorious team was able to gather around the net and hug their families and hear the song “One Shining Moment”? Well, this moment of gold’s record high is one of those once-in-a-decade “shining moments.” All of our hard work has paid off. Maybe some of our customers had initial doubts, but they finally put a “toe in the water” with one Silver American Eagle when silver was only $12 an ounce and then bought a dozen more at $15 an ounce, then some rare coins, and now many of their portfolios are worth more than they were worth just 12 months ago. Some of our largest customers started by ordering only a few Silver American Eagles a long time ago.
In this world of great risk and crisis, that’s something to be proud of. We’re helping people to be better off in a world of uncertainty and great risk. And now, as often happens in bull markets, people are calling as never before. They need to be told that that this is not a market peak. This type of bull market typically lasts for years. This is not like 1980 – a sharp bubble peak – and it is not like 2011, either, which was also a sharp bubble rise. This has been a slow and steady increase. This has also been a time of exceptional money printing and conscious evasion of fiscal sanity at the highest levels in Congress and the Fed. Back in 2011, the Republicans and Democrats were arguing over a “debt ceiling,” but today there is no debate. Both parties have abandoned all talk of a debt ceiling, or any restraint. No politician is seriously addressing debt reduction. Both parties are signing on to unlimited spending with no attention to tax income or budget balancing. This is a whole new world.
This is the time to tell clients to stick with their plan of coin accumulation. There is no need to panic. Just stick to the plan. If you had a plan, stick with it. If you don’t have a plan, draft the plan now with one of our professional account representatives.
We’re sticking with our plan of accumulating great coins using our Project 20/20 strategy. Last week, I made increased bids of over $1 million for great coins on dealer exchanges, since we need products for our customers. The rare coin market is starting to hum, as the bull market for great coins is beginning. Call your “Team Mike” representative now to see what special coins are available now, since the best rare coins available now may not be available the next time you call.
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