The Fed just fired a bazooka of liquidity at the markets. Why it points toward big gains for gold
It seems eerily prophetic now.
Last Wednesday, our CEO, Brian Hunt emailed his thoughts on gold to a handful of us at InvestorPlace. This private, internal memo could help you make a great deal of money over the next few years, so we are starting today’s Digest with it … and then moving on to discuss the enormous ramifications of its subject.
Over the past two weeks, more than a few people have asked me what the heck is going on with gold.
Gold is supposed to go up when stocks get killed, right?
My answer is “Not necessarily.”
When people freak out and sell everything, they sell gold. When people have to meet margin calls, they often sell things of value. That means they sell gold.
That’s why gold recently dropped from $1,675 per ounce to $1,480 per ounce.
But don’t count gold out yet.
As I write, gold has carved out a short-term bottom around $1,500.
I think it’s an exceptional buying opportunity.
I think gold could scream to the upside over the coming years.
Here’s why …
If I was a president or dictator or prime minister right now, I’d bail out everybody. I’d bail out manufacturers, banks, auto makers, restaurants, airlines, infrastructure operators, etc. I’d bail out your kid’s lemonade stand.
Thanks to my bold job-creating moves, I’d go down in history as the guy who took aggressive action and did something huge to save the country from “the crisis of our generation.”
People would love me now and they’d love me 100 years from now.
How would I pay for my bailouts?
Easy.
I’d borrow and print. I’d print and borrow.
I’d print and print and print and create billions and trillions for the bailout. I’d tell the public that anyone who opposes my plan is a heartless monster that doesn’t care about regular people. People who oppose my plan would get nicknames like “Heartless Henry” and “Cold-blooded Connie.”
I believe lots of political leaders are thinking this now or will start thinking it very soon.
They know the story of Franklin Delano Roosevelt. He took office in 1933 during the Great Depression. He “did something” in response to the crisis. He spent tons of money on social welfare projects and infrastructure projects. He massively increased the size and scope of the U.S. government.
As a result, people love the guy and he’s regularly ranked as one of the top three presidents in U.S. history. He’s the only president that served three terms.
Most presidents and senators and prime ministers and dictators dream about having the kind of power FDR had … and the legacy he has.
I wouldn’t be surprised see FDR-style bailouts, social programs, and infrastructure programs bloom all over the world. To pay for it all, they’ll print, print, print.
Bearish for the value of paper currencies.
Bullish for gold.
Bullish for gold stocks.
***Yesterday, the Fed took massive action that makes Brian look like Nostradamus
While great uncertainty remains, it has become clear that our economy will face severe disruptions.
Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.
So said the Fed yesterday, ushering in an era of big — scratch that — massive government spending.
As to these “aggressive efforts,” first, the Fed said the purchases of Treasury and mortgage securities are now essentially unlimited.
In fact, this week alone, the Fed will be buying $375 billion in Treasury securities and $250 billion in mortgage securities. Next, in an unprecedented move, the Fed will be buying corporate bonds — specifically, investment-grade securities that are a part of various exchange-traded funds (ETFs).
Then, there’s an unspecified lending program for Main Street businesses and the re-launch of the Term Asset-Backed Loan Facility (TALF) that we saw during the financial crisis.
As of this writing, we’re waiting on details of the Main Street program. But a news release says it will help “support lending to eligible small and-medium sized businesses, complementing efforts by the SBA.”
As to TALF, the Fed will lend money to investors in order to buy securities backed by credit-card loans and other types of consumer debt.
Finally, the Fed will be purchasing agency commercial mortgage-backed securities. This is an expansion into the commercial sector of real estate — it’s primarily debt on apartment buildings.
Put it all together and the Fed’s balance sheet has just skyrocketed — or “gone vertical” — as you can see below.
***Meanwhile the Senate is on the verge of approving a massive stimulus bill, likely having a value of at least $1.6 trillion
Despite the usual partisan bickering, Democrats and Republicans are closing in on a massive stimulus package aimed at combatting the economic destruction of the coronavirus.
The first two fiscal stimulus bills, offered up by Republicans on Sunday and Monday, failed to pass as Democrats felt they didn’t do enough to help workers. Dems argued the bills offered too much for company bailouts.
However, it’s alleged that the remaining differences on deal-points are relatively small. So, expectations are high that we’ll see an agreement sometime today (Tuesday), potentially by the time this Digest publishes.
Though the final details of the stimulus package aren’t clear, one thing is certain — it will carry an enormous price tag.
***Gold is pushing higher on the news
Yesterday, gold prices shot from fairly higher levels Sunday night to sharply higher gains on Monday following the Fed’s liquidity announcement. Gold futures pushed 5.6% higher. That was the largest daily dollar gain on record.
As I write Tuesday mid-morning, gold futures are making another big move, up 5% as I write.
This is a welcomed reversal for gold bulls who have watched the precious metal fall alongside stocks over recent weeks.
Gold climbed as high as $1,676 in late February before getting caught in the selloff, pushing prices down roughly $100, as you can see below. But I suspect your eye will be drawn to the sharp tick upward on the right side of the chart. That’s the massive gold rally beginning yesterday and extending through the time of this writing.
So, what’s fueling this huge move?
Well, as we noted in a Digest from earlier this month, gold’s price was taking a hit as panicking investors sold virtually all asset classes in favor of cash.
While this “sell everything” dynamic obviously hurt gold (alongside countless other asset classes), it also resulted in a secondary, less-noticeable headwind that has been more specific to gold …
A strengthening dollar.
You see, in troubled times, all sorts of companies, banks, and individual investors want to hold dollars. After all, it’s the world’s reserve currency and is still considered the safest currency.
But if everyone wants dollars, then from a basic supply/demand perspective, the value of those dollars is going to increase … which is what has happened.
Below, you can see the U.S. Dollar Index jumping higher in March as investors have funneled into the dollar.
This strong dollar is a headwind for gold.
This is because when the U.S. dollar is stronger, it means investors can spend fewer dollars to purchase the same international goods that required more dollars just weeks or months before when the dollar was weaker.
Given this, as the dollar strengthens, that means fewer dollars are required to purchase the same amount of gold (all else equal). This puts downward pressure on gold’s market price.
But yesterday’s news from the Fed changes this dynamic.
All of the new, added liquidity will provide counterbalance to the strong dollar. In fact, after the Fed’s move yesterday, the dollar weakened, with the ICE Dollar Index falling 0.5%. It’s falling again on Tuesday as I write.
If this trend continues, it should support a huge move higher for gold.
***You have an extraordinary resource for all-things “gold” in Eric Fry
We believe in the American spirit which will ultimately lead to a recovery and a rebound in stocks. But we believe gold could soar far higher, far quicker. That’s the dynamic we saw play out in the recovery after 2008/2009.
Plus, gold will help protect your portfolio and your wealth against the bazooka of liquidity the Fed has just fired, which will result in debasement of the dollar.
Given this, owning gold is incredibly important for investors today. And for our money, no one knows gold as well as Eric Fry. In fact, less than two weeks ago, his latest Investment Report issue focused on gold and the massive investment opportunity it’s presenting today.
But Eric has been recommending gold for far longer. In fact, it was early last year that Eric wrote Bear Market 2020: The Survival Blueprint, which offered a step-by-step blueprint outlining what Eric believes are the essential tactics every American should take when markets are crashing. The contents have never been more relevant than today.
Eric is a market veteran with decades of experience — a true insider. He’s an incredible resource for navigating complex markets like what we’re experiencing today. If you’re unclear how to position your portfolio, or the best way to add gold to it, we strongly encourage you to subscribe to Eric’s Investment Report. Click here for more.
In any case, keep your eyes on gold. All signs point toward more gains to come.
Have a good evening,
Jeff Remsburg
