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Will Gold Hit New Historic Highs?

Will Gold Hit New Historic Highs?
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By    |   Thursday, 23 July 2020 02:33 PM

Gold has skyrocketed to nearly $1,898 and is likely to surpass its historic high of $1,918 set in August 2011.

Before the pandemic, gold traded in a range around $1,450. But since mid-December 2019, it has climbed steadily as China’s pandemic became a global pandemic and national economies began to shut down to contain its spread.

Gold prices took a dip when a massive U.S. government fiscal stimulus plan was passed concurrent to a large monetary stimulus plan announced by the Federal Reserve. This is when a “V” shaped recovery seemed possible. But with the COVID infection rate un-abating and no clear path toward a U.S., let alone a global economic recovery, gold is quickly accelerating towards its all-time high.

I served as the Director of the United States Mint during the Financial Crisis and the Great Recession and have seen this pattern before. Gold climbed from $750 before the Financial Crisis began in 2008 to hit its all-time high three years later at the peak of the recession.

Many of the same factors that pushed up gold prices then exist today.

First, there was an unprecedented fiscal stimulus of nearly $1 trillion with less than the desired impact on the economy and a dramatic increase in the national debt. Second, there was similarly unprecedented monetary stimulus from the Federal Reserve: Over $4 trillion in several rounds of quantitative easing. And lastly, there was great uncertainty about how the economy would recover and what path it would take.

But there are differences between the Financial Crisis and the economic crisis brought on by the pandemic that could boost prices even higher.

The magnitude of both fiscal and monetary stimulus is record setting and staggering. Currently, the federal government’s multiple fiscal stimulus packages have a total cost of over $2 trillion. More fiscal stimulus dollars are likely. And the Federal Reserve’s monetary stimulus is on a much large scale than ever before: Quantitative easing currently stands at $2.2 trillion after just four months, in addition to loans to banks totaling over $5 trillion.

Unlike tackling systemic risk in the financial system, there is much we do not know about COVID, especially as it continues to mutate. Developing vaccines and treatments is more difficult than de-risking the banking system. As a result, the path and timing to economic recovery not certain and may take a while to figure out.

While the Fed, institutional investors, and pension funds own much of the debt that finances our fiscal spending, foreign countries account for nearly 30%. And chief among those foreign countries is China. Given that our relationship with China is quickly deteriorating, it is not clear what appetite it has for funding our economic recovery.

So, expect gold prices to break new records until the economy is on a predictable path toward recovery without the fear of inflation, which given the early stages of the economic crisis caused by this pandemic, could be some time.

Ed Moy served as the 38th Director of the United States Mint from 2006-2011.

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Before the pandemic, gold traded in a range around $1,450. But since mid-December 2019, it has climbed steadily as China’s pandemic became a global pandemic and national economies began to shut down to contain its spread.
gold, price, historic, highs
505
2020-33-23
Thursday, 23 July 2020 02:33 PM
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