The gold price isn’t just watched by gold investors, it’s also watched by market observers as a barometer of economic health.
When the gold price begins rising, and especially when it rises substantially, it’s often a sign of a deteriorating economy, or at least of concern about the future of the economy. And when the gold price begins to drop, it’s seen as a sign that the economy is doing better.
The gold price so far this year has risen over 22%, not surprising in a year that saw the economy contract by over 30% during the second quarter. As the economy began to recover, and especially as hopes of a successful COVID vaccine began to grow, the gold price began to drop. But it’s recovering once again, and poised for another year of strong growth in 2021.
There are a number of trends that support that growth, and all of them seem to support further price growth.
Here are three of them.
1. COVID Vaccine
Much of the strength and health of stock markets recently has been tied up in hopes of a successful COVID vaccine. The thinking is that if a vaccine is successful and if enough people get vaccinated, it may lead to a return to normalcy. But if the results of a vaccine disappoint, then markets are likely to tank.
Like everything else surrounding COVID, vaccines have become politicized. And no one really knows when these vaccines will be available, how many people will be able to receive the vaccines, and how effective they will be. If reports are to believed that they will only provide 3-6 months of protection, markets could get spooked. And with tens of millions of Americans not about to become beta testers for vaccines using technology that has never been used before, it’s highly unlikely that enough people will get the vaccine so that herd immunity can be achieved through vaccination.
Markets may already be trying to price in a return to normalcy, but it’s highly unlikely that adoption of a vaccine will convince enough state governors to undo everything they’ve done already in terms of mask mandates, business lockdowns, etc. The euphoria that overcomes stock markets today whenever there is any positive vaccine-related news is likely to fade over time as the difficulties in transporting vaccines, injecting millions of people, and maintaining immunity are realized. Consider the vaccine effect already priced in by markets, so that once reality sets in, stock prices will start to tumble.
2. Too Much Liquidity
Central banks have traditionally treated financial crises as liquidity crises. They see firms that should be able to pay bills, pay off loans, meet payroll, etc., but that are hamstrung by temporary inabilities to fund their operations. Thus, the central bank steps in as a lender of last resort, a role popularized by Walter Bagehot.
The Federal Reserve has performed that function in just about every crisis of the past century, but the effects haven’t been benign. Once liquidity is injected into the financial system, removing it can be just as dangerous and damaging as the initial injection. And so, the inexorable trend over time is for each subsequent injection of liquidity to remain in the economy, driving up the money supply, increasing prices, and causing widespread misallocation and malinvestment of resources.
One of the most recent attempts on the part of the Fed to act as the lender of last resort was its attempt to shore up overnight repo markets in late 2019. It was even prepared to lend about $5.5 trillion in revolving credit at one time, an enormous sum. What we found out later, after COVID lockdowns had gone into effect, was that the Fed was prepared not just to issue huge amounts of temporary liquidity, but also huge amounts of permanent liquidity.
We once thought that a Federal Reserve balance sheet over $4 trillion was astronomically high, especially when compared with the Fed’s pre-2008 crisis balance sheet of under $900 billion. But the Fed engaged in an enormous amount of liquidity creation early in 2020, and its balance sheet is nearing $7.3 trillion and is still rising. To put that into perspective, that’s larger than the economies of every country in the world except the US and China, and it’s nearly twice the size of the entire economic output of Germany.
The problem now is not too little liquidity, because we’re swimming in an ocean of liquidity. Instead, we’re going to face a problem of solvency.
3. The Problem of Solvency
While the general public doesn’t pay much attention to the Bank for International Settlements, it’s an extraordinarily important institution, known as the central banks’ central bank. And its economists have been warning for a while that the world is on the verge of a crisis, this time of solvency, not liquidity.
Here’s an example of the difference between solvency and liquidity. Let’s say you have a net worth of $500,000, and you have to pay a debt of $100,000. But your net worth is tied up in your land holdings, which aren’t easily sold. You should be able to pay that debt easily since your assets exceed your debts, but because land isn’t easily liquid, you’re facing a liquidity problem.
Now let’s imagine that you have net assets of $500,000, all in cash, but you have $750,000 of debts that you have to pay. Now you’re facing a solvency issue, because even though your assets are liquid, you don’t have assets sufficient to pay off your debts. As long as your creditors don’t call in those debts, you can get by. But once those bills are due, if you don’t have the money to pay, you’re toast.
That’s the problem that most governments and many businesses find themselves in. With liabilities far in excess of their assets, they’re hoping to get by through continually rolling over debt, or refinancing at lower interest rates. But that only works for so long, and once liquidity concerns begin to enter the market and creditors start calling in loans, then we find out who is solvent and who isn’t.
It doesn’t help matters that our fractional reserve banking system is built upon sustaining a system of chronic insolvency. With only a small fraction (or zero in some cases) of bank deposits being kept on hand, the rest of the money deposited into banks is loaned out. If a bank only keeps 3% of its deposits on hand as reserves, if depositors withdraw enough money that that 3% reserve is exceeded, the bank becomes insolvent. And just about every bank in the world is in exactly that same position.
Are You Protected?
If that doesn’t exactly paint a rosy picture of the state of the world financial system, there’s a reason for that. It’s because the financial system isn’t in great shape. The world is awash in mountains of debt, with everyone hoping to avoid the great shakeout, when we find out which debtors really were creditworthy, and which creditors will lose their shirts.
The only way to really avoid being part of that shakeout is by moving your assets away from the financial system, into time-honored means of protecting your assets such as investing in gold. Gold has played an important role in protecting investors against financial turmoil and economic crises for centuries, and continues to play an important role today.
Even more importantly, it’s easier than ever to invest in gold. You don’t have to join a bullion exchange, become a coin expert, or anything like that. And you can even use your existing retirement assets to invest in gold.
With a gold IRA, you can roll over or transfer assets from your existing retirement accounts into an investment in physical gold coins or bars. Your gold IRA retains all the same tax advantages as your existing retirement accounts, allowing you to continue saving for retirement knowing that your wealth is protected by physical gold held in a secure depository.
In this time of uncertainty, don’t you want to gain more control over your retirement and more assurance that your savings will really be there when you need them most? Contact the experts at Goldco today to learn more about how gold can help protect your future.
Trevor Gerszt is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau.
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