Earlier this week, good news about a potential coronavirus vaccine sent stock markets soaring to record or near-record highs.
Any concerns about the results of the presidential election were thrown to the wind as investors hoped that the end of the COVID crisis might be just around the corner.
The gold price and silver price took a slight hit as stock markets climbed, leading some to speculate whether an end to the coronavirus pandemic might mean the end of economic uncertainty, a return to normal, and a decline in demand for gold and silver.
That’s wishful thinking, and while everyone would love to see a return to normal, that unfortunately won’t be happening anytime soon. Even if COVID were to disappear overnight, the economy is facing significant headwinds. Here are four of the biggest obstacles facing the economy today.
Retail and Business Bankruptcies
COVID lockdowns wreaked havoc on the retail sector. Businesses from small to large saw their sales plummet, and in many cases those sales haven’t returned. Major names that have filed for bankruptcy include J. Crew, Gold’s Gym, Neiman Marcus, JCPenney, Brooks Brothers, Lord & Taylor, and the parent company of Joseph A. Bank and Men’s Wearhouse. That list will likely grow even larger by the time this crisis is over, and many of these companies likely won’t survive their bankruptcy proceedings.
The U.S. economy is driven by consumer consumption, so failing retailers could mean fewer options for consumers, and falling consumption. Because these are national retailers with numerous employees, their failure would also mean hundreds of thousands or even millions of employees losing their jobs. And while large companies get all the headlines, the number of small businesses that will be going under could be mind-boggling. Small businesses employ nearly half the U.S. workforce, so retail and business bankruptcies could completely upend the U.S. labor market.
For all the talking that government officials sometimes do about keeping the dollar strong, the reality is that the dollar is getting weaker every day. Continual unimpeded inflation will do that, and over the past century the dollar has lost over 96% of its purchasing power. Much of the loss came in the aftermath of President Richard Nixon closing the gold window in 1971, removing the last official link between the US dollar and gold.
Now with no restraint on its ability to create money, the Federal Reserve went wild, creating money ad infinitum. In the aftermath of the 2008 financial crisis, the Fed got even wilder, massively expanding its balance sheet by trillions of dollars over a period of several years. And now the Fed has responded to COVID by enlarging its balance sheet yet again, with over $3 trillion in expansion in just a few weeks earlier this year.
With that kind of money creation, the dollar will only get weaker in the future. The massive national debt, currently over $27 trillion and counting, will further incentivize even more debt creation to pay off the interest on that debt. We’re rapidly nearing an inflection point at which further debt issuance will be needed solely to pay off the interest on the debt, and the government will face some tough choices about where to spend its limited income, with even further weakening of the dollar necessary to help pay the bills.
As businesses fail, the holders of their debt could end up wiped out. In years past that wasn’t seen as a huge problem, as investors holding distressed debt could still expect 40 cents on the dollar when all was said and done. But the massive increase in the size of the corporate debt bubble since the 2008 crisis, the deteriorating quality of corporate debt, and the growing economic uncertainty mean that during the next default wave investors may be lucky to get pennies on the dollar. Some analysts believe that losses of 99% will be the norm.
For investors, that means that bonds, often thought to be the “safer” alternative to stocks, could end up becoming ticking time bombs instead. No one knows exactly when the corporate bond bubble will blow up, but when it does, it could lead to a series of cascading defaults across the economy, just like in 2008.
Of course, the real danger is what happens if this bond bubble collapse ends up becoming even bigger than 2008. With more than 50% more corporate debt in existence, and with no end to COVID in sight, the ability of many companies to repay their debt will become increasingly in doubt. That could mean that bond markets will witness a bloodbath that hasn’t been seen in generations.
Loss of Unemployment Benefits
Millions of Americans remain out of work, and tens of millions are receiving unemployment benefits. But for many of those Americans, those benefits could run out at the end of the year.
Over 13 million Americans are receiving extended unemployment benefits due to provisions in the COVID aid package. But absent action by Congress, those benefits expire at the end of December. If those 13 million Americans suddenly find themselves with significantly reduced income, it would have a major impact on consumer spending and the limited economic recovery that has occurred so far.
Endless stimulus isn’t a panacea, but Congress needs to make a decision. Either pass a stimulus package and communicate about the pace of any future stimulus, or tell the American people that no more stimulus is forthcoming.
For households to remain in a state of uncertainty, believing that Congress is going to provide more stimulus yet finally having their hopes dashed, is not conducive to saving meager resources and planning for the future. And continuing to promise stimulus risks households spending more than they should, in the hopes of receiving further bailouts, which could prove disastrous if political infighting delays or prevents future stimulus packages and unemployment extensions.
Why Gold Will Win Out
All of this taken together means that there are some pretty significant issues weighing on the economy. With what looks to be a contentious presidential transition, the likelihood of higher taxes in the future, and possibly even a nationwide COVID lockdown, the list of headwinds the economy faces is enormous. So, anyone thinking that good news about a COVID vaccine could mean the end of COVID fears, a return to normalcy, and a drop in the gold price isn’t being realistic.
The reality is that the economy wasn’t in great shape before COVID, and the self-inflicted wounds perpetrated by governments in response to COVID haven’t done it any favors. Things are most likely going to get worse before they get better, with a double-dip recession possible, and a crisis worse than 2008 well within the realm of possibility.
Against that backdrop, it’s far more likely that gold will appreciate significantly than that it will halt its momentous rise. Gold investors who have already benefited from gold’s 23% rise this year shouldn’t fear a crash, as any corrections in the gold price should only be temporary. The long-term trend for gold continues to look bullish, and we could be at the very beginning of a very strong bull market.
If you’re looking to protect your wealth, and particularly if you’re looking to protect retirement savings in tax-advantaged accounts such as a 401(k) or IRA, then it’s time to start looking at investing in gold. With a gold IRA you can even roll over or transfer existing retirement account assets into a gold investment, allowing you to take advantage of gold’s potential price growth, continue your existing retirement account tax advantages, and protect your savings from economic uncertainty, financial turmoil, and the possibility of another stock market crash.
What more could you want? Talk to an experienced Goldco representative today to find out how you can start putting gold to work in protecting your investments.
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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