Gold Is the Strongest Currency Since the Coronavirus Scare / Commodities / Gold & Silver 2020
Another tumultuous week inequity and interest rate markets has helped fuel a big pop in safe-haven demandfor gold and silver.
The major market moving eventwas, of course, the Federal Reserve’s emergency rate cut on Tuesday. The Fedslashed its overnight funds rate by 50 basis points. But even before the Fedacted, the bond market had already forced its hand as yields on the 10-yearTreasury note plunged to record low levels.
By Friday morning, the 10-yeartreasury yielded less than a paltry 0.90%. That represents almost no reward inexchange for the risk involved. Bond buyers are apparently willing to make adecade-long bet on U.S. government finances remaining solid and inflationremaining extremely low.
It’s still possible for bondsto experience capital appreciation if rates ultimately head to zero or below –as they have already done in other parts of the world. The Fed is almostcertain to cut rates again. There is a good chance at least some portion of theyield curve will be at zero later in the year.
As central bankers actfuriously to devalue cash assets, the U.S. dollar is likely to come underdownside pressure. If for no other reason than the Fed still has room to cutrates further while much of the rest of the developed world has already run outof conventional tools to depreciate their currencies.
There has been lots of talk of“coordinated action” among world central banks. Perhaps they will all gettogether and roll out some sort of global quantitative easing or otherunconventional form of stimulus. Since zero and even negative interest rateshaven’t had the desired effect, maybe they will just try dropping cash out ofhelicopters – or whatever the digital equivalent may be.
Gold is emerging as the strongest currency in the worldsince the outbreak of the coronavirus. Although the monetary metal got hammeredin futures markets in last Friday’s trading, it has quickly recouped thoselosses.
Gold is showing tremendousrelative strength versus the stock market, which continues to swing wildly on adaily basis. The Dow Jones Industrial Average has so far suffered just a sharpcorrection in the big picture. It was just a month ago that the blue-chipaverage was hitting new record highs.
But when measured in term ofgold, the Dow is in a major bear market. In fact, the Dow:gold ratio droppedthis week to a 3-year low of 15.6:1.
Another ratio we monitorclosely is the gold:silver ratio. It is now trading at an extreme high of about96:1. You’d have to go all the way back to 1991 to find gold selling at a moreelevated premium to silver – and then only briefly.
If coronavirus fears continueto drive markets, then gold could potentially spike to 100 times the silverprice. But we suspect that when markets finally calm down and prospects for theglobal economy improve, silver will begin playing catch-up to gold. And it hasa long way to go to get back to a more historically typical relationship withits more prestigious counterpart.
We are also seeing a big surgein demand for silver bullion products. The U.S. Mint reported that it sold675,000 Silver Eagles in just the first three days of March. Bycomparison, it supplied dealers with just 650,000 Silver Eagles for the entiremonth of February.
Coming off of three years ofsubpar demand for physical precious metals – the downturn really began afterthe election of Donald Trump in November 2016 – this year could see asignificant rebound.
Although fears of adebilitating global pandemic may fade – and we certainly hope they do – otherdrivers of bullion buying are likely to persist.
The Fed’s return to zerointerest rate policy makes hard money look like an increasingly attractiveplace to hold wealth. Plus, we could see rising political uncertainties andworries heading into this fall’s election – especially if investors fear theoutcome could be bad for Wall Street.
The threat of an overtsocialist becoming president seems to have subsided with Bernie Sanders losingseveral key states to Joe Biden on Super Tuesday. But Sanders is still winningthe youth vote overwhelmingly. That large and growing cohort of radicalleftists could propel more AOC types into Congress and into powerful positionsat the state and local level.
Both Joe Biden and PresidentTrump will talk a lot about unifying the country on the campaign trail. But thereality is that the U.S. is likely to remain as politically polarized as ever. Thereare no bipartisan solutions in sight for chronic problems such astrillion-dollar budget deficits.
All our big fiscal and economicissues are being handed off to the Fed to handle. The only strategy it has todeal with them is to paper over everything with more fiat dollars.
By Mike Gleason
Mike Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2020 Mike Gleason - All Rights Reserved
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