Will the Worst of Times for Central Bankers Lead to the Best of Times for Precious Metals? / Commodities / Gold & Silver 2020
During turbulent times like these, markets can be melting downone day… and zooming higher the next. Gold may serve as a fantastic safe-havenasset one day… but get hammered by futures traders the next.
The news cycle can be just as volatile. One report may show thecoronavirus is receding in China, while another may raise alarms about itsspread in other parts of the world.
One poll may show a socialist candidate for President on therise, while another may show Americans overwhelmingly approve of PresidentDonald Trump’s handling of the economy.
We have a record-low unemployment rate (at least officially),but financial markets have become more unstable than at any time since the 2008financial crisis.
To quote Charles Dickens, “It was the best of times, it was theworst of times, it was the age of wisdom, it was the age of foolishness, it wasthe epoch of belief, it was the epoch of incredulity, it was the season ofLight, it was the season of Darkness, it was the spring of hope, it was thewinter of despair…” (A Tale of Two Cities, 1859).
Long-term investors shouldn’t despair over volatile marketconditions. Drawdowns create value opportunities – though not always in themost obvious places.
Liquidation events also trigger reactions from central bankers,which in turn create new market distortions and risks – as well as new opportunities.
Last week’s global stock market mini-crash drew a massiveresponse from concerned central bankers around the world:The People’s Bank of China sought to prop up Chinese equities with direct interventions.The European Central Bank announced that it “stands ready to adjust all its instruments, as appropriate.”The Bank of Japan, said it would “strive to provide ample liquidity.”The U.S. Federal Reserve vowed to “use our tools and act as appropriate to support the economy.”
Meanwhile, the World Bank and International Monetary Fundpledged to provide assistance to countries that need it.
Last Tuesday morning, Treasury Secretary Steven Mnuchin andFederal Reserve Chairman Jerome Powell joined finance ministers and centralbank heads from G7 countries to hold emergency talks and give carefully craftedreassurances over the coronavirus pandemic.
“The only medicine central bankers know howto administer is interest rate cuts and stimulus injections.”
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“There will be coordinated action,” said French Finance MinisterBruno Le Maire.
Of course, these economic central planners know next to nothingabout how to fight a virus. The only medicine they know how to administer isinterest rate cuts and stimulus injections.
The Dow Jones Industrials surged a record 1,293 points Monday asinvestors anticipated a globally coordinated plunge protection response. The10-year Treasury note yield also traded down to a record low – well below thecurrent Fed funds target rate of 1.50%-1.75%. The U.S. Dollar Index also slidon the day.
In effect, financialmarkets were reacting as if the Fed had already cut its benchmarkrate. And then the Fed followed through with an "emergency cut"of 50 basis points the next morning.
Goldman Sachseconomists are now forecasting that Jerome Powell and company will slashrates another 50 basis points later this year.
That would effectively reinstate ZIRP (Zero Interest RatePolicy), leaving the Fed with a very limited conventional toolkit to fight thenext financial crisis or recession.
Powellwould have to face the prospect of pursuing negative interest rates orinitiating direct “helicopter drops” of stimulus into the financial system.
When Europe and Japan began pursuing negative interest ratepolicies, they did little to stimulate moribund economies. Instead, they drovecapital into higher-yielding U.S. assets, including Treasuries, and helpedboost the U.S. dollar.
When the U.S. goes to zero or negative on interest rates, therewill be no place in the world left to go for decent yields – or at least, noplace big enough and safe enough to absorb trillions of dollars in globalcapital flight.
That leaves gold andother hard assets as potentially the prime beneficiaries of a global race todebase. If cash has no yield, then gold looks even better than ever incomparison.
Gold had surged to a 7-year high of $1,680 in late Februarybefore getting smashed last Friday. Whether the selling was due to margincalls, forced liquidation carrying over from the stock market, or a“coordinated action” by bankers, it stands in contrast to the strong buying ofphysical gold and silver seen by bullion dealers in recent days.
Now that fear has returned to financial markets and central bankmonetary spigots have been turned open, we would expect investment demand forbullion to continue gaining strength.
A major increase in retail precious metals demand won’t necessarilyhave an immediate impact on spot prices, which areset by futures traders. But over time an increase in physical buying will putpressure on the very limited global supply of precious metals.
When it’s the worst of times for markets that central bankersare trying to prop up, the best of times may follow in months and years aheadfor gold and silver markets.
Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness 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 asthe Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2020 Stefan Gleason - All Rights Reserved
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