There is a tug-of-war between inflation
and deflation. Accelerated moves in either direction, will throw the
economy into a recession or maybe even a depression.
Inflation: Much of the stock
market’s recent rally can be attributed to the massive provisions of liquidity
and income support from the Federal Reserve and Congress—providing relief
measures equal to nearly 30% of the Congressional Budget Office’s 2020
estimated U.S. gross domestic product. The Fed’s balance sheet has swelled to
$7.2 trillion to ease financial system strains during the crisis. These
actions would normally create inflation. The money supply has been inflated.
Deflation: With many states still
having restrictions on business activity, it is not clear how long it will take
for consumer demand to rebound. Even with excessive money printing, it may not
make it into the hands of spenders. The low long-term rates have created
another wave of mortgage refinancing, but it is unclear if consumers are
borrowing additional cash for spending. Furthermore, the high unemployment
coupled with excess capacity in many industries and you get deflation, (a
deflationary spiral was a reason for the great depression). Products get
cheaper profits shrink workers are laid-off less
consumers products get cheaper. The money supply in
the hands of consumers shrinks or deflates.
The inflation setup is winning as
evidenced by Gold’s performance so far this year. Gold and silver increases are
not attributed to the pandemic. COVID-19 simply exasperated the underlying
weaknesses as evident by the negative real interest rates and further weakening
of the dollar. The reaction to COVID-19 over the last quarter was of “historic
proportions,” with global debt now soaring and governments injecting trillions
of dollars into their economies. Under those conditions, gold is a “lower risk
shelter to seek refuge,”
A
weaker U.S. dollar also contributed to dollar-denominated gold’s hefty gain for
the quarter. The direction of real interest rates matters the most. Since those
are near zero in the U.S., “gold’s position is far more compelling than bonds.”
What
investors can do now? If prices keep rising, including stock prices, then stay
invested in precious metals and high tech (typically low or no debt companies)
or healthcare / utilities (essential needs). If prices begin to fall, increase
percentage of assets to cash (50% or maybe more) and payoff personal debt.
The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Financial Spectrum, Inc. does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.