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July 22, 2020

    
     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.