The coronavirus shutdown has affected the entire world. This includes large and small businesses, colleges and universities, and even transportation. Crude oil and many other stocks experienced brief rallies only to fall again a few days later. Hope spikes then dissolves among investors that this virus will be cured soon and the world can go back to business as usual. People are also worried about inflation. With these very real concerns, investors should know what economists are saying right now regarding government intervention, the stock market, the value of the US Dollar, and the gold and silver price.
Many people are wondering exactly how the government bailout is going to affect the economy. Right now, the future cannot be predicted with complete certainty. That is, not until the virus is completely under control and the economy can reopen.
What we do know is that unemployment is at an all-time high with approximately 20 million Americans out of work. We also know the government already ran out of money with its bailout for small businesses. They will most likely seek to print more money for more stimulus packages. This will continue to inflate the US Dollar by increasing the money supply despite having fewer products on the market from the corporate shutdown.
Here’s a graph showing the current M0 Money Supply of the US.
This is by definition inflation. So what can investors do to protect their assets?
This is not the time to act rashly. There are many unpredictable factors right now that could occur, such as a second outbreak, mass corporate layoffs, and other catastrophic events. The worst-case scenario would involve the banks crashing, but we are not there yet. For investors and individuals looking out for themselves, economists suggest the best thing is to invest in “real assets.”
Real Assets, ETF’s, and Gold
What exactly is a ‘real asset?’ In Layman’s Terms, it is an asset the government cannot simply create and say it has value. This can be productive land, shares of a reputable private business, and of course, gold and silver and other precious metals. These assets tend to do well during inflation because of their intrinsic value. Also, because most people cannot simply invest in land or private businesses, precious metals tend to be more accessible. This can be in the form of ETFs or physical gold and silver.
With the stock market, it is experiencing incredible volatility. This does not yet factor in inflation. Within the last few months, the stock market hit record highs and lows. Kitco also acknowledges this volatility in regards to ETFs:
The GDX went from a false breakout above $31, to a false breakdown to $16, then back to knocking on the door of a breakout again in just eight weeks. This whipsaw action is basically what took place in the ETF during the financial crisis in 2008-2009, but the time frame was over a year in duration!(From Kitco.com)
Lately, silver and other junior metals are in the bear market territory. They have been, since 2013. However, these metals have not yet caught up to gold’s price trends, and people predict that metals and ETFs will. Canada and Australia’s gold prices were around $2500 earlier this week. Meanwhile, we saw the gold spot price break past $1700 in USD. The market prices a new floor for gold at $1500 USD. Therefore, miners and developers who control large deposits are in a pretty decent position to benefit from these lower currencies and lower energy prices.
At the start of 2020, the Global Mining ETFs and silver were heading into a good year since they were leading gold. This is the sign of a healthy bull market. Analysts expected the GDX would rise above a $31-32 weekly close level from an almost 7-year base. 7 weeks into the year, Global Mining ETFs went past $31 but dropped, just like it did in August 2016. Then, the coronavirus hit. Gold stocks responded to the ramifications of the virus and global shutdowns. The downturn of Global Mining ETFs and silver were also affected as suddenly investors sold assets for cash.
As the Federal Reserve aligns with the Modern Monetary Theory, investors return to looking at gold stocks. GDX specifically is anticipated to break out. Major mining companies and Royalty Firms outperformed silver and other junior metals, but the latter is expected to catch up and even possibly outperform big gold stocks. This is something analysts have seen happen time and time again, and it is their prediction that history will repeat itself. They also say that it is better for investors to be holding these stocks before the breakout occurs.
For example, Barrick Gold Corp and Newmont Corp both broke ahead of their sector first. Therefore, analysts say that investors should look to quality juniors when it is affordable to do so. The catchup between gold and other metals is most likely to occur when there is a weekly close of about $32 in the global miner ETF because investors will then look to expand on their profits with more affordable metals that have industrial usages. When a panic happens, people tend to sell their gold, and then the gold price shoots up after it breaks out to the upside with few investors in on the next bull market rise. Keep an eye on precious metals during this pandemic.
Inflation and precious metals
This all being said, investors still cannot go wrong with safe haven physical gold and silver investing. This is because inflation will affect the US Dollar. When it does, gold and silver will be extremely valuable.
The US Government and banks’ future moves are predicted to involve stockpiling cash into the economy frequently and massively. The US Government has already spent trillions with stimulus and bailing out small businesses. Additionally, the Federal Reserve also created more money to loan to banks and businesses. Australia, the UK, Canada, and Germany all made similar moves to each other in the throws of the virus and quarantine to keep their economies alive. All these factors of the volatile economy and weakening paper currency make the argument that it is a good time to buy gold and silver.
Why buy gold and silver
Purchasing physical gold and silver can protect the value of your assets and bank account. As previously stated, not everyone can afford shares of a private business or productive land. Therefore, physical gold and silver remain the most accessible.
This chart shows the ratio of the gold price in relation to the M0 Monetary base, a method for measuring the money supply.
This graph shows the ratio is below average. In short, this means that gold is cheap in comparison to the money supply. Even using a different measure like the M2 Monetary base still shows the ratio is below this 50-year average. Because gold is cheap in comparison now, the gold (and silver) price will increase in response to inflation.
The Gold-to-Silver ratio currently is near an all-time high. Currently, it takes 100oz of silver to buy 1 oz of gold. Analysts predict that this will not be the case forever, though. Don’t forget, silver and other juniors might breakout. This will mean in terms of gold and silver prices, silver prices just might rise more than gold has so far.
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Disclaimer. This article is not meant to serve as professional economic advice. Any action you take upon the information from this article and website is strictly at your own risk.