Monday Morning Wrap Up – August 31, 2020

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Trust in Money.

As summer winds down, the case for gold diversification grows stronger every day.

Wells Fargo’s Head of Real Asset Strategy John LaForge outlined in a research note to clients on Aug. 24 the factors that drove gold up 35% in 2020.

They are:

  • low long-term interest rates
  • excessive global money printing
  • a weakening U.S. dollar

The fourth reason he states might be shocking to some: distrust in the global monetary system.

Here’s what Wells Fargo research said:

“Trust in money, over the very long-term, has been a fickle thing. No paper money has survived time, while gold has. Gold is history’s trusted ‘store of value.’ Trust is particularly important when we are talking about money. This is why gold, throughout much of history, has been tied to money. If history tells us anything, it is that money is only worth what someone else is willing to give you for it. If it can’t be trusted to have value, what was once money can become worthless. It seems that recent generations know little about gold and its historical role. Gold was ditched by the West as money about 100 years ago, in favor of trusting governments and institutions. The monetary system is working today, and it is largely trusted. With that said, the recent rise in gold prices and cryptocurrencies may be a sign that a small but growing contingent is questioning the world’s monetary system.”

This follows Goldman’s Sachs recent warning that the dollar is in danger of losing its status as the world’s reserve currency.

Also – notably – in early August, Russia and China revealed a new partnership – a “financial alliance” to reduce their dependence on the U.S. dollar.

These developments make the case for portfolio diversification to gold even stronger. Many investors are now increasing their allocations to gold…have you considered if you are properly protected and hedged?

Fed Announces Landmark Policy Decision to Allow More Inflation

Last week, the Federal Reserve made history by changing its long-standing practice to head off higher inflation.

Chair Jerome Powell announced that the Fed is adopting a “flexible form of average inflation targeting.”

Simply put, the policy will mean low (zero) interest rates for longer – and the central bank will now not focus on controlling upticks in inflation.

One must question the value of zero interest rate policies here in the U.S. After all, zero interest rate policies failed to deliver economic prosperity in Japan and Europe over all these years. Why will the U.S. be different?

Here’s what Paul Ashworth, Chief North American Economist at Capital Economics said about that:

“We do wonder whether the modern-day Fed is at risk of repeating the “anguish of central banking”, as originally described by ex-Fed Chair Arthur Burns in his infamous speech in the late 1970s. Burns’ argument was that he and other central bankers had the tools to control inflation in the 1960s and 1970s, but chose not to do so because “the Fed was itself caught up in the philosophic and political currents that were transforming American life and culture.” As Burns learned to his cost in the 1970s, the less focus the modern-day Fed puts on controlling inflation, the bigger the risk is that inflation will eventually get out of control.”

Gold, of course, is a historical inflation hedge, just another reason for gold ownership now.

Gold Holds Above 200-day Moving Average

In the midst of all this, gold traded quietly last week – a much needed breather from the runaway bull market that drove gold to a record high at $2,070 earlier this month. A short-term neutral range is developing as gold builds value between the $1,910 and $1,980 an ounce level.

Significantly, gold continues to trade well above its 200-day moving average (at $1,680) – which is a positive bellwether for the long-term trend – and confirms the long-term trend points higher.

As we close out summer, we leave you with this thought:

A U.S. dollar is an IOU from the Federal Reserve Bank. It’s a promissory note that doesn’t actually promise anything. It’s not backed by gold or silver. − P. J. O’Rourke

In Gold We Trust.

Regards,

David

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