Monday Morning Wrap Up – April 27, 2020

A message from David Beahm

President and CEO

Gold $3,000

It was another wild week in the economy and the markets. As we wait for the coronavirus to peak, the economic toll from the shut-down continues to mount. Never say never. We saw oil prices go negative last week. The price of West Texas Intermediate (WTI) crude oil closed below zero on April 20. That’s right, oil sellers couldn’t give barrels of oil away for free.

In this topsy turvy world of the coronavirus pandemic, we’ve seen the government print new money and give it away (helicopter money) in the form of $1,200 stimulus checks to most Americans. The Fed has gone into full-on Rambo mode in its efforts to save the economy, aggressively printing new money, even buying assets like junk bonds. The Fed has stepped, or overstepped as some might say, into the role as both the lender and buyer of last resort.

Gold climbed last week, while stocks weakened. As the COVID-19 shutdown rocks the economy, gold shines brightly as the ultimate store of value. Major investment banks are now projecting gold will climb as high as $3,000 an ounce over the next several years.

Is the Fed Overreaching?

As we wait this week for the Federal Reserve’s policy making meeting on April 28-29, its worth taking a close look at its recent actions. Like the boy who cried wolf, we’ve used the word unprecedented so often lately it’s beginning to lose its meaning.

The Fed has attempted to ride in like a knight on a white horse to save the economy from another Great Depression. The Fed ballooned its balance sheet by about $2 trillion in the past month to $6.6 trillion as of April 22. Economists are projecting it could climb as high as $9 trillion by this summer. Yes, that’s all new money printing.

In its dramatic rescue efforts, the Federal Reserve began buying junk bonds this month. Outside of actual stocks, the Fed is buying asset classes of all kinds. Is the Fed’s move into buying assets that are below investment grade dangerous? Probably.

Meanwhile, public government debt is surging, while the Fed is effectively monetizing the debt. Here’s how this works:

The Fed prints the money. The Treasury sells new government bonds to finance the helicopter money and other emergency stimulus measures and to make interest payments on its current debt. Then, the Fed buys those bonds. Read that one more time. If that has you thinking of a Ponzi scheme, you aren’t that far off.

In the midst of this, foreign holders of U.S. Treasuries are selling. Foreigners dumped over $100 billion of Treasuries during three weeks to March, according to Fed custody data. Is that worrisome? Yes, indeed. Where will we be when no one except the Fed is willing to buy Treasuries to continue to finance our interest payments on the $24.7 trillion in U.S. debt? We will be in a world where gold is the only true money.

Will the Fed Go Negative?

While Europe has seen negative interest rates (when you have to pay the bank to hold your money), we haven’t seen that here in the U.S. Yet.

Last week, a former Fed official called for just that.

“Unprecedented situations require unprecedented actions. That’s why the U.S. Federal Reserve should fight a rapidly deepening recession by taking interest rates below zero for the first time ever,” said Narayana Kocherlakota, an economist and past president of the Federal Reserve Bank of Minneapolis.

Will interest rates go negative for the first time in history? We’ll update you on Wednesday afternoon after the Fed meeting concludes. If they do, expect an EXPLOSIVE move in gold higher.

Gold: The Ultimate Store of Value

It’s no wonder that last week in a BofA Global Research report entitled: “The Fed Can’t Print Gold”, the bank upped its 18-month gold target from $3,000 and even $4,000 an ounce over the next several years. Why? Largely because central banks are underwrite fiscal stimulus and financial markets through money printing, the bank said.

Saxo Bank, a Danish bank, went even farther, targeting gains to $4,000 gold within a few years.

Economic News

The fresh economic data is bleak. Breaking news last week saw a massive 15.4% decline in new home sales in March. The West Coast and the Northeast were hit particularly hard by the social-distancing requirements, with regional home sales down 38.5% and 41.5%, respectively.

No surprise, really. Home buyers are locked down in many regions of the country, making new home inspections virtually impossible. Sure, you can look at pictures online, but there’s no chance to look in the basement and turn on the faucets. Don’t forget. Home buyers generate a lot of consumer spending on furniture and new appliances. This shuts off the trickle-through impact on economic growth in more ways than one.

Jobless claims soared again last week, as another 4.4 million Americans lost their jobs.

Since mid-March, a staggering 26 million Americans have applied for unemployment benefits. These are real people, facing dramatic economic hardship with the loss of a paycheck. Economists’ project the unemployment forecast is closing in on levels not seen since the Great Depression.

Gold Is Real Money

It’s amazing, but not surprising, to see how the investment community has rallied around gold, with the new target of $3,000.

As the Fed continues to print new dollars with abandon, investors are taking solace in the intrinsic value of gold. Gold is real money and is the best for this money printing bubble the Fed and other central banks are creating. Soon, physical gold will only be available at much higher prices.

Would you rather buy gold today at around $1,717 an ounce, or will you wait until it is above $2,000 an ounce? The choice is yours.

We would like to hear about any questions or concerns you or those of your family or friends might be having on the investment and personal finance level. Please share those with us in a comment below, on social media or our website, or by phone at 1-800-880-4653 and we can offer guidance and recommendations.

While we all try to cope and move through this pandemic, count on Blanchard as a steady source of market analysis, guidance and support for you. We know you have questions. We are here for you and we have answers.

 Stay safe,

David

 

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