Monday Morning Wrap Up: May 18, 2020

The days are getting longer. The sun is shining brighter. Flowers are blooming. Garden centers are reopening in many part of the country so people can begin their spring planting: seeds, tomato plants, annuals and more. Spring is a time of new beginnings.

We as a country are still mired in a great deal of uncertainty, yet there is so much to be hopeful about. In the midst of the economic distress, tragic health issues and yes the deaths of many Americans, there are green shoots. Take heart. Every day there is something to be grateful for, if you take the time to focus on it.

Vast sums of money are being poured into finding a vaccine for the coronavirus. Many families are spending more quality time with each other than ever before. Those separated geographically are connecting by video visits. While millions of Americans have lost their jobs, millions more are able to telecommute and work from home. This pandemic reminds us how strong we are as a nation, and as individuals.

Week in Review

Retail sales collapsed a record 16.4% in April. Consumer spending fell off a cliff last month as the lockdown kept Americans away from malls, barber shops, furniture stores and restaurants. COVID-19 has stolen the lives of many Americans, and the U.S. economy is also a victim of this treacherous virus.

The economic collapse we’ve witnessed in the past two months is mind-blowing. It defies anything we have seen in the last 100 years and is the fastest and deepest recession in American history.

Hopes for a V-shaped recovery are dissipating fast.

Economists are warning that we could be facing an unheard of 40% decline in GDP this quarter.

Every economic cycle is different. But, this particular COVID-19 recession and recovery will be especially different, given the cause. Revenues nosedived dramatically across many industries over the past two months and it will take time for those revenue streams to come back. It’s true, stocks are off their March lows right now. But, companies can’t make money if the economy has fallen off a cliff and can’t get back up very fast.

Attitudes are different regionally, of course. But, in some parts of the country, Americans are still afraid to go to the grocery store, let alone get on an airplane, rent a car and stay in a hotel.

There are now reports that a portion of the recent “temporary” layoffs will become permanent for millions of Americans as businesses make the difficult decision to shut down for good. Many Americans will not be returning to their old jobs because the businesses are closing down.

Fed officials warned last week of widespread business failures ahead.

“You will get business failures on a grand scale and you will be taking risks that you would go into depression” if shutdowns persist, Federal Reserve Bank of St. Louis President James Bullard said last week.

Meanwhile, Fed Chair Powell warned about the potential for lasting economic damage unless policymakers pass another economic stimulus plan.

But, we already have so much debt…

Staggering Debt

The U.S. Treasury announced a record $737.9 billion budget deficit in April, as the federal budget deficit continues to grow. That compares to a $160.3 billion surplus in April last year. The budget, of course, was destroyed by virus spending and the shift of the tax date, which is why April is usually a surplus month with the inflow of tax revenue.

While the COVID-19 pandemic is today’s crisis, the colossal debt load of our nation will be a crisis for the future that can’t be ignored. In this fast-changing world, gold is taking an increasingly strategic role in portfolio diversification.

Gold Shines Bright

Current gold investment demand remains at record high levels. As the stock market weakened last week, gold prices gained. Gold is trading at the highest level since late 2012. As the uncertainty over what lies ahead for the U.S. economy in the second half of the year, gold’s stellar performance shines a spotlight on its strategic role as a store of value, liquidity source and a wealth building vehicle.

Some money managers are comparing the current rising cycle in gold to the bull market of the 1970’s.

“Once the bull market started again in 1976, it went up for four years and it went up basically from $100 to $890, so nearly nine-fold. If you use the same ratio to today’s numbers, we would end up having gold, at some point in the future, $8,000, $9,000 gold, but we’re talking five to 10 years, I think,” Florian Grummes, managing director of Midas Touch Consulting said last week.

Silver Bull Run Is Beginning

The silver market climbed to a fresh 2-month high last week. Some analysts expect silver to outperform gold in the weeks ahead as industrial demand begins to pick up as countries begin to cautiously emerge from shelter-in-place and shutdown requirements.

Gold – A Replacement for Bonds

This pandemic is changing so many things. From the way we conduct our daily lives, to the interest rates offered at the bank, to debt levels our government is taking on…everything is different. It is also changing the attitude of investors toward bonds.

As we highlighted last week, but believe it is worth stating again, investors are turning to gold as a replacement for bonds in a world where central bank monetary policy is centered on ultra-low interest rates.

The Wells Fargo Investment Institute said in a recent report that gold is being utilized by investors as a substitute for holding long-term bonds as a perceived safe-haven investment. “With no particular ties to a government or other bond issuer, we believe gold looks attractive to long-term investors.”

Interest rates have been low since the 2008 crisis and never returned to normal levels. The COVID-19 recession and bear market ensures that near-zero interest rates could be a hallmark for the next decade too.

“In our view, more central banks will move towards explicit targets for government bond yields, a policy previously adopted in the US during the Second World War as debt surged,” Capital Economics said in a research note last week.

In this environment, it makes more sense than ever to consider increasing your allocation to tangible assets like physical gold.

Consider replacing a portion of your bond allocation with a hard asset like gold that 1) is increasing in value and, 2) is an asset that will preserve your purchasing power and, 3) is a financial asset that can’t be manipulated or weakened by central bank printing presses or governments besieged with enormous debt loads.

Best wishes,

David

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