Gold climbed to a seven-week high this week – boosted by weakness in the stock market, signs that inflation is emerging in the U.S. and amid strong demand from India and China for physical bullion.

The short-term trend turned positive for gold last week as the yellow metal climbed above its 50-day moving average – a bullish investing signal that confirms the end of the recent pullback in gold prices.

Short-term gold target

Looking higher, precious metals investors are targeting near-term gold gains to $1,825 an ounce – which represents a technical chart objective based off the March lows.

Big picture supports long-term gold gains

The macroeconomic picture remains positive for gold as inflation data is coming in hotter than economists expected, which supports a gold move back to the all-time highs above the $2,000 level hit last summer.

What’s brewing now? In March, the consumer price index jumped 2.6% from a year ago levels, the Department of Labor reported last week.

We’ve been warning about the inflation seeds the government has been planting for a while now. Get ready. It’s starting to heat up – and once inflation boils – it is hard to contain without crashing the economy.

It turns out that JP Morgan Chase chief executive Jamie Dimon is deeply concerned about the future of America.

While Dimon expects a boom from pent up demand, there is a chance that a rise in inflation will be “more than temporary,” forcing the Federal Reserve to raise interest rates aggressively.

What’s more? “Rapidly raising interest rates to offset an overheating economy is a typical cause of a recession,” Dimon wrote in his recent letter to shareholders.

Dimon compared the Covid-19 crisis to past difficult periods for our country, Dimon said that we have always bounced back stronger as a nation.

“In each case, America’s might and resiliency strengthened our position in the world, particularly in relation to our major international competitors,” Dimon said. “This time may be different.”

Here’s another way to look at the inflation problem.

In 2020, the U.S. Treasury created 23.6% of all U.S. dollars that are in existence. The government printed gobs and gobs of money in its efforts to flood the country with liquidity during the Covid crisis.

And, you wonder why the U.S. dollar is going down?

The Fed has put all its chips on the table and is gambling with our future. The Fed risks that inflation will not only pick up – but get out of control.

The next economic shock is brewing and it is an inflation crisis.

The remedy for hyperinflation is painful indeed. What can we learn from history? In the late 1970’s and early 1980’s inflation hit 14% and mortgage rates spiked as high as 20%.

In a classic article in Fortune magazine in 1977, legendary investor Warren Buffett stated his views on inflation:

“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. … If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker — but not your partner.”

Stock performance during high inflation

The 1970’s are considered a lost decade for the stock performance.

From 1972 to 1973 when inflation spiked rapidly to more than 6%, the S&P 500 crashed 40%.

Between 1970 and 1979, the Dow Jones industrial average gained just 4.8 percent. That’s right…not even a 5% return over nine years!

Gold climbed 2328% in the 1970s!

Gold, a classic inflation hedge, began the 1970s at $35 an ounce. In January 1980, gold skyrocketed to a then record high at $850 an ounce – as mortgage rates touched 20%.

Always be thinking about tomorrow, especially when the pace of change picks up.

The inflation data is picking up fast. The warning bells of inflation are ringing.

The tide is turning bullish for gold again.

Momentum is picking up for gold bulls as the U.S. stock market stumbles, the U.S. dollar weakened steadily throughout April and the price of bitcoin dropped as well.

If you want to protect your assets from a falling dollar and rising inflation, increase your allocation to gold now – before the price goes up even more.

Act now to lock in today’s low prices!

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The pandemic appears to be in its third, and final act. It is true that the disease will still be in our lives for some time to come. We will face variants, and the possibility of ongoing annual vaccinations. However, the darkest days of contagion are likely behind us. What remains is an economy on the rebound.

Many economists are anticipating a strong, and prosperous second half to 2021. As recently as mid-March the Federal Reserve raised its forecast for domestic growth in 2021 by more than 50%. As a result, GDP is expected to reach 6.5% this year. If accurate, that figure would be among the highest in recorded history. While these forecasts offer plenty of excitement there is a less discussed and often unseen aspect to the economy today: fragility.

Gregory Daco, chief U.S. economist at Oxford Economics, has explained that the recovery is “fragile.” Part of what makes the US economy fragile today is the fact that many businesses are still struggling to find their way forward. Many companies aggressively pivoted, or even changed their model to accommodate the pandemic setting. Now, as COVID continues to recede, those businesses are determining what aspects of their initial change they want to preserve, and what aspects they want to abandon. Additionally, many businesses were able to stay afloat with borrowing and are facing the considerable cost of repaying those loans. Finally, much of the recovery is due to recent fiscal stimulus which, while critical and necessary, is not sustainable.

This “fragilizing” of the economy, however, is not only the result of the pandemic. These effects have been taking hold for some time and are structural in nature. That is, they are part of moorings that anchor the global economic system. One key factor of the global economy of the recent past and present is that it is characterized by output divergence. The level of output of various economies across the world varies considerably. As a result, the burden of maintaining the health of the global economy is shouldered by fewer and fewer countries.   

At the same time, continued globalization means that more countries are discovering that their success and survival are tied to the health of other countries. Simply, what happens “here” is highly contingent on what happened over “there.” The result is a more tenuous and fragile setting.

In such an environment there are many stores of wealth that become increasingly volatile. The value of the dollar is tied heavily to trade imbalances and the threat of inflation. Meanwhile, stock prices are subject to disruptions in the global supply chain that is so necessary to many businesses seeking annual growth.

Weathering the storm of a pandemic has demanded unimaginable resources. Any new, unforeseen threats could take a serious toll as many emergency reserves have been depleted. This aspect of a recovering but extremely fragile economy underscores the importance of storing a portion of personal wealth in assets that have less reliance on today’s increasingly delicate economy. For many the answer is gold which is not as prone to the threat of externalities as other assets and investment instruments.

Capitalizing on a rebound means remembering to gird for the ever-present threat of a new challenge. As Author Nassim Taleb explains “globalized economic systems operate as one. Errors spread and compound.”

This sentiment seems to encapsulate the underpinning of a gold investment strategy because, as former Federal Reserve Chairman Ben Bernanke once explained, “The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes.”

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Americans have accelerated the accumulating of liquid cash more than ever. The M2 money supply, sometimes called the “M2 money stock” is at its highest point in recorded history. Moreover, the figure has risen at a near vertical ascent since the start of 2020. As the Wall Street Journal reports, the M2 “has increased by an astonishing $4 trillion. That’s a one-year increase of 26%—the largest annual percentage increase since 1943.”

The M2 money supply is a measure of physical currency, demand deposits, negotiable order of withdraw accounts, and travelers’ checks (called the M1 money supply) and “near money” which includes less liquid assets like savings accounts, money market accounts, and certificates of deposit.

The massive growth of the M2 money supply is due to several factors. First, the U.S. has increased their purchasing of Treasuries and mortgage-backed securities. These purchases have added to individual accounts. The second factor is a similar increase in activity from commercial banks. Since the beginning of the COVID pandemic these transactions have added a total of approximately $1 trillion to M2. Third, U.S. companies initiated a dramatic drawdown of $800 billion in credit lines to help weather the pandemic. However, much of this activity occurred between February and April of last year. In recent months corporate bank borrowing has decreased “leaving a net $300 billion increase,” according to reporting from the Wall Street Journal.

The question some gold investors might have is “why does this matter?” One answer can be seen from data published by the World Gold Council which shows that “gold has been more effective in keeping up with global money supply over the past decade.” This relationship is one that we have discussed previously at Blanchard when we explained that “In 2011, gold reached a historic high of $1,900 an ounce just as the M2 money supply surged above 10 percent on a year-over-year basis.” The same Wall Street Journal reporting referenced above concluded that the M2 money supply is expected to increase by another $2.3 trillion in 2021 which will translate into a 12% increase in the total “even without any new lending or further purchases of securities by banks.” Simply, the rise of the M2 money supply likely bodes well for the value of gold.

This dynamic is poised to intensify as more American’s begin receiving their stimulus checks. More money will be in hand among a populace that has already added to their cash holding considerably over the last twelve months. The personal savings rate reached 20.5% in January which is a meaningful increase over the 13.4% seen in December of 2020. In the meantime, more investors are looking for ways to grow their wealth as fixed income assets continue to underwhelm. Additionally, as the Federal Reserve continues to take an aggressive stance towards monetary policy the value of the dollar is coming into question as money floods the system. In this kind of setting more investors seek reliable stores of value for their cash and gold enjoys new life.   

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Privacy. It’s a fashionable buzzword today – and almost a quaint concept.

The breathtaking advances in technology continue to chip away and erode privacy.

Yet some Americans – especially younger people, have less concerns about the digital footprint that we leave behind with every internet search, text or even your exact geographical location every minute of the day (which is tracked by the location services feature on your cell phone).

Baby Boomers are very concerned (47%) about data privacy use on cell phones versus only 28% and 29% of Gen Z and Millennials, respectively, according to Statista.

You may be wondering – how does privacy relate to money and precious metals investing?

The answer is simple. National digital currency.

From Sweden’s e-krona to the Bahama’s Sand Dollar – more than 60 countries have experimented with national digital currencies over the past year, according to the Bank for International Settlements.

Some see a dark side to the emerging national digital currency technology.

Last year China began testing its digital currency in cities like Shenzhen, Suzhou and Xiongan. Chinese citizens invited to try out the electronic yuan received a link they could click on to get a balance of 200 e-yuan – which was then displayed in their bank app.

To spend the money, Chinese citizens scanned a store’s QR code, or gave a QR code to a retailer to scan.

Consider this.

1. The digital currency expired in a few weeks.
2. They could only spend the e-yuan within city limits and at select stores.

Can you imagine if your money had an expiration date? And, you could only spend it within certain geographical borders or at specific places?

“The development of a hyper-centralized digital yuan would also create the world’s largest repository of financial transactions data, allowing the authoritarian Communist Party of China unprecedented access to ramp up surveillance of ordinary citizens,” Akram Keram, a Chinese expert at the National Endowment for Democracy wrote earlier this month in a Washington Post article.  

Going Cashless?

The goal of the digital yuan is to replace cash used in everyday commerce.

Over 750 million people in China bought goods online last year. Goldman Sachs estimates that digital yuan could be used by 1 billion people in the 10 years.

One of the advantages of using paper money and coins is anonymity.

Even for law abiding citizens, it could be unsettling to know that a government is tracking (and controlling) every dollar or yuan that you spend.

The digital yuan “would give the Chinese Communist Party something that no government has ever had in history: The ability to monitor in real time the minute financial dealings of its citizens,” said Yaya J. Fanusie, an Adjunct Senior Fellow at Center for New American Security  and the author of a new report on China’s digital currency.

“The privacy concerns arise largely from the massive amount of insight a CBDC [central bank digital currency] would give Chinese authorities into its users’ financial data and behavior, as well as information about anyone who interacts with those users – including, potentially, American citizens,” Benjamin Powers wrote in a recent Coindesk article.

Governments could also just cut you off from your digital money.

“In a digital-yuan-consumed society, the government easily could suspend the digital wallets of dissidents and human rights activists,” Keram wrote.

China is leading the world in the push to take its currency digital. The country already ranks and blacklists citizens as part of its social credit system and digital currency could easily be connected to that system.

That’s why diversification into tangible assets offers an often overlooked benefit – extreme privacy.

Precious Metals and Rare Coin Ownership is Private

One of the many benefits of diversification into physical precious metals is discreet and private wealth accumulation and transfer. Gold bullion and rare coins are easily transportable and not tracked by any financial institution or government.

For estate planning purposes, with rare coins and precious metals, you can split your wealth among your heirs evenly, or in whatever proportions you prefer.

You can preserve your wealth in a way that is portable, secure, and private.

Many precious metals investors choose to store their investments in a fireproof home or business safe or a bank safe deposit box.

International Storage Options

For the ultimate in privacy, some investors turn to the International Depository Services (IDS) of Canada, a precious metals depository in Toronto. Assets are stored here in an international personal custody account, which is off depository balance sheets and beyond the reach of the U.S. government.

Another option is the Strategic Wealth Preservation Storage Facility. The SWP is a precious metals storage facility located in the Cayman Islands. Independently owned and operated, this non-financial institution is the closest off shore storage option for North American investors seeking to internationalize their hard assets.

The Bottom Line

Advances in digital currency are coming. While you can’t change or stop these developments, when you invest in tangible assets like gold bullion and rare coins you get additional peace of mind that a portion of your assets are private.

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