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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Election politics take center stage.

Only 70 days until the presidential election.

The nation is hurtling towards one the most contentious and most significant presidential elections in decades.

Indeed, the political conventions are now in full swing. And, thanks to Covid, the nominating conventions are virtual.

Instead of in front of thousands of in-person delegates, Joe Biden officially accepted the Democratic presidential nomination in a virtual event last week.

President Trump and the Republicans follow suit this week in a four-day virtual, televised affair.

The election fast approaches as partisan politics reach new heights daily, the economy is mired in the worst recession since the Great Depression – with millions of workers unemployed. And, the health crisis continues to rage on – with over 176,000 Americans passing from the Covid virus this year.

Meanwhile, on Capitol Hill, negotiations on another round of emergency stimulus stalled last week as Republicans and Democrats remained far apart on ideas of how to help the millions of unemployed Americans.

Stocks Face a Tough Fall

In the midst of the economic woes, the S&P 500 closed at a record high last week!

How can this be you ask?

It’s like when you play cards.

Only in this case, the dealer is the Fed. And, the Fed is “all in” on stocks.

The Fed created trillions of new dollars in 2020 – to provide liquidity to the stock market and – in never before moves – the dealer, er the Fed, is buying corporate bonds and ETFs this year. So, the house is stacking the deck in the favor of the stock market. Nonetheless…

Challenges Loom Large

Looking ahead, the stock market faces a tough couple of months.

The contentious U.S. presidential election, rising U.S.-China trade tensions, and still the threat of another wave of the coronavirus pandemic coinciding with the seasonal flu season lie ahead. After the swift stock market run-up, a pullback is overdue.

This Week’s Main Event

The annual Fed conference in the swanky mountain town of Jackson Hole, Wyoming, will be virtual this year.

You can watch it live – a first ever for this exclusive and previously closed door Fed event.

Mark your calendar for Thursday and Friday!

The annual Fed Economic Policy Symposium, titled “Navigating the Decade Ahead: Implications for Monetary Policy,” can be viewed on the Kansas City Fed’s channel on YouTube (9:10 am, ET).

Thursday morning Chair Powell is slated to deliver his keynote speech.

What to Watch For

After the release of the July FOMC meeting minutes, it became clear the Fed is preparing to adopt an average inflation target. History continues to be made as monetary policy goes where it has never gone before…

What that means

If inflation targeting becomes official – it would open the door for the Fed to tolerate moderate overshoots of its 2% target to compensate for periods of below-target inflation.

• These changes would reinforce market expectations of a “lower for longer” zero interest rate monetary policy to support the economy once the coronavirus is finally under control.

Inflation targeting is bullish for gold. Why? Because U.S. Treasury yields would slip even lower, giving a lift to the price of gold and silver.

In Economic News Last Week

Over a million Americans joined the unemployment rolls last week.

Initial unemployment claims jumped to 1.106 million in the August 15 week, making it the biggest weekly increase since March.

Big picture: Over 50 million Americans filed for unemployment insurance since the pandemic began in March.

Key takeaway: The economy is hitting the skids again, now that the $600 per week extra in unemployment insurance expired. The economy is not out of the woods yet. It’s only stock market investors who are riding high as the Fed’s money printing benefits Wall Street more than Main Street.

Who Owns Stocks? (Not As Many As You Might Think)

While you likely own stocks, not all Americans do.

In fact, the percentage of Americans who own stock, either directly or through retirement or mutual funds, is falling. It most recently stood at about 55%, the Wall Street Journal reported last week.

In fact, “Stock ownership is increasingly concentrated among a sliver of the population. The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to data from the Federal Reserve,” the Wall Street Journal said.

That means, while you may be cheering the recent recovery in stocks, it has little impact on the day to day financial picture for about half of Americans who own no stocks at all.

Gold Enters Much Needed Consolidation Phase

In the meantime, after the historic, runaway bull market that drove gold through the $2,000 mark earlier this month, the precious metal has entered a short-term consolidation phase.

Just like a car that raced at top speed for hundreds of miles and is now out of gas, the gold market has reached a temporary stalling point.

Sideways consolidation in gold is likely for at least a few weeks, as the gas tank refills.

Where gold might go in the future

The underlying fundamentals for the gold market have not changed. Major investment firms continue to forecast higher gold prices. Goldman Sachs expects gold to climb to $2,300 an ounce within 12 months. Bank of America raised its 18-month forecast this April to gold at $3,000 an ounce.

Until next week…

Regards,

David

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Consumer inflation heats up fast.

Is the inflation genie out of the bottle? Once it has escaped, policymakers know it is very hard to get it under control…

New data last week revealed that July Consumer Prices jumped higher. The annual core CPI inflation rate rose to 1.6%.

Here’s what costs more now: Gasoline prices increased by 5.6% m/m in July, motor vehicle insurance prices increased by 9.3% m/m last month, air fares increased by 5.4%, used vehicle prices rebounded by 2.3%, lodging away from home rates increased by 1.2%, clothing prices increased by 1.1% and new vehicle prices increased by 0.8%, Capital Economics noted.

Here’s what new research titled: “Inflation collapsed in 2Q, but it’s rising fast now” from a BofA Global Research report says:

“Inflation initially collapsed in 2Q20 as the pandemic hit, but it has recovered quickly in recent months as central banks engaged in unprecedented easing. In turn, the aggressive expansion of monetary and fiscal policy in the US has led to fears of US currency debasement and overshooting inflation.”

It’s no wonder gold prices surged an astonishing 35% higher from Jan. 1 into the August high! Gold is an excellent inflation hedge and now official numbers are beginning to capture the impact of the Fed’s massive money printing scheme.

The Gold Rally Pauses

Last week we saw the gold rally correct and consolidate. No, this does not mean the gold rally is over – far from it!

In technical terms, the gold rally was ‘overbought and due for a correction.’

After all, since July 1st gold surged from $1,769 an ounce to the $2,059 level — that’s a massive move in a short period of time.

Corrections are normal in all markets and the gold rally simply ran out of gas in the short-term and needs time to consolidate and build value at its new higher price point. The fundamentals remain strong for gold and silver.

For the short-term, expect gold to move into a holding pattern as it gains strength for its next move higher with a target at the $2,300 an ounce level.

Congress Takes a Break

As political jockeying continued, the U.S. House and Senate failed to come to terms on a new Covid-19 stimulus package before leaving for their August recess last week.  Congress isn’t slated to return until Sept. 14 (for the House) and Sept. 8 (for the Senate).

Covid Infections Leveling Off

In the midst of the political bickering, new Covid-19 infections in the U.S. appear to be plateauing for now. The daily number of new Covid cases stood around 55,000, roughly the same as a week ago and steady for the past two weeks.

The daily national Covid-19 spread rate is now down to around 1% per day as of August 12.  That has fallen to near the lowest levels of the pandemic so far and down from a recent high of 2 percent.

The focus is shifting to a potential second wave that could be sparked by schools returning to in-person learning and the onset of the fall influenza season.

Covid Rates Are Still High In South and Sun Belt States

Key economic driver states like California, Texas and Florida, however, have already started reinstating restrictions on indoor and group activities due to rising Covid cases there. In total, there are 21 states that account for 30% of the U.S. economy that have either reinstated restrictions or paused their economic reopening plans, according to S&P Global.

“As more states reverse plans for reopening and the U.S. government negotiates the next round of emergency stimulus to keep the economic recovery on track, recent real-time economic data continues to be mixed,” according to Beth Ann Bovino, U.S. Chief Economist at S&P Global.

“S&P Global Economics still sees the probability of a worse economic outcome–than its base-case projection–at 30%-35%. Although our base case is for a gradual recovery through next year, still-high levels of COVID-19 infections, together with no agreement in extending emergency COVID-19 relief, suggests that the near-term outlook remains challenging,” Bovino said.

Global Pandemic Picture

Total Covid-19 cases in the United States have topped the 5.3 million mark, as we continue to lead the world in the highest number of infections. And, tragically, more than 160,000 Americans have lost their lives to this pandemic.

Brazil is in second place with 3.3 million cases and India is third with 2.5 million cases, according to data from Johns Hopkins University.

Coronavirus Vaccine

Looking ahead, the CDC predicts initially we could have 10 to 20 million doses of a Covid vaccine – by year-end perhaps. However, there are 100 million Americans who are considered ‘high priority’ – people who work in essential jobs like health care or front line workers and those with high risk conditions. It will likely take up to two years before there is enough manufacturing capacity for all 320 million Americans to get access to a vaccine.

Disconnect between Stock Market and Economy Continues

In the midst of all this economic uncertainty, the stock market is flirting with its all-time highs despite the fact the economy isn’t anywhere close to previous levels of output.

It’s like Charles Dickens’ novel: A Tale of Two Cities.

Stocks are climbing against a backdrop of record economic damage in the U.S.

Chalk it up to massive money printing by the Fed – once again fueling a liquidity driven move in speculative and risky assets.

Is it sustainable? That’s why investors diversify – into tangible assets like gold and silver.

Where’s the Mail?

Last, but not least, it turns out the post office could end up as a central player in the next U.S. Presidential election. As unlikely as that would have sounded just 8 months ago – it may be true.

As the call for mail-in balloting increases so Americans fearful of the Covid pandemic can protect their health and vote by mail, there are concerns budget cuts could delay delivery time.

The election is fast approaching and could be a major flashpoint for the stock market and precious metals.

Financial markets do not like uncertainty – and there remains much uncertainty over perhaps the most divisive presidential election in decades.

The Bottom Line

This historic global gold rush into gold remains intact. Major investment firms continue to point to higher gold prices over the next 12 months with targets at $2,300 and even $3,000 an ounce. With widespread vaccination for Americans still one to two years out, and a watershed presidential election just around the corner, gold is money you can count on to protect, preserve and grow your wealth.

Stay safe,

David