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If you are parking your sidelined cash in a money market fund, caveat emptor.

That’s Latin, of course, for let the buyer beware.

Long thought to be a safe harbor in turbulent times, money market funds are showing their true stripes these days. Few investors read the fine print on their investment company’s website or obscure SEC documents, so we are detailing current issues you need to understand here.

Long gone are the days when you can earn even 1% on a money market fund.

Today, the national average for a money market yield is 0.09%.

In fact, business is so bad in the money fund industry, Fidelity liquidated and closed two of its prime money market funds this month (June 2020).

A little history – breaking the buck

Investors’ park cash in money market funds that they want to keep safe. Investors believe that these accounts are secure, safe and can’t lose money.

Yet, that is not true.

Money market funds seek to keep the net asset value (NAV) at $1. There is a phrase called, “breaking the buck,” which means if the NAV falls below $1, investors will lose money.

In the midst of the 2008 financial crisis, a major money market fund – The Primary Fund, which had about $65 billion in assets – broke the buck. Initially, The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. Source (NY Times)

Eventually, because the value of investments fell (the fund held a lot of debt from bankrupt Lehman Brothers) – it was forced to liquidate and investors in that money market fund only received 97 cents for each dollar invested.

What is going on with money markets?

The current zero interest rate environment and the specter of negative interest rates is making these funds even more risky now.

A money market fund generally holds investment-grade short-term government bonds that mature somewhere between 30 and 90 days. Some money market funds also hold triple A–rated corporate debt.

What happens when interest rates are zero or negative?

They lose money.

It’s important to remember that money market funds are not insured against loss by the FDIC. Here’s what the Consumer Financial Protection Bureau (CFPB) says:

“Money market funds are offered by investment companies and others. Money market funds are not insured by the FDIC or the NCUA, which means you could possibly lose money investing in a money market fund.” (Source: CFPB)

What will happen to your money?

Major investment companies are addressing the issue of negative interest rates and the impact on money markets funds on their websites – if you look for it.  That shows that investors are asking questions about this – and the funds are tacitly acknowledging that that negative rates may cause a run on the funds.

Will you be able to withdraw your funds with these restrictions in place?

You may need to wait up to 10 business days to withdraw your funds from a money market fund and pay a “liquidity fee” to get it.  And, these accounts have ‘broken the buck’ in the past – which means you may get back less than you initially deposited.

 Charles Schwab notes it is permitted to impose a liquidity fee up to 2% on redemptions.

Here’s the info straight from the SEC’s documents:

“The SEC also is adopting amendments that will give the boards of directors of money market funds new tools to stem heavy redemptions by giving them discretion to impose a liquidity fee if a fund’s weekly liquidity level falls below the required regulatory threshold, and giving them discretion to suspend redemptions temporarily, i.e., to “gate” funds, under the same circumstances. These amendments will require all non-government money market funds to impose a liquidity fee if the fund’s weekly liquidity level falls below a designated threshold.” (Source: SEC rules).

Negative rates could cause a run on money market funds, which could send these funds spiraling lower fast.

Here’s the hard truth.

  • You aren’t making any money holding funds in a money market fund (0.09% interest rate).
  • The NAV of your money market fund could go below $1.
  • You may have to pay up to a 2% liquidity fee to get your money back.
  • You may have to wait up to 10 days to get your money back.

Where can investors park assets to ride out the pandemic in safety?

Gold and silver.

  • Gold and silver are a tangible assets.
  • They are highly liquid. Gold and silver can be quickly sold for cash on the spot – in any country around the world. Gold is one of the most liquid financial assets in the world.
  • Gold is rising in value. In fact, gold is up 16% year to date!
  • It is non-correlated to stocks – when stocks go down, gold rises.

Consider increasing your allocation to gold now.  Get asset preservation, liquidity and rising value all in one golden package.

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How Long before We See Gold Hit $2,000?

Did you wonder what would happen to the economy once the second wave of Covid-19 hits in the fall?

It turns out the first wave still isn’t over. In fact, it’s getting worse. Covid-19 infections are spreading like wildfire in hot spot states.

Last week, the U.S. recorded a new all-time daily high of Covid-19 cases – at 40,000 in one day. The U.S. now has 2.4 million confirmed Covid-19 cases – and 122,370 deaths – more than any other country. Texas and Florida governors hit the pause button on their reopening plans as those states became the new hot spots.

Covid-19 is indeed reshaping our economy in ways we never could have imagined and it will be months or years before we understand the new landscape we now live in.

Because of Covid-19, Microsoft announced it is permanently closing all physical stores, while retail employees will continue to serve customers remotely and digitally. Hilton Hotels announced it laid off 22% of its corporate staff as business and personal travel could take months or years to return to its pre-Covid-19 levels.

Markets react

In the midst of this news, the stock market cratered last week as investors began to question the market’s swift recent recovery.

And, gold soared to a new 8-year high! With gold closing in on the $1,800 an ounce level, new all-time highs are within easy reach this year.

New economic data

Last week, the government reported a 4.2% drop in personal income in May. If consumers don’t have money, they can’t spend it. The recession isn’t over for millions of American. The latest jobless claims report saw another 1.48 million people file for unemployment insurance benefits.

Presidential election looms

Recent polls show Democratic contender Joe Biden beating out incumbent President Donald Trump. There are still several months before Election Day and sentiment may change. Yet, this looms as a major turning point for the country in 2020.

Early insights reveal expectations that a ‘clean sweep’ for Democrats would hold back the stock market. Why? In large part because that could pave the road for higher corporate taxes and a reversal of the sweeping tax cuts that were put into place under the current Administration. Expect election news to move front and center into daily headlines in the weeks ahead.

Wall Street Embraces Gold

Wall Street is turning to gold in 2020 like never before. From Goldman Sachs, to BofA Global Research, big firms are bullish on the prospects for gold ahead.

A June 24 BofA Global Research report was titled: “Another GOLDen breakout = Stay bullish”

The firm stated that gold is breaking out to the upside, which is in line with their “secular call a year ago targeting $2,114 -$2,296” an ounce.

How long before we see Gold $2,000?

With the country in the worst recession since the Great Depression, the Fed on a money printing binge, social unrest at the highest level in decades and a major President Election just months away, we could see gold hit $2,000 faster than you think.

U.S. dollar won’t be king forever

As the Fed continues to degrade the value of fiat money by printing trillions of new dollars just this year in an effort to stoke economic growth, it puts the future of the U.S. dollar’s supremacy at risk.

For now, we have the benefit of being the “reserve currency” of the world. At this pace of money printing, it is only a matter of time before the U.S. falls from that pedestal. The result won’t be pretty for America. We are talking the potential for sky high interest rates as foreign governments will no longer have any incentive to buy our government debt.

Mainstream money managers are talking about this now.

Scott Minerd, the chief investment officer of Guggenheim Investments, thinks investing in gold could help offset any concern about the status of the U.S. dollar as a global reserve currency, according to recent Bloomberg article.

“With the Fed going all-in on financing the government deficit, the U.S. dollar could be at risk to negative speculation of its status as the dominant global reserve currency,” Minerd said.

With so much uncertainty, it’s no surprise investors big and small, domestic and foreign, continue to turn to gold.

While gold is creeping quietly higher, now is your chance to add gold to your portfolio before it scales the $2,000 mark. Do you own enough gold to hedge, protect, preserve and grow your wealth for now and the future?

Wishing you a Happy Fourth of July!

David

We live in a historic period in which the US economy is experiencing a massive inflow of money. This tidal wave will have a meaningful impact on all investments, including gold. To understand why, one must first understand the M1 and M2 money supply.

The M1 money supply is a measure of currency in an economy. This category includes physical currency, demand deposits, negotiable order of withdraw accounts, and travelers’ checks. These are forms of currency that are highly liquid because they can be used almost immediately for a purchase.

In contrast, the M2 money supply represents the total amount of both the M1 supply and “near money” which includes less liquid assets like savings accounts, money market accounts, and certificates of deposit. The Federal Reserve has the power to influence the M2 money supply by using a variety of tools. For example, the Fed can change the reserve ratio which dictates the amount of reserves a bank must carry against total deposits. When the ratio drops banks are in a position to increase their lending which drives up the money supply. Additionally, the Fed can raise or lower the discount rate which influences the money supply because with a lower rate it becomes more affordable for banks to borrow more. The Fed can also purchase issued securities like Treasury bills from banks which will also increase the money supply.

In mid March of this year, the US saw a dramatic increase in the amount of M2 money in our economy. In fact, when compared to the same point in 2019, the M2 supply has increased approximately 12%, representing the largest jump in over a decade.

This increase has coincided with an increase in gold prices in recent months which is a phenomenon we have seen before. 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. This heightened level of M2 money supply is likely to persist for the long-term given the Fed’s recent announcement that they plan to keep interest rates near zero until 2022.

However, the increase of M2 totals and the corresponding rise in gold prices is more than an economic factor.  It is also a psychological one because investors are witnessing the debasement of the US dollar. Debasement is the lowering in value of a currency as a result of a government printing more money. In these circumstances, investors often seek more stable forms of currency that will not be negatively impacted by the Fed’s stated goal of maintaining a low interest rate and thereby keeping the M2 money supply elevated.

In uncertain times investors look for more than a return, they look for consistency. As the value of the dollar comes under scrutiny in the US and abroad, investors are turning to gold as a store of value and a rare place to grow wealth as low interest rates reduce the earning potential of many other investments. 

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No doubt, you’ve been both comforted and confused by the strong rebound in the stock market in recent weeks. You aren’t alone.

Speculators run the show these days.  And that only lasts so long before it falls apart. 

The Speculative Day Trading Mania of 2020

We are seeing a stock market mania and a bubble – while we are in a recession!

There is a reason for the massive disconnect in the stock market and the real economy.

Day traders.

Have you heard? A new crop of amateur traders have jumped onto the day trading bandwagon during the pandemic and helped drive the stock market up about 40% off its March low.

Ever since online brokerage firms moved to the $0 trading commission model back in October, new accounts opened by individual (retail) traders skyrocketed. The data backs this up.

The perfect storm

The Covid pandemic created a situation ripe for this new day trading mania.

Day trading surged in recent months as millions of Americans were deprived of their sports teams to watch (and bet on) and were stuck at home under shelter-in-place orders. The newly minted $0 trading fees lured thousands of new day traders into the stock market game.

Indeed, we have a recipe for a new speculative bubble. If you are remembering back to the Dot.com crash in 2000, you’ve got a good memory. Before it was over, the NASDAQ index crashed 78%.

The Robinhood traders

They call them the Robinhood traders, based off a new mobile phone trading app company that offers fractional shares. Sure, buy a piece of a stock for $1, $15 or whatever you’ve got.

In recent months, equity inflows are at seven times their pre-Covid levels, to nearly $3 billion a day, CNBC reported on June 11.

Warning: They have no idea what they are doing

This new breed of day traders is creating chaos in the stock market. Trading off apps on their cell phones. With no knowledge of markets, fundamentals, or valuations, these day traders are trading on whims, ticker symbols that sound familiar and have driven two companies in bankruptcy up over 300% in days.

Just a couple of weeks ago, an obscure Chinese online real estate company’s American depository shares (ADSs) skyrocketed 1,250% intraday before closing 400% higher. The reason?

The company name – FANGDD Network – was similar to the acronym FAANG, which refers to the high-flying technology stocks: Facebook, Apple, Amazon, Netflix and Google.

Yep. The day traders jumped on the bandwagon and bought an obscure Chinese company because they mistakenly assumed by the ticker that it related to U.S. tech stocks.

The speculators are running the stock market show right now.

Hint. This won’t end well.

Indeed, the recent 1,800 point sell-off in the Dow warned of what could lie ahead.

Retail investors are often called the “dumb” money, while institutional traders – Wall Street pros – are called the smart money.

What are smart money investors saying now?

The day trading boom pushed stock market euphoria to its highest levels in 18 years. Citi’s research team warned in early June, that the bank’s Panic/Euphoria model hit its highest euphoria reading since 2002. What does that imply? A 70% plus probability of a down market in the next 12 months, Citi’s chief U.S. equity strategist said.

Rely on Gold

Now is the time for you to prepare your portfolio!

Take advantage of the safety, security and diversification properties of physical gold. Gold is already up 15% this year, with smart money investors forecasting new all-time highs within a year.

Gold is your safety net in all types of storms. This new speculative bubble in stocks is looming like a black cloud on the horizon. The bubble will burst. They always do. Take out an insurance policy now to protect your wealth now by increasing your allocation to physical gold. Remember the NASDAQ fell 78% from 2000-2002. You can prepare now for whatever lies ahead.

Fed to the Rescue. Again.

You may have heard the saying, “Don’t Fight the Fed.”

Last week, the Fed once again turned fear into greed and boosted stocks with an unexpected announcement that it will start buying individual corporate bonds.

Whatever it takes. Yes, indeed.

No matter the future cost, the Fed valiantly continues to support the bubble in risky assets, known as the stock market.

No matter how far the stock market valuations differ from the underlying economic picture, the Fed is all in, willing to do whatever it takes to keep the stock market and liquidity train running.

Until they can’t.

Jeffrey Gundlach, founder and chief executive of DoubleLine Capital, warned recently about the inability of “Superman” Fed Chairman Jerome Powell to save the stock market.

Looking ahead, the billionaire money manager expects the stock market to fall from its “lofty” perch as he foresees corporate credit downgrades and a wave of white-collar layoffs ahead.

And, gold? Gundlach forecasts a move to new all-time highs for gold ahead.

Mixed Economic Signals

Fed Chairman Jerome Powell appeared before Congress last week in his semi-annual testimony and warned about the “potential longer-term damage” from permanent job losses and business closures due to the Covid pandemic.

In the midst of these dire warnings, May retail sales snapped back hard with a 17.7% gain last month. Chalk it up to major pent-up demand after consumers sheltered in place for months.

Looking ahead, capacity in some sectors, like eat-in dining, remains severely limited by social distancing requirements.

Also, the extra $600 in weekly unemployment insurance is set to end at the end of July, which could once again dampen retail sales.

People Are Still Getting Laid Off …

The number of people who lost their jobs last week and filed for unemployment benefits stands at almost twice as much as the 2008-09 recession. A total of 1.5 million people applied for unemployment benefits last week, plus another 760 thousand gig workers filed through a special Pandemic Unemployment Assistance program for unemployment compensation.

Over 2.2 million additional people were thrown out of work last week. And, no matter how many corporate bonds the Fed buys, those people still won’t have a regular paycheck.

Covid Cases Jump in Some States

In Texas, hospitalizations due to Covid jumped 11% last week, while the list of states reporting record-high daily cases hit nine. While economists talk about what the second wave could do to the economy, we still haven’t finished the first wave.

Meanwhile, November Presidential Election Looms

Polls last week revealed that Joe Biden edged ahead in the polls by more than 8% to President Donald Trump. Much could change over the next five months, but this remains a key flashpoint in 2020.

As social unrest hit the highest level in decades, a health crisis gripped our nation and a recession forced millions of Americans out of work. The November vote will be a significant election for the economy and the markets. Stay tuned.

Gold Stands Strong

In the midst of the recent stock market recovery off the March lows, it is useful to note that gold maintained its double-digit gains that emerged since the start of 2020.

Gold is up 14% year-to-date and stands at an 8-year high.

In the midst of the uncertainty and the stock market rebound, gold continues to perform well.

Indeed, last month the World Gold Council stated that “Gold is a clear complement to stocks, bonds and alternative assets for well-balanced US investor portfolios. As a store of wealth and a multi-faceted hedge, gold has outperformed many major asset classes while providing robust performance in both rising and falling markets.”

The WGC explained the four ways that holding gold can support your portfolio:

  1. Generate long-term returns
  2. Act as an effective diversifier and mitigate losses in times of market stress
  3. Provide liquidity with no credit risk
  4. Improve overall portfolio performance

Many economists and hedge fund managers warn that another leg down in the stock market is just around the corner. Consider using this time now to prepare and get ahead of the next selling phase with an increased allocation to gold.

Parting Words

Gold is money. Everything else is credit.     – J. P. Morgan

Best Wishes,

David

A wake-up call hit Wall Street last week.

The Dow plunged over 1,800 points in one day, or 6.9%, chalking up the worst day since March.

Rightly so, many have questioned the stock market’s near vertical rally in recent weeks, while the pandemic rages on and many businesses are a skeleton of their former selves.

Last Thursday, the excessive optimism collided with reality and stocks plunged.

Signs that coronavirus cases are surging in some states with new “hot spots” emerging in places like Arizona, Texas and Utah, triggered the sell-off. Confirmed Covid cases in the U.S. topped two million last week and over 113,000 people have died, according to Johns Hopkins University data.

The economy has reopened. And, government officials reveal there is little interest in closing it back down as cases surge. Yet, the virus has not been tamed.

This dose of reality, that the country and businesses aren’t going to suddenly ‘get back to normal,’ hit Wall Street investors head on last week.

Indeed there is incredible progress underway, with over 160,000 potential vaccines in the works for Covid. Even if a vaccine is approved within 6-12 months, there is not enough manufacturing capacity to quickly churn out the 400 million vaccines that would be needed to protect every American.

Progress is being made. But, there remains a long road ahead before our daily lives and the economy will return to normal.

It’s Official – We Are In a Recession

Last week, the National Bureau of Economic Research (NBER) told us what we already knew. The U.S. entered a recession in February.

That marked the end of the record-long 128-month expansion in U.S. history, going back to 1854 when record keeping began.

Last week’s quick plunge in the stock market revealed that investors are no longer confident that a “V” shaped recovery in the economy is likely.

The Covid pandemic is still with us, and will likely be an overhang on economic growth for the foreseeable future.

Fed Chief Powell Warns Of Long Road to Recovery

In a somber message to the country last week, Federal Reserve Chairman Jerome Powell predicted a slow recovery for the U.S. economy in the wake of the deepest recession since the Great Depression.

He expected unemployment to fall to 9.3 percent by the end of 2020, leaving millions of Americans still without a paycheck.

“My assumption is there will be a significant chunk … well into the millions of people, who don’t get to go back to their old job … and there may not be a job in that industry for them for some time,” Powell said last week.

Notably, the safety net created by Congress will disappear for many Americans on the low end of the income spectrum. In July, the extra $600 a week in unemployment benefits expires. Many economists are concerned that jobs will likely still be scarce at that time.

It’s the ripple effect that can hold the economy down.

Unemployed people can’t spend. That means businesses like day care centers, hair salons, gyms, restaurants will see less money coming in. Those businesses will suffer and can’t hire new workers, and may need to lay more employees off. Those unemployed people can’t pay their rent. Landlords then are put in a tight spot and may not be able to pay their mortgages. It’s a vicious cycle that spills over into every aspect of the economy.

Remember the dot.com bust?

Just because the stock market climbed in recent weeks doesn’t mean the economy is okay. To the contrary. It’s been excessive optimism and a whole new crop of day traders driving the stock market higher in recent weeks.

Indeed, as professional sports have shut down, day trading activity surged at low-cost, discount brokerages around the country. The usual sports betting set, looking for excitement,  turned to day trading as the country was under shelter-in-place orders.

In fact, the day-trading boom that helped drive stock-market euphoria to its highest level in 18 years, increases the odds the stock market will retreat once again within the next year, Citi told its clients in a research note on June 5.

No wonder, sound-minded investors are pouring money into gold this year, for safety, security and as a vehicle to preserve and protect their wealth.

Fed Pledged to Keep Interest Rates at Zero Through 2022

At last week’s Fed meeting, the central bank pledged to keep the benchmark fed funds rate at 0% – 0.25% through 2022.

Never before in history, has the Fed come out and stated that interest rates will be so low for so long. Monetary policy has reshaped the normal movement in the Treasury and interest rate markets.

Rates are being artificially suppressed at zero and will stay down for years.

Who does that hurt? Savers. Older Americans who need to reduce their risk profile on their portfolio as they age. Where can Americans safely park their assets? Certainly not in the stock market.

Gold is Up Nearly 15% in 2020

Throughout it all, Americans are rushing into the gold market seeking the safety and security of precious metals.

Huge demand for precious metals and the safety they provide drove premiums on New York gold futures up sharply in recent weeks and months. The result? Banks have been flying in tons of physical gold to New York to store the bullion in Comex vaults.

“Gold has reached America from all over the world,” said Allan Finn, commodities director at Malca-Amit, a company that transports gold securely. “The flows into New York are unprecedented,” he told the Wall Street Journal last week.

As the paper gold markets gyrate and see dislocations, it once again underscores the peace of mind, stability and security of owning your own tangible assets.

Physical gold ownership means you can hold your gold in your hands and store it safely in a home safe or a bank safe deposit box.

Indeed, there’s no substitute for physical gold ownership in today’s rapidly shifting digital world.

Best,

David

Gold prices are often cited as a simple example of how supply and demand works. However, beneath this basic dynamic is something far more complex: the gold supply chain. Supply involves more than just mining yields. It also involves intricacies like recycling operations, transportation, and refinery What is Happening to the Gold Supply Chainactivity. In the months following the COVID-19 outbreak, all three of these components have experienced significant shocks.

Consider gold recycling, which commonly represents approximately 25% to 30% of the available supply. Of this total, an estimated 90% is considered high-value gold consisting of jewelry. The remaining 10% is industrial recycled gold sourced from electrical components. This portion of the total, while small, has great potential as technology continues to expand its out-sized role in our lives.

Research from the World Gold Council determined that even the high point of gold recycling (2009) captured only 1% of the above ground stock. The 2009 high point represents another characteristic of gold recycling which is that it tends to increase as economic conditions become unfavorable. The global economic crisis was taking its toll in 2009. Another example of this principle can be seen in the late 1990’s Asian Financial crisis which was responsible for a 19% boost in gold recycling.    

By this logic, gold recycling should be increasing today given record high unemployment numbers. However, this is not the case. In fact, recycling activity fell to just 4% of the gold supply on a year-over-year basis in the first quarter of 2020. The reason: social distancing and shelter-in-place measures dramatically hindered activity.

Next, let’s look at transportation, which is necessary for moving gold from mining operations to refineries. This part of the supply chain relies on road, air, ship and rail activity. Again, social distancing and government mandated shutdowns put heavy pressure on these areas. Moreover, of the few flights occurring during the pandemic, many were reserved exclusively for medical supply transportation. This disruption has significantly increased the cost of moving gold as the number of commercial flights dropped from approximately 100,000 per day to roughly 30,000 a day.

Finally, refinery operations also experienced a downshift in operations as a direct result of the virus. By the end of March, three of the largest refineries in the world halted all activity in an effort to slow the spread of COVID-19.  As the World Gold Council explains, “the consequent reduction in global refining capacity – approximately 1,500t of gold annually – meant that bars and coins could not be produced in the necessary forms as quickly as needed.” Other refineries in Africa and the U.S. also temporarily ceased operations in response to the global health crisis.

These three factors illustrate the complexity underpinning the gold supply/demand dynamic that, on the surface, appears so simple. The value of gold is tied to much more than miners ability to pull it from the ground and the consumer’s appetite. Gold prices hinge on the ability to get the raw material into the hands of buyers. In recent months, that chain has been disrupted. The good news is that easing restrictions are reintroducing activity into recycling, transportation, and refinery activity all of which will favor investors.

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Known as the “Oracle of Omaha,” many believe Warren Buffett, Chairman of Berkshire Hathaway Group, to be the greatest investor of all time.

The Big Buffett Silver Trade

What many investors may not know about Warren Buffett is his big silver buying spree 20 years ago.

From 1997 until 2006, Berkshire Hathaway bought over 37% of the world’s silver supply. A keen value investor, Buffett saw silver’s collapse from $50 an ounce to under $10 an ounce as a buying opportunity. In 1997, Buffett bought 111 million ounces of silver, which equals about 3,500 tons.

Buffett did pretty well on that silver investment. In 1997, his company made $97.4 million (pre-tax) on his silver investment. Here’s what he said to shareholders:

“Our second non-traditional commitment is in silver. Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government. Ever since, I have followed the metal’s fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand.” See the 1997 Berkshire Hathaway Letter here.

Fast forward to today.

Silver is outperforming gold in the second quarter, with gains of about 18% just this month.

Silver was shunned early in the Covid-19 crisis as industries around the globe shut their doors, which decreased industrial demand for this useful precious metal. As the lockdown ends, factories are opening their doors. Even more significantly, individual investors are rushing into the silver market as a safe-haven and wealth preservation tool.

The Covid-19 crisis has reshaped fiscal and monetary policy, opening the door to paper currency degradation, inflation, and the monetization of the U.S. government’s debt.

As Buffett saw several decades ago, there is inherent value in silver. It is both a monetary and an industrial metal.

Covid-19 is reshaping our daily lives, the economy, fiscal and monetary policy and the definition of what is money and a store of value. From the beginning of time, gold and silver were used as money. That’s one thing that Covid hasn’t been able to change.

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At the end of Mark Twain’s, The Adventures of Huckleberry Finn, the main character tells the reader that he is going to “light out for the territories.” That is, he is going to head out to the great frontier. In this new chapter of history, investors should consider how they will reach the frontier…the efficient frontier.

The efficient frontier is a concept that is part of modern portfolio theory, or MPT. The idea behind modern portfolio theory is that investors must seek the maximum return given the risk profile of their portfolio. The efficient frontier is a tool MPT practitioners use to assess if they are getting the largest possible return based on the level of risk they are taking on. Or, to put it another way, the efficient frontier is a way to ensure you are not taking any additional, unnecessary risk for the investment return you are receiving.

The “frontier” is a curved line that sits on an X, Y axis. The line represents the greatest possible return an investor can earn based of the level of risk represented in their portfolio. It is not possible to construct a portfolio that crosses this boundary. An optimal portfolio resides on the curve because it offers the most return for risk absorbed. If a portfolio sits anywhere below the curve it is “inefficient” because it represents a rate of return that could be increased without adding to the current level of risk. For example, an investor might be receiving a 7% annualized rate of return on a portfolio that exposes the holder to more risk than is necessary to achieve that same return.

This established concept in portfolio management has new resonance today as investors seek to ensure that there is no unnecessary risk in their portfolio given the return they are receiving. For many, rebalancing is necessary for returning to the frontier.

Research shows that gold plays an important part of that rebalance. Consider, the performance of gold in comparison to the S&P 500 during several, historic financial downturns. During the Great Recession, gold returned nearly 50% while the S&P 500 fell by almost the same percentage. In the previous 2002 recession gold gained while the S&P 500 fell. This inverse relationship has appeared many times including Black Monday, the Long-term Capital Management Crisis, and the September 11th terrorist attacks.   

The present represents a critical juncture for investors. Over the last decade, many investors have enjoyed equities growth lasting for a historically long period. Over those years, many felt encouraged to overweigh their exposure to equities in what seemed like a “can’t lose” environment propelled, in part, by accommodative monetary policy.

Now, many are awakening to the fact that their portfolio has become a more aggressive play than they intended. As a result, they reside well beneath the frontier. With gold, they can rebalance the risk profile of their portfolio without severely impacting the return they have factored into their long-term plan.

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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