The Economic And Monetary Conditions Are Perfect for Gold
The comments below are an edited and abridged synopsis of an article by Ivan Martchev
Gold has had risen rapidly against the CRB Index as industrial commodities crash because of the coronavirus effect. Gold is staying firm. This dynamic has caused bullion to register a relative all-time high compared with the CRB Index.
What happened to gold after it registered its previous all-time high relative to the CRB in 2008? It doubled in absolute terms to peak above $1,900 in 2011.
We are in a similar environment now. Interest rates have dropped to zero at the fed funds rate level, and the US federal deficit will be larger than 10% of GDP (larger than after the 2008 crisis) due to the $2 trillion bailout. Record deficit spending and the Fed’s QE with no preset limits is the perfect environment for gold.
The difference with 2008 is that this is a government-mandated recession. The US government has to stop the economy in order to stop the coronavirus. It’s like turning off the circuit breaker on a house and having backup power for part of the house only. Second-quarter GDP growth in the US will be down double digits (in the 20%-40% range). GDP numbers are reported on an annualized basis, so if US GDP is down 10% from the prior quarter, it is reported to be down 40% on an annualized basis. Third-quarter GDP in the US may be up in double digits because of the same calculation if the US government has managed to flatten the curve of the infection.
With record deficit spending and interest rates at zero, we may be faced with an environment where the Fed will keep interest rates below inflation for some time, until the economy normalizes after the outbreak is controlled. This would be the perfect environment for gold.
