The mainstream is a fickle place.
On the one hand, we had Bank of America raising its 18-month price projection for gold to $3,000.
On the other hand, some people argue the price of gold could crash later in the year.
Gold is up over 13% on the year, but the yellow metal has seen some price pressure over the last couple of days as various government agencies have started to move toward reopening the economy.
An article published by CCN offers three reasons gold could “crash to earth” in the coming months – none of them particularly compelling.
A coronavirus vaccine.
A quick economic recovery
Deflation and a soaring dollar
The first two reasons both embrace the mainstream narrative that the economy was great before the pandemic and that it will quickly go back to “normal” as soon as governments open things back up again.
But there is no normal to go back to. The economy wasn’t normal before the pandemic.
Coronavirus was merely the pin that popped the economic bubble. Everybody is still fixated on the pin, but getting rid of it doesn’t stop the air from coming out of the bubble. A coronavirus vaccine would ease the pandemic, but it wouldn’t do anything to address the malinvestments and debt that were already rampant in the economy before coronavirus reared its ugly head.
In fact, gold was already on an upward trajectory before COVID-19. In 2019, the yellow metal charted its best year since 2010. The price increased by 18.4% in dollar terms. This was in large part due to the Fed’s pivot to loose monetary policy last year. Keep in mind, the central bank was already cutting interest rates, running repo operations and relaunching quantitative easing prior to the pandemic. The response to coronavirus simply put the Fed’s extraordinary monetary policy into hyper-drive.
The economy was already broken thanks to the efforts of the Fed in response to the 2008 financial crisis. To fight the impact of coronavirus, the central bank doubled down on those policies. This is basically like the arsonist throwing gasoline on the fire he set and then claiming he’s trying to put it out.
And that leads us to CCN’s reason #3 – deflation.
This kind of Federal Reserve monetary is the exact opposite of deflation. In fact, it is literally inflationary – increasing the money supply. That doesn’t necessarily mean it will manifest in rising consumer prices, but it certainly doesn’t scream “deflation.” Peter Schiff recently said that with this monetary policy, hyperinflation has gone from the worst-case scenario to the most likely scenario.
During a recent interview, Peter made a strong case for rampant price inflation.
When you create money, you are creating inflation. Now, that inflation will manifest in various ways. I mean, when the stock market went up a lot, when the real estate market went up a lot, it was inflation that was driving those price increases, not the real increase in the value of the businesses, but the nominal price. And prices are going to rise. The Fed is putting money into the economy at a time where production is actually going down. What’s happening as a result of the coronavirus is businesses are not operating. Goods are not being produced. Services are not being provided. Yet, we are creating more demand by flooding the economy with freshly printed money. You’re just focusing on certain prices. Yes. Airline tickets are down. Nobody is flying. OK. Gas prices are down. Nobody is driving. This is only temporary. But look at what’s happening to other prices. They’re already rising. And they’re going to rise even faster in the days, weeks and months ahead.”
The CCN article focuses on the plunge in oil prices. But this is purely a function of supply, demand and overproduction. It does not imply a broader drop in consumer prices. In fact, other prices are skyrocketing. As Peter explained, “When you have a rise in consumer prices, it’s a broad-based rise in the general level of prices. But within that, prices can be falling. … Oil prices can go down in an inflationary environment. Don’t be fooled by what you are seeing in the oil market.”
And it will take months for the impacts of all of this Fed money-printing to work its way through the economy. In a nutshell, deflation is not the worry here. And the dollar isn’t likely to soar. In fact, Peter said people will likely start dumping dollars.
Nobody can hold dollars. Nobody can hold any bonds denominated in dollars. This is now like a game of musical chairs where nobody wants to get caught with dollars when the music stops playing.”
And when that happens, what will they buy?
What else are they going to do? I mean, what are they going to use as an asset? They’re not going to just swap dollars for euros or swap dollars for yen. They’re going to just buy gold.”
Indeed, the environment is bullish for the yellow metal. After all, the Fed can’t print gold.