While we begin to emerge from the common coronavirus (COVID-19) pandemic, it comes as no surprise that the world and nearly every state in the United States are already in the midst of an economic depression, not to mention the heartbreak over a loss. The new government stimulus packages are a necessity for many Americans and may help stimulate the economy to a degree, but there is no magic wand. We do not have full confidence in an immediate comeback or the long-term impacts of this unexpected event. If people hang on to the stimulus money, we could easily find ourselves in a longer-term recession instead of a much-needed economic comeback.
In an article by Investopedia entitled, Stimulus Package, contributor Adam Hayes states, “A stimulus package is a coordinated effort to increase government spending and lower taxes and interest rates to stimulate an economy out of a recession or depression.” While this is undoubtedly the intention of the US government, this pandemic has impacted the economy like no other event history. It is also possible that the stimulus package could backfire. Hayes goes on to say, “A potential problem of fiscal stimulus is that to increase public spending, the government has to increase its borrowing, which would lead to a higher debt-to-GDP ratio. Also, people may choose to save the excess disposable income instead of spending it, which could render the stimulus package ineffective.” No one knows for sure how the stimulus package will play out.
Gold Sellers React
During previous recessions, the attempt by investors to acquire physical gold to grow their wealth and protect their assets (much like purchasing stocks and bonds) required some effort. Personal investors should expect competition by gold sellers and real money traders (RMTs) as well as other private investors. In previous post-recession periods, many dealers secured gold bullion and went on to become some of the wealthiest gold sellers in the world, with wealth that expanded in less than 10 years. Prices are rising today as a result of the worldwide interest in gold due to the current economic scenario.
Gold as a Diversification Option
When financiers implement a broad set of investment options, including a hedge against inflation, their financial portfolios are more secure when a recession hits. Whether or not investors desire physical gold, they have the opportunity to invest in a gold-backed exchange-traded fund (ETF)—a paper form of gold investment. Primarily they invest in the price of gold (owning a share of the trust). This global recession is the time when investors look at diversification, especially when the Fed is going into a national debt to help with our economic recovery—which could place us into an inflationary state. Also, consider that the central banks are continually adding physical gold to their stockpiles. Gold already serves as a worldwide reserve currency in which investors swap some of their stocks and bonds for gold while gold prices are stable.
The Nature of Gold
Gold is the ultimate form of money—a store of value. Unlike stocks and bonds, gold is not generally used as an income-producing asset. Gold investment is not the same as a stock or bond but rather more like paper money to some degree. Gold, like the US dollar, is a medium of exchange that pays no dividends. So, while the US dollar and gold have more similarities than other forms of investments, they are different primarily in that gold supplies have a limit. With the Fed increased its balance sheet from $5 trillion to $9 trillion, consider that this figure is nearly as much as the total value of all gold in the world. As interest rates continue to drop, given the stimulus, the fixed amount of gold is going into the hands of savvy investors at a critical time. The fact is, gold maintains its purchasing power over and over—in a way that has outperformed all fiat currencies for more than 100 decades.
A Time For Gold
Investors, financiers, and banks have learned that in times like these when the value of newly printed paper money is unstable, gold prices rise. We also know that in times like these, investors turn to gold as a hedge against inflation, since gold supplies are less constant. Below are some thoughts about why it may be time for gold:
- Current supply and demand drives gold prices higher in times of crisis
- Gold as a hedge against inflation is more sound than paper money (when printed to stimulate the economy)
- As the demand for gold rises, the value will increase; it’s essential to purchase low before the recovery period ends
- Gold is an excellent diversification tool for financial portfolios in periods of economic recession
- Physical gold and gold-backed investments are low-risk transactions
- Gold cannot be printed and therefore devalued like fiat money
Consider that the gold price peaked as high as $1,921 per ounce in 2011 as the US economy was ending a recovery period. In fact, the cost of gold has begun to rise in response to the pandemic, with today’s gold price up 6.80% in only the past six months (according to Kitco). Oddly enough, a recessionary recovery period is often the best period to buy gold.
The recovery of the worldwide pandemic is inevitable—it’s a matter of when and how Americans and the world can make a comeback. While the world may never come back the same, it will indeed get back to a new normal. Consider that the time for gold is now—during the period between a recession and an economic comeback.