Gold: Adjusting To A New Paradigm

Fundamental Perspective

With the government printing massive amounts of money, tensions between the US and China rising, Europe dealing with Brexit, the effects of the pandemic continuing to spread, and tensions with Iran rising, the fundamentals for gold still look fantastic. Massive unemployment, businesses closed or failed, and people leaving some of the big cities all point to a serious economic crisis and are bullish for gold. All the trillions of dollars that have gone into the system have clearly not been enough to restore the economic system. In March, the best thing the Fed did was to act right away with a stimulus package. That action avoided a devastating sell-off of almost every asset in the markets. The Fed helped establish the confidence that it would provide a buyer of last resort for assets, which kept the market from entering a free fall.

The low made in gold in March basically said that the damage from the pandemic had been taken into account. Then, gold raced up $600 or so, which was the premium the market added in relation to the US dollar losing its purchasing power as a consequence of all of the stimulus the Fed is adding to the system.

Now, the longer the Fed waits to do something more, the more damage is being done. We expect massive bankruptcies in the financial area to begin to appear, just as retailers and companies in other sectors, such as airlines, are going bankrupt.

It is not just the United States that is facing this currency crisis. It is a crisis of all fiat currencies around the world, where governments are printing money in staggering amounts. This means that inflation is on the horizon, and it means that fiat currencies are going to be worth far, far less and, possibly, even just worthless pieces of paper. The Fed is talking about an inflation target, since it knows that the way to avoid every asset deflating is to allow some inflation. In March, every asset already collapsed. We are dealing with a completely new set of markets in a new paradigm. The entire economy has changed and will continue to change. It is hard to see any decisive steps that the Fed can take to avoid either deflation now or inflation in the near future. Main Street has already collapsed, and Wall Street may not be that far behind.

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Disclosure: I am/we are long DUST.

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