The Best Investments to Make as the Fed “Prints” Money

Wall Street and their friends in the Big Media have been having a field day since March.

You’ve seen the stories: Big Tech companies such as Amazon.com Inc. (AMZN) up 60%, Hertz Global Holdings Inc. (HTZ) more than tripling after filing for bankruptcy protection, airline and cruise line stock swinging wildly up and down…

All great stories to make you jump in head first, trade without thinking, and make your broker a lot of money while you’re at it.

One story they tucked “below the fold” has been the meteoric rise in precious metals.

Silver and especially gold have had a stellar year. The SPDR Gold Shares (GLD) ETF, probably the easiest way to invest in gold, is up over 18% this year.

If you bought it at the March bottom, you’d be up twice as much.

It’s been years since we saw that kind of move in gold.

Of course now that it’s up so high, Wall Street is starting to talk about it, ads for gold are everywhere on TV, and Robinhood traders are piling in.

In the long-term, they’re right. Gold and silver will keep rising.

But don’t join them. At least not yet.

Here’s why…

Gold is Useless – Which is Why It’s Valuable

Used in coins for thousands of years, gold and silver are one of the oldest commodities to still be traded.

That history has given these precious metals a certain mystique.

And it’s true that in the short term, their prices can vary based on some pretty obscure reasons. For example, gold is thought to bring good luck in India, especially to young couples. So the 20,000 weddings that happen in India every year are a big source of demand for gold.

Most of those weddings take place between October and December, and in a second round from January to March. In the Hindu calendar, those dates are said to be fortunate.

As you can imagine, that usually sends gold prices up a bit around that time of year.

Central banks also tend to use gold as a reserve, to sell or buy to keep their currencies stable.

Gold is particularly good for this because it’s widely accepted but doesn’t have much use. Unlike platinum, copper, even silver, gold has very few industrial uses. The few that do exist use so little gold it hardly matters.

That means that industrial demand won’t have much of an effect on the price of gold. It makes it keep its value over the long-term better than other metals, not to mention fiat currencies.

In a way, it’s because gold is useless for industry that its price is so stable.

And that stability is precisely what makes it so valuable to central banks – and why it’s been soaring in value this year…

Gold May be Stable, but the Dollar is Not

Here is a chart from the St. Louis Federal reserve, showing how much money is floating around in the U.S. economy:


As you can see, this “M2” measure of money has been rising steadily since 2016. You’d expect that, as the money supply grows along with the economy.

But then you get to March of this year, and suddenly M2 spikes.

Here’s another chart, showing the assets of the Federal Reserve, also since the beginning of 2016:


The Fed’s balance sheet held steady until 2018, when the central bank started to deleverage, trying to bring markets back to normal after the 2008 Financial Crisis.

At the end of 2019, the Fed had to intervene when the banking system briefly seized up. It did so by lending banks money it had created out of thin air in return for assets, mostly Treasury bonds.

You can see that uptick in the Fed’s assets in the chart above.

Then we get to March of this year, and just like the M2 measure of the money supply, the Fed’s balance sheet shoots up, almost doubling in two months.

Thousands of words have been written about this, but the short version is quite simple. As the world went into lockdown to try to take control of the virus, the economy seized up.

Stores had to close, so they couldn’t pay wages and rent. That meant their landlords couldn’t pay their mortgages.

Without getting paid, workers also couldn’t pay rent, meaning their landlords also couldn’t pay mortgages.

These and all kinds of other webs of transactions that make up the economy largely stopped.

It’s as if money suddenly became scarce.

So as part of the stimulus, the Fed started pumping money into the system. That’s what you’re seeing in these two charts.

The Fed has several different programs to accomplish this, but they all boil down to this. In return for a bank depositing Treasuries, bonds, bond ETFs, and so on at the Fed, the central bank transfers money to that bank.

Generally, this is a loan – although recently the Fed has also started buying these assets too.

What makes this a monetary stimulus is the fact that the money the Fed sends to the banks didn’t exist before. It’s literally created out of thin air.

You could think of it as “printing money,” although nowadays this is all done digitally.

Because the economy ground to a halt in March, there really wasn’t enough money in the system. So an intervention like this was required, although whether the big banks should have benefited the most is another question.

What’s important for the price of gold is that all this new money finds its way to the stock market. As we’ve talked about before, there’s nowhere else for it to go. There’s little to spend money on right now, with stores, travel, and even most sports and sports gambling all closed.

Saving the money or investing in government bonds doesn’t work either, because interest rates are near zero.

So the stock market is the only place left. That pushes stocks up, but not necessarily because they’re great investments. Hertz, for example, was clearly a bubble. Kodak (one of my old employers) seems to be another bubble catching the eye of loads of Robinhood traders.

There’s also something else happening. Suppose companies held their actual value steady since March.

You’d still expect stock prices to move up, simply because the Fed has created new dollars.

In short, it’s a form of asset inflation. With much more cash (as we see in the form of M2 above) chasing the same number of stock shares, prices of those shares are almost forced to go up.

That’s precisely why gold has been rising so fast.

As you saw, gold’s value doesn’t change much. There’s little industrial demand for it, and even the demand for jewelry has dropped amid COVID-19 lockdowns.

So if anything, gold is slightly less useful now than it was last year.

But because we’ve created so many new dollars, an ounce of gold trades for more dollars now than it did before.

In fact, protection from this kind of inflation is the traditional case for investing in gold…

Gold is Your Best Play on Inflation

See, precious metals are not particularly good in protecting from crashes. In March, as during the 2008 Financial Crisis, gold prices eventually crashed along with everything else. That because of this: when margin calls started to happen to large accounts, institutions use gold as their “asset of last resort” and start cashing it in to cover margin calls.

When people panic, lose their jobs, and the economy seizes up, people want money. So they sell everything.

But once stimulus gets going, central banks start creating money out of nothing and governments go on a debt binge, currencies become less valuable while gold stays steady.

So gold prices start soaring.

In the long term, this will continue. There’s no end in sight for this stimulus. Earlier this week, Fed Chairman Jerome Powell said the Fed would do whatever it takes to support the economy.

So expect more money to be conjured up.

And while Congress and the White House are deadlocked in negotiations over another stimulus package, it’s clear there will be one – and the price tag will be in the trillions.

So the dollar will continue to lose its value, while gold will stay steady.

The same goes for silver, which has soared almost 30% in the last two weeks. Over the past two decades, the price per ounce of gold has on average been 60 times higher than the price per ounce of silver.

Before silver’s recent spike, that ratio had ballooned as high as 120-to-1. That’s the highest it’s been in the last 100 years:


As you can see, this current financial climate is unlike anything we’ve seen. Those kinds of short-term discrepancies tend to work themselves out. Indeed, silver jumped and caught up a quite a bit in in last couple of weeks:


But the accompanying 30% rise in two weeks isn’t sustainable.

As I’m writing this, gold and silver prices are both below their short term highs (which happen to be the all-time high for gold) as investors take profits – but they’re both still at the top of the chart.

In the short term, the drop is likely to continue. Both metals are overdue for a pause. We’re actively stalking a place to buy puts on the silver ETF (SLV) in the Dark Edge Project trading room. When institutions start taking short-term profits in large size, I’ll show just how that’s happening in the trading room.

But in the longer term, both will keep going up. With all this stimulus and little GDP growth, there are few other stores of value out there.

Great trading, stay safe out there, and God bless you,

D. R.

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