Many times a day, we are asked what we think will be the impact on gold prices of the enormous money-printing by the Fed. We think the impact is much greater than you might imagine because it is in combination with huge fiscal stimulus. In a nutshell, we think the current path leads to a new all-time high in gold this year and a crisis of confidence in the dollar. It's baked in the cake, in our view.
Please note, this is an opinion not investment advice.
Two points need to be made. First, most of the monetary stimulus to date is repo... money that must be returned in time certain and does not add to bank reserves. Repos unfreeze short-term liquidity but it's the POMO...Permanent Open Market Operations or QE... that grows the balance sheet and bank reserves. There is much more QE to come, in our view, to keep mortgage rates down and bank balance sheets healthy (two Fed priorities). Repos have not satisfied the markets. To date, the Fed has announced $500 billion in new POMO Treasury purchases since COVID-19 of which more than half was used in the first few days. We expect new QE to total $4 trillion+ before the Fed is done.
Second, and most important, the fiscal stimulus is even greater and far more problematic than the monetary stimulus. Fiscal stimulus requires an enormous increase in an already huge deficit. If the Treasury seeks to borrow the extra $2 trillion or more that is sure to be authorized, the issuance would drive up Treasury yields which are already rising at the long end. The Fed will attempt to prevent this by purchasing the newly issued debt. The Fed is already funding about 70% of the current deficit (just follow the cusip numbers). So, QE this time around is not only going into financial markets like it did in 2009...a huge amount of it is going to flow through the Treasury and into the economy (payments to businesses and individuals, the real helicopter money), adding artificial demand at a time when the economy is producing less. This is very damaging to dollar confidence and highly inflationary.
We think the Fed and the Treasury have decided to sacrifice the dollar. We think they will be successful. Gold's price will reflect this.
Written March 21, 2020.
This article is the collaboration of Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, and reflects the thinking that has helped make them successful gold investors. Rudi is the current Chairman and CEO of Seabridge and Jim is one of its largest shareholders.
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