As Gold hits new recent highs it is difficult to keep up with the amount of “stimulus” or support that has been announced by central banks. As Ray Dalio, founder the largest hedge fund in the world, Bridgewater Associates, says:
The Fed Will do Practically Anything to Save the System
And it certainly seems like this is the case. ‘A good crisis should never go to waste’ appears to be the mantra of policy makers. The speed and size of the Fed’s programs, as well as in many other countries, far outweigh the programs during the financial crisis.
Here is Everything the Fed has done to Save the Economy
The sheer size and scope of these actions is unprecedented. And this is being repeated globally. The UK has gone even further, with the central bank directly supporting the government.
Bank of England to finance UK government Covid-19 crisis spending
With tax revenues drying up and unemployment rising it seems to be the only alternative. Indeed, looking at anecdotal evidence, one commentator Jared Dillian (@dailydirtnap) wrote on Twitter:
“Check out the credit card statements today and saw that I am down about 60%. That’s the number I’m hearing from other people, too. People will learn to like saving. It will take years for spending to return to normal. Our consumption patterns have been permanently altered.“
This is the key point. There is no return to the previous normal; a new normal will emerge. And it will look something like this: more government spending and intervention in the economy. Coupled with this is more government intervention into citizen’s privacy rights, and individual rights. The reemergence of the state as the main actor in global politics, continuing the trend of Trump’s election and Brexit will also be apparent. This can be seen in the recent decision of the United States to cut funding to the World Health Organisation. Expect to see more of this with other UN agencies, as well as other, multilateral organisations such as the IMF and World Bank:
Trump halts World Health Organisation funding amid coronavirus pandemic
The World Health Organisation has come under China’s growing – and malign – influence
Away from politics, consumers will become citizens and the age of austerity will end for governments and begin for people. The era of excess consumption, zero saving, of living paycheque to paycheque will have to – or at least begin to have to – come to an end. Credit card debt, luxury purchases and lifestyle consumer experiences will all be cut back. To make up for this shift, and reduction in demand, governments will of course step up to fill in the gap.
And thus, the stimulus that has occurred since early February is only the beginning, and not the end. Governments will be directly supporting employees at companies that will fail and those who will be out of work. There will be no big cash reserve to start hiring once again. The line in this chart does not suddenly go straight back up:
This is era defining stuff. And no one is paying attention.
The Fed’s Cure Risks Being Worse Than the Disease
The consequences of such interventions are deeply philosophical. The removal of real risk creates the inability of businesses to fail in an orderly way, and everyone being bailed out poses the biggest challenge to capitalism since Karl Marx. This began of course in 2008 but the move to save Main Street as well as Wall Street this time means that we are embedded in a new social contract with government – the likes we have never seen.
Naturally, any asymmetric concentration of power, whether within a relationship, family, tribe, business or country by a single actor never ends well. And that is what gold is signalling to the market. Gold has seen this story before, or at least an earlier version:
New recent highs as deficits explode and central banks debase all their currencies simultaneously means that the money supply, if forced through the system by governments, will accelerate rapidly. Add to that the current inequality of wages for essential workers and it’s easy to see inflation moving higher. Yet there could be deflation in asset values such as real estate and equities, as well as bonds as the speculative excess of the last decade unwinds. Perhaps Covid-19 was the trigger of the great mean reversion of the 2020s?
Regardless, Gold should continue to outperform other asset classes during this turbulence and beyond, as the new normal gradually appears.
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.