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Precious Metals Could Offer Relief if Fed Reach Expands

Isaac Nuriani    |
Oct 30, 2020

The 2008 financial crisis served as our introduction to the controversial Federal Reserve measure known as quantitative easing (QE). QE made a return in a big way this year, thanks to the onset of the COVID-19 pandemic. The Fed effectively said in late March it would do whatever is necessary to keep capital markets functioning. The message was clear: there would be no predetermined limit on the dollar amount of assets the central bank would purchase. Not only that, the Fed also expanded assets eligible for purchase to include junk bonds.

Stocks are now the only asset class that remains off limits to the Fed. But there’s reason to believe that single prohibition will change eventually. Former Fed chair Janet Yellen is one respected and influential central bank figure who believes Congress should grant to the Fed the authority to purchase equities.

If the Fed is given the green light to buy stocks, the influence of America’s central bank could become even greater than it is now. W.E. Messamore of CCN.com suggests the consequences of a Fed with no limits on either the amount or type of asset purchases would be significant. He suggests we could be looking at a Fed-engineered centrally planned economy facilitated by central bank interventions in capital markets.

The Federal Reserve’s influence over the economy and markets seems to be growing. It appears that trend could continue as the pandemic’s economic fallout generates profound and potentially lasting implications for the country. I believe retirement savers should recognize the possibility of an expanding Fed footprint and find ways to help hedge their portfolios against the potential negative fallout.

One part of the solution might be to diversify into often-uncorrelated physical asset classes and alternative assets such as gold. Many times through history, gold has responded positively after intense periods of Federal Reserve accommodative monetary policy.

Fed Policy in Pandemic Era: Significant Accommodation for Years to Come

How does the pandemic affect QE? The economic think tank American Institute for Economic Research (AIER) recently published a piece by Joakim Book in which he ponders what life might be like if influence of the virus is ongoing. At one point, he speculates how the population at large might greet a novel coronavirus vaccine once it’s available:

Vaccines will arrive, faster than ever before in human history, but the combination of not providing enough protection and a sizable portion of the population refusing to take them, will mean that corona restrictions remain in place.

Book’s pithy analysis of the vaccine outlook is not without merit. You may have heard that a large number of Americans say they will not take a COVID-19 vaccine when it’s ready. Recent poll results seem to bear that out. According to a recent USA Today poll, two-thirds of Americans said they wouldn’t take the vaccine when it’s first available. Another one-quarter said they would never take it. In a Gallup poll taken in August, over a third of Americans said they would not be vaccinated.

As for the supposed limited effectiveness of a vaccine, Book may be on to something there, as well. Credible data suggests the effectiveness of the flu vaccine is around 40%. During the 2004 – 2005 flu season, the vaccine was just 10% effective.

Here’s what I’m getting at: If COVID-19 remains a feature of society going forward, so, too, will the virus’s economic consequences. One of those consequences could be perpetual underperformance of the nation’s economy. And if COVID-19 does, in fact, prove to be a long-term drag on America’s output, it’s reasonable to believe it might strengthen and perpetuate the Fed’s use of QE. Our nation could become even more reliant on government deficit spending and the strong Fed monetary policy that helps enable it.

The pandemic’s anticipated extended consequences already are shaping the Federal Reserve’s outlook and agenda. On September 1, Fed Governor Lael Brainard delivered remarks on the central bank’s forward-looking agenda in the age of COVID-19. Brainard indicated the Fed’s primary goals for the foreseeable future are the achievement of maximum employment and an average inflation rate of 2%. She went on to suggest that interest rates potentially could remain at zero for many years.

There is concern the pandemic has caused or will cause lasting economic damage. If that ends up being the case, there’s no telling when rates might rise again. At a time like this, it’s not a bad thing for retirement savers to consider ways to diversify their holdings. And it might be a good time to study in more detail the ways gold has responded to ultra-accommodative Fed posture in the past.

In the Past, Precious Metals Have Performed Favorably During QE

The Federal Reserve first introduced QE during the 2008 global financial crisis and gold and silver prices rose over the next three years. From 2008 to 2011, the Fed launched the first two rounds of QE. During that period, gold and silver soared 160% and 400%, respectively.

Fast-forward to the current year. I mentioned earlier that March 23 was the date the Fed announced it was open to doing whatever is necessary to “fix” the pandemic-riddled economy. Very soon after, precious metals prices rose. From that date through today, gold has climbed roughly 30% and silver has jumped about 100%.

It’s true that both metals have been trading sideways for the last few months after a tremendous April-to-July run-up. Still, experts believe there are a lot of miles remaining in the precious metals bull’s legs due to generous Fed policy. One of those is Dan Oliver, CEO of Myrmikan Capital. Oliver is projecting gold to reach $10,000 per ounce in this cycle due specifically to the Fed’s current devotion to highly accommodative monetary policy.

The possible negative effects of a long-term commitment to loose-money policy include the onset of an inflationary climate. It could be conjectured that concern over the use of initiatives such as QE to implement this policy has helped boost precious metals in both the recent and very recent past. The Fed has put all of us on notice that this accommodative posture will be with us for as far as we can see right now. What is less certain is just how loose monetary policy might become.

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