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Last February, San Francisco Federal Reserve Bank President Mary Daly told reporters the central bank was kicking around a rather stunning idea: To make quantitative easing (QE) an option the Fed would go to more regularly in the interest of helping the economy. “Should those [QE policies] always be in the tool kit – should you always have those at your ready?” Daly wondered aloud in front of the reporters.
“You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, but one that you would use more readily,” Daly added. “That’s not decided yet, but it’s part of what we are discussing now.”
There’s been a lot of talk of the Fed entering the “QE infinity” universe since the COVID-19 pandemic achieved critical mass. But if you’ve been listening carefully to the drumbeats, it sounds as though the Fed already had decided QE would be a standard feature of the monetary policy landscape.
This all seems to indicate that dollar-debasing quantitative easing is here to stay. And analysts such as Jared Dillian of Mauldin Economics expect gold to benefit greatly from the Fed’s newfound comfort with monetary policy extremism.
Dillian recently penned a love letter to gold that appeared in MarketWatch. He cites a variety of reasons why gold should be featured in everyone’s portfolios. But it’s the Federal Reserve’s unbridled affection for QE that underpins his enthusiasm for the metal.
Landscape of “QE Forever” and Record Deficits Bode Well for Gold
Dillian says he’d like it very much if the country returned to a gold standard. He’s not alone, particularly in this era where there’s no longer a “stop” button on the Federal Reserve’s money printing press. Indeed, one of President Trump’s nominees to the Federal Reserve Board of Governors, Judy Shelton, is a proponent of stable money. Shelton has made no secret of her desire to see that stability achieved through a gold standard.
However, Shelton has yet to emerge successfully from the Senate confirmation process. And even if she does become a Fed governor, it’s unlikely she’ll be able to engineer a return to anything resembling a hard-money standard. “So,” writes Dillian, “we’re stuck in a world of unlimited quantitative easing (QE) and other Fed funny business. Which means this is a world where you want to own gold.”
It’s hard to deny the causal effect QE and other Fed easy-money policies can have on gold price increases. When the Fed launched two initial rounds of QE during the 2008 financial crisis, gold soared more than 160%. Last June, the Fed announced interest rates would move back down after a 2018 in which they rose four times. That sparked gold to immediately break through a longstanding technical resistance price level of 1,350 dollars per ounce. The metal went on to climb roughly 14% in just under two months. And since the Fed’s March 23 declaration that it would do whatever’s necessary to stabilize the economy, gold has climbed another 14%.
“Gold is bound to keep rising in this environment,” writes Dillian. “Because the Fed can print an infinite number of dollars, but it can’t print gold.” (my emphasis)
QE is not the only reason gold has a clear path right now. As Dillian points out, savers also look favorably at gold when the federal deficit soars. When gold surged from late 2008 through mid-2011, the jump was energized largely by QE1 and QE2. But it was also helped along by a massive increase in the deficit during that period. In 2008, as the financial crisis unfolded, the country ran a 455-billion-dollar annual deficit. Come 2009, the government threw a ton of money at the crisis. As a result, the deficit grew to 1.4 trillion dollars – an increase of over 200%. 2010 and 2011 both saw a 1.3-trillion-dollar deficit as the government continued its efforts to repair the economy.
Up to this point, the highest annual budget deficit registered was 2009’s 1.4 trillion dollars. However, it’s expected we’ll smash through that figure this year as the government scrambles to contain the pandemic’s economic damage. Goldman Sachs projects the 2020 deficit will come in at a mind-boggling 3.6 trillion dollars by the time the dust settles.
There’s a New Era in Fiscal & Monetary Policy – Protect Yourself with Gold
It’s tough to imagine a better environment for gold than one in which both quantitative easing and deficit spending are boundless. And that’s the environment we’re all living in right now.
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