July 28th, 2020 2:03 PM by Gregg Mower
Have you checked the price of Gold lately? If you do you will see that it is bumping up against $2,000 an ounce. This is about a $700 an ounce gain since March. It is fantastic if you own gold, but what is this signaling? Traditionally gold prices rise as an offset to inflation, but we don’t have any nor do we see any inflation in the future with more people out of work due to the COVID-19 scare. So why the sudden increase? So many questions as to what is going on in the world these days that things of late seem to be backward. The stock market hitting new highs during a pandemic with so many out of work. Interest Rates are at all-time lows. And the government is handing out money like it is nothing.
Unfortunately, the ladder is probably what the reason is for the increase in gold and silver prices. The reason is simple and yet complex. When the government puts so much stimulus (money) into the economy eventually that money will make it back into the economy, which is good right? Not always, as people view the government stimulus checks as “free money” so they spend it on other items than food and necessities. This effect has not been quantified yet in the economic world as we have never seen this in the history of the U.S. People that didn’t need the money to survive simply put it in their savings or invested it in the stock market. The government is considering another round of stimulus checks as I write this and there are a significant amount of people that really need the money yet there are significantly more that don’t need it. There is no real way for the government to determine who needs the money and who does not. Tax returns can show what people make but they are not accurate as most people write off as much as they can. So, the Government sends the checks out to all Americans to keep people spending and since we are in uncharted territory with all this stimulus gold and silver (precious metals) see this as a potential for future inflation.
The Government has also implemented the Paycheck Protection Loan (PPL) Program for small businesses. This program provided small businesses (businesses with less than 500 employees) with loans that can be forgivable under certain circumstances. Some of these “small businesses” received millions of dollars with no oversight. We are seeing news now of people buying expensive cars and other things with the PPL money. We have no idea who received the money, how much, and how they are spending it. I myself was offered $150,000 for MAE Capital Mortgage Inc. which I declined as we remain busy even though I had to lay off our receptionist and my wife. I might be too conservative in not taking the money given to me, but I was raised to borrower money only under dire circumstances or to leverage Real Estate. In addition, we don’t know what the payback terms will be as the government has not done its due diligence and could end up hurting more than helping, we just don’t know yet. This could lead to even more bankruptcies when these loans become due. Precious metals are taking this into consideration in a belief that there will be inflation due to this uncontrolled government spending.
Then there are the unemployment benefits that were pegged at an additional $600 a week and that was in addition to the state unemployment money that was, at it’s maximum, $400 a week. So, people have been getting $4,100 a month, and for most people that was a raise without work. This has created a disincentive for employees to go back to work and employers that have seen a slow down will not feel a responsibility to hire back the laid-off employees in the short term knowing they are getting paid by the government. This has created people with more money then they had before when they were working full time and time to spend it. This has contributed to more investment in the stock market in hopes of making even more money from “free money”.
These effects are why precious metals have been rallying. We are also seeing an extraordinarily strong Real Estate Market. These are assets that will grow if there is inflation or the devaluing of the dollar. The devaluing of the dollar to other currencies worldwide will cause an immediate increase in cost for goods that are imported to the U. S., and you guessed it, China will be the big winner of the U.S. Stimulus packages. It appears, as I write this blog post, that the U.S. government is negotiating for yet another stimulus package. This is a huge reason for the increase in precious metals prices as people are looking to the future to see the inflation coming. People will also ask the question; “is this political”? I won’t go there in this post as I believe there is definitely politics involved on both sides, but if and when the next stimulus package is released it will pump even more money into, what some believe an already bloated economy. We have all been hearing how people are really hurting with this pandemic, I would argue that sure there are some hit hard, but the majority of folks are doing just fine and more money will mean more spending which will put more inflationary pressure on our economy. As we are starting to see shortages of some products since a good portion of the U.S. labor force in manufacturing was laid off for a month or two or more. This shortage of supply of goods will drive prices higher thus creating inflation in areas where there would not have normally been. All these factors are scaring the economically minded person, and if you study basic economics you will read that holding assets during inflation is the best thing to do other than holding on to cash. The reason is that assets will increase in value and cash will decrease in value and precious metals are the original assets to go to during inflation. These are the reasons for looking at precious metals and why they are increasing at an alarming rate. On the Real Estate end of this discussion, we are seeing a rising real estate market outside of big cities. I will be following this discussion as the world evolves and posting more updates as we move further into stimulus and the pandemic. www.maecapital.com