Investing

The Central Bank Economy Undermined By Gold

As economies don't seem to recover as fast as financial markets have recovered, it becomes clearer that we live in a central bank economy. While several countries still struggle with major outbreaks or an up-rise in cases, we face the biggest global economic crisis in human history.

In March a major sell-off on financial markets and a drop in jewelry demand out of India caused a dip in gold prices. Just as The Golden Investor foresaw in March, gold and gold stocks outperformed the market after the corona crisis dip reaching an all-time high in gold prices. As central banks started implementing major unconventional corona crisis stimuli packages it became clear that gold would recover and even outperform in the short and the long run. As the corona crisis is far from over, more central bank infusions are necessary to hold off a financial crisis amidst this health crisis. However, as more and more investors seem to realize that this unlimited liquidity is disentangling reality from financial markets and fears of a central bank crisis are rising, gold is seeing an almost exponential rise in demand.

Figure 1 – One Year Gold Price

Gold prices are rising fast, crushing expectations of Goldman Sachs and Citibank, analysts are quick to revise their expectations. As Congress is discussing a new round of stimuli, while in June the ECB already expanded their initial Pandemic Emergency Purchase Package, it becomes clear the central banks are far from over pumping new money into markets. However, as the ECB already bought up 36 billion euros in Italian government bonds, exceeding self-set limits, and governmental debts are rising like new corona cases, it is clear that this rise in gold prices is just the start.

As stock markets seem to have recovered, real markets lack to see real recovery. As governments struggle to find the right balance between the right corona safety measures, rises in cases around the globe limit economic growth as corona limitations are reintroduced. As long as full economic freedom is limited we have to accept a drop in economic prosperity. Central banks are out of ammunition and governments run big deficits, causing bigger rises in gold prices with every new economic impulse as faith in governments and central banks fades away.

Interesting will be to see how Bitcoin reacts to the current crisis. Bitcoin has seen a somewhat similar, however slightly less intense bull-run since late March. As stock markets are not likely to rise even further, because many conventional, non-digital companies will start to face though times when governmental stimuli will be cut-off. The latest bull-run is driven by digital companies, who thrive on the social distancing society. As lockdowns ease, but economies still face social distancing limits, we will likely see flat markets, or even a correction downwards. Imagine what will happen if there is no working vaccine in Q1 2021. Currently there is no way out, if central banks stop their unlimited liquidity boosts economies will be killed, but with every new measure the efficiency of stimuli drop. This creates the perfect storm for gold to rise as it cannot be created by central banks.

The only thing that can stop gold is a new sell-off on stock markets, apart from that gold is likely to reach even higher levels. The Golden Investor continues to hold gold and silver, closely monitoring markets and watching central banks struggle with the chaos they themselves created. This is no corona crisis, it is a central bank crisis and it will get ugly. From now on The Golden Investor will report less on gold, as the narrative on gold has been the same since the corona dip. However, this does not mean The Golden Investor is less bullish on gold, these are golden times for gold bugs. Sit back, relax and watch central banks drown in their own liquidity.

Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.

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