We predicted that gold was running on borrowed time, but the breakdown came more quickly than even we expected.

With stocks crashing and gold selling off on renewed pandemic fears, the question is what the Fed can or will do this time around…and will it matter in the long run?

October 28, 2020

Dear Fellow Investor,

As a hurricane is barreling toward my home — with the eye wall scheduled to hit in about 30 minutes — I want to rush some commentary out to you on today’s market volatility while I still can.

Of course, you know by now that the major U.S. stock indices fell for the fourth day in a row, with each losing about 3.5% today alone.

Gold was no safe haven, dropping about $30, or 1.6%, while silver shed about $1.00, or 4.16%. The U.S. dollar was deemed the safe harbor by investors, gaining about 0.56%.

If this sell-off gains momentum, we’ll undoubtedly see the Fed step in with another rescue effort.

The big question is, what more can it do?

Former New York Fed President Bill Dudley just penned a Bloomberg editorial in which he noted that “No central bank wants to admit that it’s out of firepower. Unfortunately, the U.S. Federal Reserve is very near that point.”

More QE is an obvious answer for the Fed’s next step, and I’m one of the few you’ll find who won’t rule out negative rates at some point. But what the markets really want right now is a fiscal stimulus package…and they won’t get that until well after the election.

Add it all up, and we’re in for quite a ride over the next few days and weeks.

The important thing to remember is this:

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Betting On The Sure Thing

Just the other day I retweeted someone else who had really put things into perspective.

As my response implied, this is just the beginning. With every market and every economy around the world addicted to not just easy money but ever-easier money, we’re going to smash every record that we set along the way.

In a nutshell, this is the case for higher gold prices. And it’s all we really need to be worried about.

For example, during our recent New Orleans Conference, Brent Johnson, the well-known proprietor of Santiago Capital, explained his “milkshake” argument for significant dollar strength during the next big financial crisis.

Frankly, I found his argument sound and compelling. It’s very likely to happen as he postulates.

But I also found the counterarguments, from Peter Schiff and many others who argued that the dollar’s very status as the world reserve currency would make it the first to fall, to be compelling.

Bottom line, I don’t believe anyone knows the precise path ahead, or can clearly predict it in any detail.

History actually tells us that there’ll be some big surprises along the way (witness 2020).

But what we do know, or at least can project with some confidence, is that gold and silver will be trading for much higher prices a year or two or three down the line. This means a couple of things:

1) That the dollar (and other fiat currencies) will have significantly devalued against gold and silver. Thus, it’s important to protect against the devaluation of your wealth by owning these metals beforehand.

2) That mining stocks should leverage the gains in the metals, and therefore should be trading at multiples of current levels.

Note that I was careful to use the word “should” in point No. 2. That’s because there are some scenarios in which the mining stocks could underperform, including when no one wants the risk of paper holdings, or when energy prices are so high that mining costs rise more quickly than earnings. We saw both scenarios come into play post-2008.

But back to the big picture…

There was broad, even unanimous, agreement at New Orleans 2020 that the macro picture for gold is powerfully bullish. I’d even venture to say that it may be the most bullish in gold’s history as a freely traded investment asset.

And yes, as a contrarian this degree of consensus worries me. In truth, it may be my greatest concern regarding gold.

Yet, as some of our speakers noted, it’s not that unusual to have agreement on the macro picture. In this case, the macro forecasts, resting as they do on the necessity for significant currency debasement due to debt loads, is based much more on simple math than any figurative reading of tea leaves.

In short, we’re in a world where the values of currencies must get cheaper. And that means “things” will become pricier on a relative basis…with monetary metals outperforming the pack.

So we needn’t sweat the small stuff, and should instead maintain our focus on the horizon — where we’ll see much brighter days for gold.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference