After an historic rise, the Federal Reserve’s balance sheet has settled down. After going up nearly $3 trillion in a matter of three months, it peaked in early June 2020. The balance sheet actually fell in June, but not by a lot, relatively speaking. It has started to go back up again in July.
It was obvious the Fed would not be able to maintain the pace of monetary inflation that was seen from March through May. Still, the federal government continues to run massive deficits that are beyond comprehension. Meanwhile, Congress is considering another “relief” package, which will probably include more direct payments to Americans. It is not so much of a relief when you go to the grocery store and see the prices.
I can’t imagine the Fed’s balance sheet will flatten out from here. I think it will continue rising, although at a slower pace than March through May. Someone has to buy up all of this government debt, and I don’t think foreign central banks and private investors will be able to cover it all at low rates.
I think we are going to see massive deficits for a while now. They were already projected to be high before the coronavirus and the lockdowns. I also think we will continue to see Fed inflation to cover much of these deficits.
The only thing that will change this situation is high consumer price inflation. That is already a reality with food and some other items. But we have price deflation with other things that are not in high demand right now, especially in the travel and leisure industry.
With a massively growing national debt and Fed inflation, it is understandable that gold and silver are on the rise.
Gold and Silver vs. The Fed’s Balance Sheet
The Fed massively inflated from 2008 to 2014. Gold and silver rose substantially from 2009 to 2011/ 2012. But then the prices retreated while the Fed’s balance sheet kept going up for another 2 or more years. Still, there was an anticipation that the Fed was slowing down its asset purchases, so there is still somewhat of a correlation.
If the Fed promised right now that it would stop inflating and keep that policy for several years, and if people believed it, then gold and silver prices would likely come crashing down.
But that’s not what is expected to happen. Most people expect that the deficits will continue and that the Fed will help fund these deficits by buying government debt. The Fed is now on the hook to bail out a lot of people and businesses and industries.
Gold has hit $1,900 and is near its all-time nominal high. Silver is well over $20 now, but would still have to more than double to reach its all-time high.
We can’t be sure of anything in this world any more, but I do expect that the price of gold and silver will continue to rise. Silver carries more risk, but the rewards could also be more lucrative.
Even more lucrative will be mining stocks, which have been hammered for the last 9 years or so, up until this year. Some of these mining stocks will explode in price if and when gold and silver soar higher.
It is going to be a wild ride though. There will be big up days, but there will also be big down days.
If you want to speculate in mining shares, I recommend an ETF such as GDX or GDXJ. They provide some diversification in an otherwise risky industry. You can also find mutual funds that focus on mining stocks.
I think gold is a necessary hedge against massive inflation and disaster. It should always be part of your portfolio. But I think now presents a special time where you can actually try to profit off of it.
Stocks and bonds have both done well lately. But this may not last. I still think there is a giant stock bubble. There is also a bond bubble, but people seek U.S. Treasury debt for safety, as long as price inflation is not seen as an imminent threat.
If and when stocks and bonds fall out of favor, where else will investors turn? Where will anybody turn who is just looking to preserve their wealth? I think gold is an obvious answer.