The price of gold hit new all-time highs this week in terms of U.S. dollars.  As I write this, the price is at about $1,990.  One small up day from here will put it over $2,000 per ounce.

It’s about time. The Fed has been on a money creation spree since the fall of 2008.  The Fed did hold steady from late 2014 up until last year, but the rest of the time saw unprecedented balance sheet expansion.

It’s still a bit curious why gold peaked in 2011 and started to fall in 2012.  Perhaps it was in anticipation of the Fed winding down its QE.  But really, I think it is just mostly about demand.  The economy seemed to be getting a little stronger at that point even though the Fed was still creating money and keeping interest rates low.  Most investors went to stocks and real estate.

I think this officially marks the resumption of the gold bull market that started at the turn of the century.  I should know because I bought my first gold in 2000 or 2001 when it was around $300 per ounce. It’s now up almost seven-fold over two decades, which is actually better than if I had bought stock index funds. I understand that I am comparing it based on gold’s low point, but it is still worth noting because I hear so often that gold is a bad investment because it doesn’t pay any dividends.

The Fed’s balance sheet has calmed down a bit since late May, but there was a lot of damage done from March through May of this year.  The balance sheet exploded by almost $3 trillion.  Plus, Congress is still running massive deficits, tax collections are presumably way down, and they are talking about another massive bailout/ stimulus bill. I don’t think bond investors can support all of this new debt at these low rates without the Fed playing a significant role.  In other words, I expect the Fed will continue to expand its balance sheet.

The FOMC met this past week, but its major moves happened months ago.  Its targeted federal funds rate is already near zero, and its QE is essentially open ended.  Therefore, there isn’t much to report.  The Fed will do whatever the Fed feels like doing.

In its statement, it said “The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world.”  I have had to frequently correct people on this point.  The coronavirus isn’t causing economic hardship. It is the fear and reactions to the coronavirus that have caused the economic hardship.

So the Fed is just playing it by ear.  It has always done this to some degree, but at least in the past there was some predictability.  I suppose there is predictability now in the sense that rates will stay near zero and the Fed will continue to buy up government debt.

When it comes to politicians and central bankers, I think there is a lot of evil.  They lie, and they purposely do things to enhance their own power.  And while I still think that’s true, I also believe that the central bankers really don’t have that much of a clue of what to do other than to just keep creating money.

While I think the establishment hyped the coronavirus up, it wasn’t the Fed that locked down the economy.  It isn’t even the Fed that is running up the debt.  But the Fed is enabling the run up of the debt by supporting it.  It really doesn’t know what else to do. Jerome Powell and company don’t necessarily want a destroyed economy, but they have no other solutions. They could tell Congress that the Fed will no longer be buying U.S. government debt, but we all know that’s not going to happen.

On top of all this, GDP came in this week.  In the second quarter, there was a decline of 32.9% (see update below).  This is unprecedented.  While it isn’t a perfect measurement, it does give us an idea of just how bad things were and will continue to be.  There probably hasn’t been a decline in economic growth that steep since the so-called Civil War in the 1860s.

It’s interesting that economic growth can decline by one-third and we can have over 40 million new unemployment claims, while stocks are at or near all-time highs. Stocks seem to like the Fed’s funny money as much as gold.

Still, I would bet on gold over stocks over the next few years.  Stocks are still in a massive bubble.  Investors almost seem to no longer worry about actual earnings.  Eventually, there is something of a return to the mean, even with the massive monetary inflation.

I still like gold stocks as a speculation play.  It is an opportunity that I have been waiting for, for quite some time. There will be significant pullbacks in the gold market, but I expect it will continue to go higher from here.

Update: To be clear, the 32.9% GDP drop in the second quarter is an annualized rate.