Precious metals markets are advancing this week as a massive new stimulus bill makes its way through Congress.
On Thursday evening the House of Representatives passed a $2.2 trillion coronavirus relief bill on a party line vote.
It’s a big deal whenever Congress commits to spending that kind of cash, especially when it’s money that has to be borrowed into existence. These days, though, it’s not that unusual for Washington to dole out trillions of dollars at a time.
The bill in its current form will almost surely die in the Republican-controlled Senate. Meanwhile, negotiations on a compromise bill are expected to continue. Both the White House and Democrat leaders say they want additional stimulus checks handed out.
Nobody seems concerned about the ballooning federal budget deficit – which is already on track to exceed an unprecedented $3 trillion this year. Perhaps that’s because nobody doubts the Federal Reserve will provide whatever liquidity the government needs to pay its bills.
Stimulus from the Fed has helped pump up the stock market. The S&P 500 rallied this week despite more bad news on the economic front for airlines, restaurants, hotels, and other hard-hit industries.
Also rallying are precious metals markets. And today’s news that President Trump has contracted Covid-19 could add more fuel to the fire.
The metals have been moving inversely to the U.S. Dollar Index, which fell this week after rising the previous one. The negative correlation is often strong, though not always.
Over a period of years to decades, the dollar’s strength or weakness versus foreign currencies tends not to matter as much as its actual rate of depreciation. These are two very different things.
It’s possible for government officials to actively pursue a “strong dollar” policy against the currencies of foreign rivals while at the same time deliberately debasing the value of the currency at home.
Ever since President Richard Nixon de-linked the U.S. dollar from gold in 1971, government debt has accelerated to the upside – as has the total currency supply.
In the process, the purchasing power of the dollar has steadily diminished. What cost $1.00 in 1971 costs $6.37 in 2020, based on the government’s own Consumer Price Index.
It’s all reflected in gold prices, which recently surged to a record high of over $2,000/oz – 100 times higher compared to gold’s dollar price a century ago. Measured by gold, that’s a 99% decline in the currency’s purchasing power!
Further declines are guaranteed by the Fed’s own avowed inflation-raising objectives and the exploding debt spending by government.
The answer to how all the trillions in “free” money being handed out by Washington will ultimately be paid for is through inflation. All holders of Federal Reserve notes will take a hit on their purchasing power.
Holders of precious metals stand to retain purchasing power over time and increase it during a bull market.
In the very long run it really doesn’t matter what gold and silver’s nominal prices, or exchange rates versus the U.S. dollar, are. As sound money, the metals’ real value can’t properly be measured by any fiat currency.
It’s more accurate to view long-term gold and silver price uptrends in terms of dollars as measures of the dollar’s loss of value.
You can hold gold and silver knowing that regardless of where they trade next year, next decade, or a generation from now in terms of dollars, they will at least retain meaningful purchasing power in terms of real goods and services in the economy.
The same can’t be said for fiat currencies that can collapse, bonds that can default, or shares of companies that can go bankrupt.