It’s a strange world out there for investors today. Stocks in the U.S. are very expensive — despite the fact that S&P 500 earnings may drop 40% in the second quarter.
Investment grade bonds yield tiny amounts that amount to basically nothing once you factor in inflation. Interest rates are near zero and will likely stay that way for years to come.
The U.S. Federal deficit was a shocking $863 billion in June. That’s equal to the entire 2019 fiscal deficit! The spike was primarily due to the PPP loan program, which tried to save businesses from collapsing during the pandemic.
It’s Not Just COVID-19
This jump in government spending and money printing has been largely blamed on the COVID-19 crisis.
But this is simply not true. The Federal Reserve began lowering interest rates and re-starting QE (money printing) in September of 2019. That’s well before the COVID-19 crisis began.
Very low interest rates, Modern Monetary Theory (MMT), and massive money printing were always going to happen. I wrote a piece titled “Why MMT is Inevitable” in July 2019. The current viral crisis just moved up the timeline and gave the government a good reason to take extreme measures very quickly.
Most people assume that once this crisis is over, things will go back to normal. That is not going to happen.
If the Fed takes their foot off the gas at this point, a massive bubble will pop. Stocks will go down dramatically and bond yields will rise. Things will get very ugly for a few years. The current crisis has made our economy even more dependent on the Fed than before.
Now that we’re printing so much money — and with rates so low — it will be nearly impossible to stop even if we wanted to. We’d have to either slash government spending or hike taxes dramatically. And as I’ve mentioned before, neither of those are realistic options.
So we will continue to print money indefinitely. As investors, you and I must think hard about this situation. We need to figure out the best course for ourselves. It is not going to be an easy road to navigate.
The one thing I remain confident of is that governments around the world are going to continue printing money. And interest rates are going to remain extremely low.
Gold, Silver, Miners
The most obvious implication of all this is that every single investor should have exposure to precious metals (PMs) such as gold and silver — and miners. I know I’ve been hitting this subject hard over the last year or so, but there’s a good reason for it.
I believe these assets continue to be the best way to hedge your portfolio against financial and monetary chaos. With bonds paying out basically nothing for years on end, I think the market will flock to these assets in the coming years.
And once everyone else realizes that the Fed can’t stop printing, there will be an incredible rush into gold and silver.
On March 20th of this year — when gold was trading around $1,500 — I wrote the following.
“The upside for gold here is substantial. I believe gold prices could top $3,000 in the next year…
If you’re willing to take on more risk, check out gold miners. Gold miners have been hit harder than most other sectors. But I believe the outlook for precious metal prices is bright, and gold miners should benefit more than most companies from low fuel prices.”
That day pretty much marked the bottom of the precious metal miner market. The largest gold miner ETF, GDX, is up 96% since. I don’t always get it right, but this one was on target.
If you’re only now building a position in PMs, don’t let this recent performance scare you away. Gold and silver miners got hammered early on in this crisis. GDX is only up 32% overall for the year.
I believe the bull market in gold and silver is just getting started. We’re due for a dip after this recent run. And if we get one, consider taking advantage of it. It just might be the best protection your portfolio could have for the next decade.