Gold And Silver Shine As Fed Targets Bondholders For Capital Losses

As the tech-heavy stock market indexes sold off on Thursday, many investors were forced to re-think their positions.

For the past few months, mega cap technology companies like Apple, Amazon, and Tesla have led the market higher. Yesterday they led the market lower.

Now the question is: Where can investors look for leadership going forward?

As would be expected during big down days for equities, gold held up relatively better. For the week, though, gold, silver, and platinum prices are all down.

Palladium has certainly shown leadership within the metals space in recent years. But despite this week’s gains, palladium prices still sit below their highs from February. And despite this week’s setbacks for gold and silver, they still trade well above their levels from when the coronavirus lockdowns began.

Silver has vastly outperformed all the precious metals as well as copper and most base metals. You’d never know it from watching CNBC, but silver is also besting the stock market year to date – outperforming even the high-flying Nasdaq.

Unlike stocks, which have been going up for years and reaching overbought extremes, silver is likely still in the early stages of a bull market. As it is prone to do, silver will both rise and pull back sharply along the way.

So, the possibility of some additional downside price action in the near-term shouldn’t discourage long-term bulls. What should provide encouragement is the fact that silver and gold markets stand to benefit from negative real interest rates and a tsunami of new unbacked paper debt hitting the economy.

This week, the Congressional Budget Office projected the annual budget deficit to hit a staggering $3.3 trillion.

News Anchor: The United States hasn't seen debt like this since World War II. Officials say the national budget deficit will hit $3.3 trillion this year, more than triple that of 2019. And next year, the nation's debt will likely be bigger than the size of the entire economy. It comes as the federal government ads $2 trillion in spending to fight the coronavirus and an economic recession.

When government debt grows faster than the economy and ultimately exceeds the country’s entire GDP, that signals financial distress.

A private company that was carrying more debt than the value of its total underlying assets would be facing insolvency. Its bonds would be rated as “junk.”

U.S. Treasury bonds face no such downgrade on the horizon. It’s not necessarily that investors have confidence in the full faith and credit of the United States government itself. But they believe the Federal Reserve would step in to buy Treasuries in unlimited quantities if necessary.

The Fed’s printing press won’t save holders of Treasuries and other dollar-denominated financial assets from real losses. In fact, the Fed’s open program of raising inflation rates will ensure bondholders and savers lose purchasing power over time. It’s just a question of how much.

What person in their right mind would hold assets that are virtually guaranteed to lose value? Perhaps the fact that Federal Reserve notes are, for now, losing purchasing power at a gradual pace offers some the illusion of safety.

It’s true that precious metals markets can be volatile by comparison on a day to day basis. But that’s just noise if your time horizon is measured in years.

The major trend for gold and silver prices is up in terms of dollars. In terms of the stock market and other major asset classes, precious metals also have the potential to make gains in the months and years ahead.

At the very least, hard money serves as an indispensable portfolio diversifier in uncertain times. When markets gyrate and U.S. dollars depreciate, physical gold and silver provide a tangible hedge against inflation and financial insecurity.

*********