Not so long ago, experts were telling us the economic recovery from COVID-19 would be quick.
That has changed.
Those voices are still out there, to be sure. But with increasing frequency and volume, we’re also hearing the healing process could be very long and very drawn out. The “V-shaped” recovery so many had been anticipating appears as though it’s no longer an option. The damage that’s been done – and will continue to be done – is much too great. Nearly 40 million Americans having filed for unemployment since the middle of March. The growing consensus is that the total impact resulting from that level of sudden joblessness eliminates the chances of a rapid recovery.
Some highly respected members of the economics community are now going even further than to proclaim we’ll have to suffer through a deep recession. They’re saying we might have to contend with a depression before we reach the recovery stage.
Regardless of whether the pandemic’s worst economic outcome is a long and painful recession or – yikes – a depression, it’s obvious we’re a long way from regaining the robust economy that was in place just a few short months ago. Also obvious is that the government and Federal Reserve will be pulling out all the stops like never before in their attempts to keep the country functioning. While those efforts are additional confirmation as to just how bad things are, savvy retirement savers will also recognize they have the potential to launch gold skyward.
Federal Reserve President: “V-Shaped Recovery Is off the Table”
As far as near-term projections for the economy go, the news is not good. “The V-shaped recovery is off the table,” Minneapolis Federal Reserve Bank President Neel Kashkari said flatly during a recent appearance at a virtual roundtable discussion. Kashkari believes there will be a bounce, of sorts, in the third quarter of this year. However, he’s convinced the economy will be “nowhere near back” to where it was at the end of last year. Kashkari – like practically everyone else – views unemployment as the principal barometer of economic health. In his opinion, April’s near-15% unemployment will return to earth at a snail’s pace. The implication is that double-digit joblessness will be with us for some time.
Moody’s Analytics chief economist Mark Zandi also sees double-digit unemployment well into our future – except his outlook for the nation’s overall condition is considerably more worrisome than Kashkari’s. Zandi believes that a depression, of all things, is very much within the realm of possibility.
In a recent appearance on CNBC’s “Trading Nation,” Zandi declared that a much-predicted second wave of the coronavirus would result in a depression.
“If we get a second wave, it will be a depression,” Zandi told CNBC. “We may not shut down again, but certainly it will scare people and spook people and weigh on the economy.”
Unprecedented Government “Fixes” Could Send Gold Soaring
It seems clear the economy will be fighting for its life for a long time. But there’s reason to believe one asset – gold – could thrive while the pandemic’s economic fallout continues to play out.
We know the recovery efforts will include record levels of both federal deficits and Fed quantitative easing (QE). History tells us each of these initiatives has the potential to send gold into outer space.
When the federal government was frantically trying to dig the country out of the 2008 financial crisis, the deficit took flight. By year-end 2008, as the crisis was quickly unfolding, the government ran up a $455 billion deficit. A year later, that figure had ballooned to $1.4 trillion – the largest federal deficit in any year up to this point. And there was little improvement in 2010 and 2011 while Washington was still knee-deep in repair efforts. The deficit in each of those years registered at $1.3 trillion.
So here we are in 2020, dealing with the still-uncontained global outbreak of a deadly virus that has ground the worldwide economic engine to a halt. Any guesses as to where the federal deficit will be by the end of this year? Goldman Sachs has one, and it’s more than a guess. According to the investment banking giant’s projections, year-end 2020 will see the deficit reach a thoroughly astonishing $3.6 trillion, besting 2009’s record deficit by nearly 700%.
Some may remember how well gold did from 2008 to 2011 while the crisis effects’ continued to roil around the globe. Part of that surge was attributable to then-unprecedented quantitative easing asset purchases by the Federal Reserve. But there was a “Part B” as to why gold climbed over 160% during that period: a record-setting deficit. And now there are predictions this year’s deficit will be more than seven times larger than the 2009 burden.
So what about the prospects for QE this time around? If you’re hopeful for a robust performance by gold, have no fear. The Federal Reserve has you covered.
Experts have been saying we’re now in a world of “QE infinity.” As it happens, that might not be hyperbole.
You might remember when the Federal Reserve announced on March 23 it was committed to making as many asset purchases as necessary to maintain functionality of the economy. That announcement was followed up by another from the Fed on April 9, one in which it declared the range of assets eligible for Fed purchase was to now include junk bonds.
Well, it’s clear the Fed is making good on its commitment to buy practically everything it can. In late February, the Fed balance sheet was at $4.1 trillion. It’s now at $6.75 trillion, and predicted to reach $10.5 trillion by the end of the year.
Notably, from the Fed’s March 23 “whatever it takes” announcement through today, gold is up 17.5%. And Washington is just getting started.
Record deficits and massive QE. It was the perfect recipe for a gold surge during the 2008 financial crisis. There’s no reason to think it won’t serve as the perfect recipe for a gold surge during what has now become the 2020 financial crisis.