The first time we were introduced to the controversial Federal Reserve policy of quantitative easing (QE) was during the 2008 financial crisis. QE returned with a vengeance this year when the COVID-19 outbreak seemed to a reach a point of no return. In the latter part of March, the Federal Reserve effectively said it would do whatever is necessary to keep the economy functioning. The implication was clear: there would be no predetermined limit on the amount of asset-purchasing by the central bank.
There was something else. Not only did the Fed decide it would buy up as much in assets as necessary, but the central bank also expanded the breadth of assets eligible for purchase to include junk bonds. Stocks remain off the table, but for how long? Some Fed hawks, including former Fed Chair Janet Yellen, are pushing for Congress to grant to the central bank the authority to buy stocks.
Should that happen, there would no longer be any asset off limits to the Fed for purchase. Some say the result effectively would be a Fed-engineered centrally planned economy facilitated by central bank interventions in capital markets.
The Fed’s influence over the economy and markets has been expanding steadily. It appears that trend will continue in what is quickly becoming the “pandemic era.” Astute retirement savers will recognize the possibility of an expanding Fed footprint and consider the ways they can help shield their portfolios from the potential negative fallout. One part of the solution might be to include gold among their assets. Gold has demonstrated itself to be particularly responsive as a safe haven in the face of drastically loose monetary policy.
Fed Policy in the Pandemic Era: Unprecedented Influence?
In a recent piece for the economic think tank American Institute for Economic Research (AIER), Joakim Book ponders what society might look like going forward in a nation where COVID-19 remains a constant public health threat. At one point, he speculates about how a COVID-19 vaccine – once it’s available – might be received.
Vaccines will arrive, faster than ever before in human history, but the combination of not providing enough protection and a sizable portion of the population refusing to take them, will mean that corona restrictions remain in place.
There is already a large portion of the population saying they won’t take a COVID-19 vaccine. According to a recent USA Today poll, two-thirds of Americans said they wouldn’t take the vaccine when it’s first available while one-quarter said they would never take it.In a Gallup poll taken in August, over a third of Americans said they would not be vaccinated.
Moreover, the effectiveness of such vaccines is modest, at best. According to health experts, the effectiveness of the flu vaccine is around 40%. During the 2004-2005 flu season, the vaccine was just 10% effective.
Here’s the point: We now could be living in a COVID-19 world for as far as the eye can see. And if that’s true, we will be living in a COVID-19 economy, as well – one that may have perpetual underperformance as a standard feature. If that’s the case, then it’s reasonable to consider our nation will become even more reliant on government deficit spending as well as the drastic Fed monetary policy that goes a long way to enabling it.
For its part, the Fed already seems to be planning for an America scarred by the pandemic. The forward-looking Fed agenda, centered on achieving maximum employment and an average inflation rate of 2%, means the central bank will be keeping interest rates at zero for a long time, potentially. When Federal Reserve Governor LaelBrainard outlined that agenda back in February, MarketWatch’s Gregg Robb noted it could mean rates remain “near 0% for years to come.” And now that there are signs the eventual effects of the pandemic on the economy could be enormous, there’s no telling when rates might rise again. Given this outlook, it’s worth noting how an ultra-accommodative Fed posture has exerted an acutely beneficial effect on gold.
Gold Could Be Helpful as a Portfolio “Vaccine” Against Ultra-Loose Fed Policy
The Federal Reserve first introduced QE during the 2008 global financial crisis. When it did, gold and silver went on a tear. From 2008 to 2011 – years which saw the Fed deploy the first two rounds of then-historic QE – gold and silver soared 160% and 400%, respectively.
March 23 of this year is when the Fed announced it was “all in” on providing assistance to an economy that looked as though it would be devastated by the novel coronavirus. Both gold and silver reacted immediately. From that date through today, gold has climbed roughly 30% and silver has jumped about 100%. It’s true that both metals have been trading sideways for the last couple of months, neither continuing to climb nor coming back to earth. Still, many experts believe there are a lot of miles remaining in the precious metals bull’s legs due to generous Fed policy. One of those, Dan Oliver, CEO of Myrmikan Capital, is projecting gold to reach $10,000 per ounce in this cycle due specifically to the Fed’s singular devotion to highly accommodative monetary policy.
Also Read: Silvers Magic Carpet.
We already know the Fed is going to maintain a highly accommodative posture on monetary policy for the foreseeable future. What we don’t know is just how accommodative it might become. The possible long-term economic consequences of the pandemic could provide a convenient justification for previously rare and drastic monetary policy initiatives to become “normal.” Even before the pandemic, the Federal Reserve openly stated it was considering making QE a standard central bank tool. If QE does, in fact, become just another tool in the central bank’s toolbox and there is no asset that’s out of bounds for Fed purchase, the scope and impact of Fed monetary policy could be gargantuan.
There’s no way around the effects of Federal Reserve policy. And the more drastic it is, the greater the potential consequences to your savings.Fortunately, gold has a demonstrated record of strengthening in the face of an aggressively dovish Fed.
We know not everyone will take a COVID-19 vaccine. But when it comes to available measures for helping to keep your retirement savings healthy in an America where the Federal Reserve’s influence continues to expand, it might make sense for you to consider vaccinating your portfolio – with gold.