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These Are the Times That Call for Gold

As third quarter trading kicks off following a tumultuous first half of the year, investors are hoping for an auspicious July.

Both stocks and precious metals posted impressive advances in the second quarter. The S&P 500 finished the April-June period with a gain of nearly 20%, its best quarterly performance since 1998. The Dow Jones Industrials, meanwhile, posted its best quarter since 1987.

It’s worth noting that in 1998 – and more famously in 1987 – the stock market also suffered a sharp 20%+ decline during the second half of the year.

In a volatile trading environment for equities, a big move in one direction tends to beget a big move in the other. We’ve already seen a big move lower earlier this year – and a subsequent move higher that was nearly equal in magnitude.

The bull run has seen the shares of leading tech giants, including Amazon, Apple, and Microsoft, hit new all-time highs. Smaller brick-and-mortar companies tied more directly to the fortunes of the real economy haven’t fared so well.

The question going forward is whether the broad stock market will correct to reflect a hollowed-out economy that remains partially locked down… or whether stocks will continue to move higher in response to artificial fiscal and monetary stimulus.

Until the Chinese virus stops spreading (and politicians stop constricting economic activity in response), we will likely see the above-mentioned divergences persist and market volatility remain heightened.

Conventional fundamental analysis should be thrown out the window.

Risk

In this environment, it is quite possible that Wall Street will be celebrating the S&P 500 hitting a new record in the second half of 2020 at the same time as economic misery on Main Street hits a new low – and major U.S. cities descend into chaos amid violent protests and de-policing.

These are strange and scary times. While investors can hope for a return to normalcy in the months ahead, they shouldn’t count on it.

“These are the times that try men’s souls,” wrote American Revolutionary Thomas Paine (“The American Crisis,” December 19, 1776). He added, “Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph.”

In order for investors to triumph during a period characterized by a deadly pandemic, economic despair, unhinged markets, unlimited Quantitative Easing, social unrest, and deepening divisions, they need to be prepared for the next big shoe to drop. A crisis in the U.S. banking or political system – or in the U.S. dollar itself – could be coming.

These are the times that call for gold (and silver). Owning financial insurance may never have been more important.

Gold and silver markets racked up impressive gains of their own in the second quarter. Gold in particular finished on a high note – closing Tuesday at $1,789, its highest level since 2012.

If gold’s recent upside breakout garners immediate follow through, a new all-time record high may be only a few days away.

A new all-time record high for gold may be only a few days away.

Gold is up 18% year to date, far outperforming the stock market. Despite rallying strongly off its lows, the Dow is still down 9% for 2020. The tech-heavy Nasdaq is up 12% for the year, but even it is underperforming gold.

Regardless of whether artificial stimulus injections propel stock market averages higher in nominal U.S. dollar terms, they could continue to lose value in terms of sound money (gold and silver).

When economic and political fears are running high and the Federal Reserve’s printing press is running on overdrive, that combination is like rocket fuel for precious metals markets.

To quote Thomas Paine once again, “What we obtain too cheap, we esteem too lightly.”

A flood of Federal Reserve Notes pumped into the banking system, the Treasury bond market, the junk bond market, and directly into Americans’ pockets through “stimulus” checks is cheapening the value of the currency and severing the link between economic productivity (i.e., work) and reward.

It’s much harder to mine gold or silver out of the ground than it is to expand the supply of fiat currency.

That makes hard money less convenient from the standpoint of politicians and bankers. But it also ensures that, unlike paper or digital representations of money, gold and silver coins will always be esteemed for their intrinsic value.


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