Money Creation Inflates Gold

Money Creation Inflates Gold

July 16, 2020  Economy Gold Investment

On the surface it may sound encouraging to cash-strapped Americans that more currency is being created on their behalf. The thought being, that if more money is created, perhaps more of it will come their way. The Treasury Secretary, Steve Mnuchin is currently working on a plan with the Senate, to get additional stimulus payments authorized by the end of July. These funds would be distributed to Americans, in addition to those already distributed, to help relieve financial stresses related to the COVID-19 pandemic. All too often however, money created to help has the opposite effect because of the inflation often created with the additional currency.

Projection Review

In our “Precious Metals Outlook  2020” presented in October 2019, we told you about the recession likely to arrive in 2020, before COVID-19 had even materialized.  We also recommended holding onto Gold and Silver, but to consider selling Platinum and Palladium by year end, and look for opportunities to repurchase them during the 2020 recession.  The tables turned markedly, once the recession started in February. 

Those who took our recommendations to heart, have done well.  Platinum ended the year around $1000, but was below $600 by the middle of March 2020.  Palladium ended the year around $2000, but was below $1420 by the middle of March 2020.  These were good reentry points to get back in, for those watching.  

Meanwhile, spot Gold has climbed from $1500 to over $1800, with spot Silver moving from $17 to nearly $20 today.  While there may be some temporary pullbacks in Gold and Silver, they both appear poised to end the year higher than they currently are.

The question we have to ask ourselves, is what are the likely effects of currency creation for Gold and Silver going forward?  This is a question for which there is already an answer, if we look at what has occurred previously.  When we create more of something, the supply is increased, while demand for that item tends to decrease. 

In the case of $Dollars, when more are created, demand actually increases - because it often takes more of them to purchase the same amount of items.  That is, when the value of Dollars decreases, the quantity needed increases.  This is the current situation both here in the US, and abroad.  During the Great Financial Crisis of 2007-2009, the budget deficit reached nearly 10% of GDP.  GDP is a measure of the economic output of a nation; sort of like our national income level.  This year, our budget deficit is over 14% of GDP, and the highest it’s been since WWII.

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