In a report titled, “The Fed Can’t Print Gold,” analysts at Bank of America raised their 18-month gold price target from $2,000 per ounce to $3,000 per ounce, as fallout from the COVID-19 coronavirus recession continues to take hold. “As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure,” analysts including Michael Widmer and Francisco Blanch said in the report. “Investors will aim for gold…beyond traditional gold supply and demand fundamentals, financial repression is back on an extraordinary scale.” Meanwhile, policymakers are dusting off many of the same remedies utilized during the last decade’s financial crisis. The Federal Reserve, for example, is injecting cash into the system utilizing many of the emergency-lending programs it originally introduced in 2008.
Unlike the sporadic unemployment victims of 2008, the current COVID-19 pandemic is utterly crushing entire industries. Travel, in all of its various forms, is at the top of the list. It easily includes airlines, cruise ships, and hotels. Then it bleeds into all aspects of the tourism industry, including theme parks, landmarks, and national parks. The entertainment rung consists of a huge swath of small to large businesses ranging from bars to restaurants, concert halls to movie theaters, and amphitheaters to stadiums. By the time you add in the collateral damage of other industries, you’re dealing with unemployment numbers greater than experienced during the Great Depression. States opening up early only ensures a protracted pandemic.
Market Watch analysts suggest that the world’s advanced economies are structured around consumption, which can make up 50% to 70% of activity. Output declines of 50% to 100% can translate into an economic contraction of about 25% or more. Inflation is inevitable, as prices must adjust accordingly to lower corporate earnings, reduced dividends and buybacks, and reduced rental income from properties. This global business slowdown feeds unemployment. As the global recession increases, household cash resources decrease, which causes less spending and further fuels cutbacks, layoffs, and ultimately exacerbates the unemployment cycle.
In spite of tax cuts, increased unemployment compensation, and helicopter money, there will be an increase in bad debt, which will directly affect the bank’s willingness to lend. But reduced demand will continue the recession cycle. The credit-dependent real economy and investment markets will be directly and increasingly affected. Recapitalization requires the conversion of hybrid investments into equity or writing-down capital values of bail-in bonds, adding to investor pressure. All of these factors support Bank of America’s call for the skyrocketing price of gold. Call the precious metal experts at American Bullion at (800) 653-GOLD (4653) for assistance, while prices are still well off previous highs.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.