Gold is now looking past the political games
(Kitco News) - Hopefully, we have just one more weekend to go before we can put this year's U.S. general election behind us.
With the COVID-19 pandemic devastating the U.S. and the global economy, this election season has been one for the history books and has been chock full of uncertainty and turmoil. According to political pundits, there are growing expectations of a blue wave in Washington with the Democrats taking control of Congress and the White House; however, memories of 2016 continue to loom large on the horizon, so at this point, anything could happen.
Regardless of what the government looks like for 2021, they will have a heck of a mess to clean up. Earlier this week, economic data showed that the U.S economy grew 33.1 % in the third quarter, however, this comes after the economy contracted by more than 31% in the second quarter. As the dust starts to settle, it looks like the U.S. economy will contract around 4% this year.
This means that no matter what, the U.S. is going to need to pump more capital and liquidity into the economy. The government will have to continue to support businesses and consumers who have been impacted by the global pandemic.
And the U.S. isn't alone. The ECB continues to take the reins as it tries to provide support for the European economy. Thursday, ECB president Christine Lagarde basically said that more central bank stimulus will be coming in December as it "recalibrates" its financial instruments.
"We have little doubt that circumstances will warrant a recalibration and implementation of monetary policy," she said during her regular press conference.
The inevitable scenario of stimulus on a global scale is what is going to drive gold prices higher. More government and central bank spending will add to the growing deficit, lead to more money printing. The only direction central bank balance sheets are going is up.
Earlier in the week, I had a chance to talk to Michael Howell, managing director at CrossBorder Capital, who said that his firm sees global central bank balance sheets growing by about 30% this year and is forecasting further liquidity growth of between 15% and 20% in 2021. He added that global liquidity could push to as high as $195 trillion, more than double global GDP.
"You are going to have so much liquidity in markets that gold has to go higher," he said.
He is not the only one signaling the alarm when it comes to the growing inflation threat. Thorsten Polleit, chief economist at Degussa said that instead of looking at consumer inflation, investors need to pay attention to money supply growth.
Instead of showing up in consumer markets, inflation is current driving asset markets, pushing equity markets, bond prices, and commodity prices higher.
"It may take a while for inflation in asset markets to show up in consumer prices it will eventually happen," he added.
Both economists see gold as a must-have for investors to protect their wealth.
"Holding gold is the best way of getting a risk reduction and return enhancement in your portfolio," he said.
"Holding gold, especially at current prices, is a wise thing to do," said Polleit.