Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
As a new administration took power in Washington this week, investors weighed new opportunities as well as new risks.
The Biden administration promises to undo much of the policy agenda President Donald Trump had implemented. However, those expecting a new era in American politics are likely to be disappointed – or relieved, depending on their perspective.
Joe Biden is anything but new or transformational. He seems to view his mandate as that of reassembling the Obama-Biden administration for a third term.
Obama’s Federal Reserve Chair Janet Yellen is among the familiar faces Biden has picked to populate his cabinet. Yellen will take the helm as Treasury Secretary.
She testified before the U.S. Senate remotely ahead of the inauguration and urged lawmakers to commit to more fiscal stimulus.
Janet Yellen: Without further action, we risk a longer and more painful recession now and longer-term scarring of the economy later. Neither the President-Elect nor I proposed this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run I believe the benefits will far outweigh the costs.
The government’s ability to borrow at low interest rates may seem limitless given the Fed’s unlimited capacity to buy Treasuries. But that doesn’t mean there aren’t costs and dangers involved. Chief among them is a decline in the value and global credibility of the U.S. dollar.
Inflation risks appear to be rising at the same time as the threat of higher taxes looms.
If Janet Yellen and Joe Biden get their way with Congress, then trillions of dollars in new taxes on businesses and investors could be coming down the pike. Yellen wants the Trump tax cuts repealed, which would revert the U.S. corporate tax rate to one of the highest in the developed world.
When pressed by GOP Senator Mike Crapo, Yellen said she would push for a globally coordinated tax hike through the Organization for Economic Cooperation and Development. She decried the “global race to the bottom on corporate taxation” that makes other countries more attractive for capital investment.
Apparently, she thinks higher taxes wouldn’t deter economic activity if only everyone else adopted them too.
Also in Yellen’s crosshairs is cryptocurrency. The former central banker urged Congress to “curtail” the use of Bitcoin. She falsely claimed that its primary use is for “illicit financing.”
In fact, Bitcoin is held mainly as an alternative store of value by investors and speculators. Their purpose in acquiring it is for expected price appreciation – an entirely legal objective.
Unfortunately for Bitcoin holders, Yellen’s remarks contributed to a sharp selloff in cryptocurrency markets this week. Over $100 billion in total market value was erased.
Meanwhile, another alternative asset class – precious metals – fared much better despite pulling back a bit here today. Gold prices are up $30 or 1.6% this week to trade at $1,865 an ounce.
Spot silver checks in at $25.70 per ounce as of this Friday recording on the heels of a 3.2% weekly advance, exactly double of gold’s move this week in percentage terms. We’ll still need to see some more upside price action in silver in the days ahead before a significant technical breakout can be achieved.
Other metals, including copper, have already made new multi-year highs in 2021.
And platinum looks to be next. Platinum prices traded up near a five-year high on Thursday. The scarce metal currently comes in at $1,118 after gaining 2.8% since last Friday’s close.
And finally, its sister metal palladium is off 1.1% this week to trade at $2,392 an ounce.
Metals markets appear to be well positioned to benefit from the policies of the Democrat administration and the nonpartisan Fed.
For now, precious metals, unlike cryptocurrencies, aren’t being singled out for more regulations and restrictions. In an environment where the monetary authorities not only DON’T view inflation as a problem – but actively seek to generate higher rates of price increases in the economy – rising gold and silver prices are completely compatible with their objectives.
At some point that may change if gold and silver price spikes begin to reflect too negatively on the standing of the U.S. dollar on the global stage. For now, though, a weak dollar policy is in force as Washington favors stimulus over all other concerns.
Stimulus measures which President Trump himself supported will have a much better chance of passing an evenly divided Senate than a Biden tax hike package. Current political realities all point to more borrowing, more money printing, and more inflationary fuel for precious metals markets.
Meanwhile, this recent explosion of money printing and debt-funded spending over the last year has sparked a renewed interest among lawmakers in the key role gold and silver can play in hedging against systemic risks.
For example, a group of Idaho legislators are working right now to secure a role for the monetary metals in hedging the Gem State’s government reserves.
Introduced by Representative Ron Nate (R-Rexburg) and Senator Steve Vick (R-Dalton Gardens), House Bill 7 would permit the State Treasurer to hold some portion of state funds in physical gold and silver to help secure state assets against the risks of inflation and financial turmoil and/or to achieve capital gains as measured in Federal Reserve Notes.
The Idaho Treasurer, like a few treasurers in other states, is currently handcuffed when it comes to investment choices. State statutes provide extremely limited options for holding, managing, and investing Idaho’s “idle moneys” (which currently amount to several billion dollars).
As a result, Idaho’s reserves are invested almost exclusively in low-yielding debt paper – such as corporate bonds, tax-anticipation notes, municipal bonds, repurchase agreements, CDs, treasuries, and money market funds. Some refer to these instruments as “return free risk.”
These debt holdings appear to have low volatility, but they carry other risks – not the least of which is pernicious inflation and the steady erosion in real value of principal, coupled with interest rates that are negative in real terms.
An allocation to gold and silver provides a hedge against inflation, debt default risks, stock market declines, and volatility – and it historically increases overall returns. Gold and silver do not have the default or loss of purchasing power risks that bonds or other debt instruments carry.
A few other forward-thinking states are themselves examining ways to implement a modest allocation of state funds to gold and silver.
The Texas Teacher Retirement Fund owns close to $1 billion in physical gold. Recently, the Ohio Police and Fire Pension Fund (currently valued at more than $15 billion) approved a 5% allocation to the yellow metal.
This year, South Carolina will consider the feasibility and efficacy of an in-state depository to securely store gold, silver, and other metals for the state’s reserves and other investments.
In 2019, Wyoming considered legislation to affirm the treasurer’s ability to invest the state’s reserve, trust, and pension funds in gold and silver. Wyoming is expected to consider this measure again in 2021.
The monetary metals can provide states with a meaningful way of hedging taxpayer funds against debt default risks, stock market declines and the federal policy of perpetual Federal Reserve Note devaluation. And a gold allocation has historically boosted overall investment returns while also reducing volatility.
An allocation to physical gold and silver fits squarely within the objective of protecting state funds against financial risks and would logically be included on any list of safe investment holdings.
Let’s hope that these efforts across America continue to gain momentum.
Both Money Metals Exchange and the Sound Money Defense League are devoting staff time and resources to propel these initiatives forward – and we encourage you to reach out to your own representatives to encourage them to support these and other sound money reforms.
Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.