Is More Stimulus Good for Gold?

Is More Stimulus Good for Gold?

One of the biggest debates raging in Washington right now is that of more stimulus. There’s no denying that the economy remains weak, that states are continuing restrictions that are keeping businesses from being able to operate at full capacity, and that the future of the economy is highly uncertain.

Both political parties seem set on passing a stimulus bill, but the devil is in the details. We saw from the last stimulus bill that most of the stimulus was handed out to corporations, while individuals saw only modest checks. Right now, both parties seem to have locked horns on whether the next stimulus package should be a smaller one targeted to help families and individuals, or a larger one that will continue to bail out businesses affected by coronavirus lockdowns.

The question gold investors have is, how will more economic stimulus affect gold? Is it a good thing for gold, meaning that it will boost the gold price, or is it bad for gold, meaning that it will lower the gold price? Let’s look at the arguments for either case.

The Argument That Stimulus Is Bad for Gold

If economic stimulus ends up helping businesses and stabilizing the economy, it could put the economy on the road towards recovery and normalization. And that could mean that the gold price might decrease because investors will have more confidence that businesses will continue to grow and service their debt, and stock prices will increase.

Much of the recent demand for gold has come from investors who are worried about the economy, its strength, and its future. And if their attitude about the future becomes one of optimism, they might be tempted to get rid of their gold, which would put downward pressure on the gold price.

The Argument That Stimulus Is Good for Gold

On the other hand, the fact that the economy still needs a stimulus package in order to survive could be seen as a negative. An economy that needs government stimulus is an economy that is essentially on life support. Thus, further stimulus could confirm investors’ worst fears about the economy and cause them to buy even more gold.

Depending on the size of the stimulus package, and whether or not it provides for direct payments to individuals, it could also stimulate gold purchases. The first round of stimulus payments to individuals saw many investors adding to stock holdings, paying down debt, or otherwise productively investing their money from the government.

If the government were to provide another $1,200 check, or a $2,000 check, or something even bigger, how many investors would use that money to buy gold? By this point, having seen what the lockdowns have done to the economy, many who receive government money from this point forward are almost certainly thinking about investing in gold.

Then there’s the fact that a stimulus package is going to add to the national debt. And the larger the package, the more debt will have to be created. All of that debt will have to be sold to someone, which means, like the first stimulus package, that it will likely be monetized by the Federal Reserve.

Just like with previous rounds of quantitative easing, this will lead to a significant increase in the money supply and a devaluation of the dollar. And as the dollar devalues, the value of gold increases in relation.

So What Will Happen?

The case for stimulus leading to an increase in the price of gold seems to be the stronger one. Just imagine if Congress were to continue to pass stimulus package after stimulus package. The continued increase in the national debt and the continued monetization of that debt would continue to weaken the dollar and strengthen gold.

This is the long-term trend that we’ve been seeing for decades now, as each year the dollar gets weaker and weaker, while gold gets stronger. More and more investors are realizing that the Federal Reserve is a one-trick pony, responding to every crisis with the same solution, creating more money. And as a result, those investors see the writing on the wall, that eventually the dollar will become worthless. They’re positioning themselves to protect against that eventuality by investing in gold.

How Gold Protects Your Investments

Unless you’ve been following gold for the past several decades, you may not know that its performance has exceeded that of stock markets for the past 20 years. Since the beginning of 2001, gold has averaged annualized gains of 10.4%, versus 5.1% for the Dow Jones Industrial Average and 5.0% for the S&P 500.

Many analysts expect the outlook for stock markets to continue to weaken over the next decade, with some expecting stocks to remain a net negative for quite a while. Gold seems to be one of the only sure bets over the next few years, having broken through its all-time high price already this year. And at its current price, it has exceeded most analysts’ price predictions for 2020 by several hundred dollars.

The outlook for gold over the next year is for it to continue to strengthen and gain in value, as the economy struggles to regain its footing in the aftermath of coronavirus lockdowns. And that’s good news for gold investors.

Not only is the case for gold looking strong, but the ways that investors can invest in gold are growing all the time. One option that’s growing in popularity is that of investing in a gold IRA.

A gold IRA is just like a conventional IRA, only that it invests in gold. It offers all the same tax advantages as any other IRA and is subject to the same regulations. But unlike IRAs offered by most brokers, a gold IRA allows you to purchase physical gold coins and bars through your IRA.

Even better, you can fund your gold IRA by rolling over assets from existing retirement accounts. So if you have, for instance, $200,000 in retirement assets in a 401(k) and you want to invest $50,000 of it in gold, you can roll it over into a gold IRA without tax consequences. That allows you to diversify your portfolio with gold and take advantage of gold’s potential for growth, while protecting your investments against a weakening dollar.

If you’re worried about dollar devaluation and a weakening economy, shouldn’t you start thinking about protecting your assets with gold? Contact Goldco today to find out more about how gold can benefit you and your investments.

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