The Federal Reserve, the Price of Gold, and the Future of Your Retirement

The US Bureau of Economic Analysis released its advance estimate of second quarter GDP Thursday morning, and it was as frightful as you could imagine. US economic output declined by an annualized 32.9% in the second quarter, a record shattering the previous record drop of 10% set in 1958. And that isn’t the only thing wrong with the economy.

Millions of Americans remain out of work, the $600 weekly unemployment bonus paid by the federal government recently expired, and the moratorium on evictions just ran out. Now that American households are being forced back into reality, tens of millions of Americans are going to realize just what a 32.9% contraction really means.

The government wants to try to keep people from feeling the negative effects of the economic slowdown, at least for a while. That’s why there’s much talk of a new stimulus package, with new $1,200 payments, extension of unemployment benefits, etc. The government has resorted to the oldest trick in the book, printing money out of thin air, in order to try to keep the economy afloat.

Enter the Federal Reserve, which has been only too willing to monetize all that new spending. So far this year, the Fed has created nearly $3 trillion out of thin air, adding to its already bloated balance sheet. And with Congress set to spend trillions more before the August recess, the Fed is going to be pressured to create even more money in order to monetize all this new debt.

What the Fed Is Doing

The Fed has intervened in markets this year at a level that dwarfs even the reaction to the 2008 crisis. Remember when the TARP bank bailout was being debated in September 2008, and we found out that Congress was going to spend $700 billion? That was an astronomical sum. But after successive rounds of quantitative easing over the past 12 years, we’ve become so inured to this massive money creation that another $3 trillion created out of thin air gets cries of “more, more” today rather than “too much, too much.”

The Fed’s intervention really began last year, as it sought to stabilize overnight funding markets. At one point it had pledged up to $5.5 billion in lending to keep those markets secure. Now the Fed has reestablished all of its old 2008-era lending facilities, plus created new ones to enable lending to private businesses, municipalities, and households. There’s hardly a sector of American society now that is exempt from the Fed’s reach.

The Reaction of Stock Markets

Wall Street loves it when the Fed creates so much money, as more money and lower interest rates keep the Wall Street casino going. The stock market and corporate debt bubbles that have been growing over the last several years have their origins in the trillions of dollars created by the Fed as a response to the Great Recession. Almost as soon as the Fed began to try to tighten monetary policy, markets reacted poorly and stocks sank, a sign that the US economy isn’t strong and has instead become dependent on cheap money to keep the party going.

But rather than trying to wean businesses off easy money and low interest rates, allow market forces to function, and allow bad debts to be liquidated, the Fed panicked when stock markets plummeted earlier this year. The massive amounts of money forced into the financial system boosted stock markets once again, erasing fears among many 401(k) account holders but also enriching Wall Street traders who benefited from that volatility to reap huge gains.

Now that the Fed has slowed its asset purchases, the question is, what will it do next? If Congress passes a multi-trillion dollar spending bill, will the Fed move to monetize that new debt through more asset purchases? That would make many on Wall Street happy, but it would harm Main Street investors who continue to see their standard of living eroded by a weakening dollar and higher prices.

Gold Hits a Record, Silver Surges

In some areas of the market, it’s deja vu all over again. Just like the Great Recession, we’re seeing a surge in the prices of precious metals. Gold has broken through to new record high prices, and could very well break the $2,000 barrier soon. Silver has seen a massive jump too, and it too has a significant amount of headroom ahead of it. Over the past year or so, gold has risen more than 50% in price, while silver has risen about 65%.

Some may be tempted to see this and think that it’s too late to buy precious metals, that they’re too expensive, or that they are in a bubble too and will only drop from here. Regarding the last point, a drop in the near future isn’t inconceivable. Gold and silver did drop from early to late 2008, as economic conditions worsened so much that many investors had to sell their holdings in order to raise cash. And now that gold has broken through to a record high, don’t be surprised to see some profit-taking, which will put short-term downward pressure on the gold price.

But in the long term, both gold and silver are likely at the front end of another bull market. Some analysts are even calling for gold to hit $3,500 an ounce within two years. With demand for gold increasing, and supply tight due in part to coin shortages from mints, all the factors are falling into place for a massive price breakout.

Protect Your Assets With Gold

If you have assets in a tax-advantaged retirement account such as a 401(k), 403(b), TSP, or similar account, you may be afraid of your investments losing value in stock market crash. And if you’re like most investors, your retirement plan probably doesn’t offer an option to invest in gold, silver, or other precious metals. That’s where a gold IRA can offer you the protection you need.

A gold IRA is just like any other IRA, except that instead of investing in stocks, bonds, or investment funds like most IRAs, it invests in physical gold coins or bars. That gives you the benefits of investing in gold, including wealth protection, long-term value, and defense against inflation and economic turmoil, while still affording you the same benefits of a tax-advantaged retirement account. If you’re looking to safeguard your retirement savings and haven’t done so already, think about opening a gold IRA today.