3 ‘Golden’ Opportunities as the Fed Infinitely Expands its Balance Sheet Following COVID-19 Rout

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  • While Congress continues to hash out the details of a trillion-dollar-plus stimulus package, the Federal Reserve has stepped forward with their own package as Chairman Powell had his own “whatever it takes” moment.

    Any limits that were previously announced have been lifted. Their commitment, they will buy bonds “in the amounts needed to support smooth market functioning.” Any hesitation that the Fed previously had regarding lowering rates or adding duration to their balance sheet by purchasing anything more than short-dated government bonds is gone. They are now ready to monetize virtually anything.

    If this is the case, why hasn’t the market rallied and especially gold. This is where the Congress and the President come in. While allowing stocks, corporate bonds, muni bonds and the like provides cash to those that need it, it doesn’t necessarily mean that cash then makes it into circulation. There has to be some willingness to spend, borrow and lend. While the Fed may stand at the ready to provide liquidity, there isn’t a direct mechanism to increase the money supply and velocity. However, if the Federal Government spends trillions, that provides a borrower and the primary dealers will be wiling to buy the debt and sell it to the Federal Reserve. The combination of Fed buying, and government borrowing may allow the U.S. dollar surge to abate, which has caused weakness in gold.

    It’s in this environment that makes the current position of gold similar to 2008. Gold didn’t exactly go up as the credit crisis was expanding. In fact, it declined around 30% before bottoming in October 2008. It was at that time that fiscal and monetary policy came together and alleviated the dollar shortage and gold began to rally as the dollar lost value. That eventually led to the all-time high in gold prices in 2011 over $1900.

    The current Fed policy is more significant than what was pursued in 2008 and the Stimulus package may be as well. The potential fall-out from the business closures across America has led Goldman Sachs to drastically lower its 2Q 2020 GDP estimates to project that GDP will decline 24%. That would mean that the potential decline in GDP is 2.5 times greater than any decline in history.

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  • As the policy response potentially comes into alignment, here’s three ways to consider investing for a large rally in gold prices.

    Gold Play #1: SPDR Gold Shares (GLD)

    GLD is an ETF that invests in gold bullion. Since its introduction in November 2004, it has provided a great way for investors to maintain exposure in gold as an asset allocation strategy. Since it has options available as well, it also provides ways to speculate, protect and use high probability strategies against it.

    While the all-time high near $185 or higher may be in view over the coming year, the recent high near $160 is a reasonable near-term target for GLD.

    Gold Play #2: VanEck Vectors Gold Miners ETF (GDX)

    GDX is an ETF that tracks the NYSE Arca Gold Miners Index. The intent of the index is to track the overall performance of companies involved in the gold mining industry. The idea of using an ETF is that you’re not trying to pick the winners and losers. The ETF will weight the largest companies more than the smallest and will allow you an ability to gain a more general exposure to gold stocks. The upside of looking at gold stocks is that they may have an ability to increase earnings and revenues at current prices and may outpace gold’s performance if it rallies. Its top 5 holdings are Newmont Corp (NEM), Barrick Gold Corp (GOLD), Franco-Nevada Corp (FNV), Wheaton Precious Metals Corp (WPM) and Kirkland Lake Gold Ltd (KL).

    GDX has near-term upside near $160 and has a longer-term target of $180 or higher.

    Gold Play #3: VanEck Vectors Junior Gold Miners ETF (GDXJ)

    GDXJ is an ETF that tracks the MVIS Global Junior Gold Miners Index. The intent of the index is to track the overall performance of small-cap companies that primarily mine gold and/or silver. These companies ae frequently in the early development phase and are responsible for many gold discoveries throughout the world. As a result, these companies provide the greatest opportunity as well as the greatest risk.

    GDXJ has a near-term upside to retest its recent highs near $42.50. It’s 2011 high was near $180. It’s current price is just off of its 10-year low.

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